# Proto Labs Inc: Form 10-Q for the period ended Jun 30, 2020

- Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669)
- Form: 10-Q
- Filed: 2020-07-31
- Accepted by EDGAR: Jul 31, 2020, 12:54 ET
- Period: 2020-06-30
- Accession: 0001437749-20-016139
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1443669/000143774920016139/prlb20200630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000143774920016139/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $106.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $221.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $54.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $111.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $52.5m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $110.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $8.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $17.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $14.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $31.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $6.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $12.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $26.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.47 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $1.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 26,760,866 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 26,837,938 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $53.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $33.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $14.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $98.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $213.0m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $698.4m | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $51.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $97.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-06-30 | $601.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,733 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019.*

### Forward-Looking Statements

Statements contained in this report 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. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. “Risk Factors” of this Form 10-Q, as well as our most recent Annual Report on Form 10-K as filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

### Overview

We are the world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts. We manufacture prototypes and low-volume production parts for companies worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over the Internet. We target our products to the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.

Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers.

### Injection Molding

Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-run production often come back to Protolabs’ Injection Molding product line for additional quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-demand manufacturing injection molding product offering. This product offering utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs, typically in annual volumes of less than 10,000 parts.

### CNC Machining

Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process.

Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 1,000 parts.

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### 3D Printing

Our 3D Printing product line includes stereolithography, selective laser sintering, direct metal laser sintering, Multi Jet Fusion, PolyJet and digital light synthesis processes, which offer customers a wide-variety of high-quality, precision rapid prototyping and low-volume production. These processes create parts with a high level of accuracy, detail, strength and durability. Industrial 3D Printing is best suited for functional prototypes, complex designs and end-use applications produced in small quantities, typically in the range of one to several hundred parts.

### Sheet Metal

Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, which provides customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the product developer or engineer to fabricate quick-turn prototype sheet metal or short-run production parts. The Sheet Metal product line is well suited to produce quantities in the range of one to 500 parts.

### Key Financial Measures and Trends

### Revenue

Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our historical and current efforts to increase revenue have been directed at expanding the breadth of our product offerings, gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including:

- expanding the breadth and scope of each of our product lines by adding more sizes and materials to our offerings;
- the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;
- expanding 3D Printing to Europe through our acquisition of Alphaform in October 2015;
- the introduction of our Sheet Metal product line through our acquisition of Rapid Manufacturing Group, LLC (RAPID) in 2017; and
- continuously improving the usability of our product lines such as our web-centric applications.

During the three months ended June 30, 2020, we served 17,037 unique product developers and engineers who purchase our products through our web-based customer interface, a decrease of 18.2% over the same period in 2019. During the six months ended June 30, 2020, we served 29,703 unique product developers and engineers who purchase our products through our web-based customer interface, a decrease of 5.9% over the same period in 2019. The economic uncertainty arising from the COVID-19 pandemic has impacted the number of product developers and engineers who purchase our products. While we expect the number of product developers and engineers served to grow in the long-term, challenges posed by the COVID-19 pandemic on the global economy have continued through the date of this report. Steps taken by national and local governments to slow the spread of the virus, including business shutdowns and shelter in place orders, have hindered the ability and willingness of project developers and engineers to proceed with development and commercialization projects on the same scale as they have historically. At this time, it is difficult to predict the future given the current economic uncertainty and evolving market conditions.

### Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and custom parts. We expect our personnel-related costs to increase in order to retain and attract top talent and remain competitive in the market. Overall, we expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.

We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our mix of revenue by product line, pricing, sales volume, manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.

17

### Operating Expenses

Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs are the most significant component in each of these categories.

Our recent decrease in operating expenses is mainly due to cost saving measures implemented as a result of the COVID-19 pandemic. However, our long-term business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and sheet metal custom parts for prototyping and low-volume production. In order to achieve our long-term goals and support our revenue growth, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.

*Marketing and sales.* Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade shows and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base and grow revenue.

*Research and development.* Research and development expense consists primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. Costs for internal use software are evaluated by project and capitalized where appropriate under ASC 350-40, *Intangibles — Goodwill and Other, Internal-Use Software*. We expect research and development expense to increase in the future as we seek to enhance our e-commerce interface technology, internal software and supporting business systems, and continue to expand our product lines.

*General and administrative.* General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.

### Other Income, net

Other income, net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates.

### Provision for Income Taxes

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. Overall, we expect our effective tax rate for 2020 and beyond will remain consistent based on the current tax laws.

### Market Conditions

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a pandemic. The full financial impact of COVID-19 is unknown at this time and will depend on the duration of government restrictions, including travel restrictions, quarantines, shelter in place orders and shutdowns and duration of the economic slowdown and nature and timing of a recovery. The Company has been deemed an essential business and all of our global manufacturing operations have remained open. The Company has activated a global, cross-functional response team, which is closely monitoring the situation and implementing additional safety measures to help ensure the well-being of our employees, customers and suppliers, to minimize disruptions and provide for the safe and reliable supply of products to our customers. In accordance with the guidance provided by both the World Health Organization and the U.S. Centers for Disease Control and Prevention, the Company has implemented safe work practices, including social distancing and work from home guidelines.

We are actively monitoring key product availability and continue to stay connected with our customers to understand impacts on their operations. All of these efforts will help us better plan and prepare, so we can continue to be a leading supplier of custom parts. In anticipation of exposure due to an economic slowdown driven by COVID-19, the Company increased its bad debt reserve by $0.9 million as of June 30, 2020.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The CARES Act is meant to infuse companies with various income and payroll tax cash benefits to ease the impact of the pandemic. A technical correction to the Tax Cuts and Jobs Act of 2017 was included in the CARES Act allowing qualified improvement property to claim bonus depreciation for respective assets placed in service in 2018 and 2019. The impact of the CARES Act to the Company was a $2.6 million reduction in our income taxes payable and a corresponding increase to our deferred tax liability. In addition, the Company has elected to defer deposits of the employer portion of the Social Security tax for the quarter ended June 30, 2020 through the quarter ended December 31, 2020. The Social Security taxes are being accrued for and will be paid beginning in 2021.

See "Risk Factors" in Item 1A of this Quarterly Report on Form 10-Q for further information of the possible impact of the COVID-19 pandemic on our business.

18

### Results of Operations

The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.

*(dollars in thousands)*

|  | Three Months Ended June 30, 2020 |  | 2019 |  | Change $% |  | Six Months Ended June 30, 2020 |  | 2019 |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $106,575 | 100.0 | $115,932 | 100.0 | $(9,357) | (8.1) | $221,683 | 100.0 | $229,384 | 100.0 | $(7,701) | (3.4) |
| Cost of revenue | 54,119 | 50.8 | 55,696 | 48.0 | (1,577) | (2.8) | 111,127 | 50.1 | 110,288 | 48.1 | 839 | 0.8 |
| Gross profit | 52,456 | 49.2 | 60,236 | 52.0 | (7,780) | (12.9) | 110,556 | 49.9 | 119,096 | 51.9 | (8,540) | (7.2) |
| Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |
| Marketing and sales | 16,936 | 15.9 | 19,285 | 16.6 | (2,349) | (12.2) | 35,116 | 15.8 | 37,862 | 16.5 | (2,746) | (7.3) |
| Research and development | 8,648 | 8.1 | 8,169 | 7.1 | 479 | 5.9 | 17,635 | 8.0 | 16,182 | 7.1 | 1,453 | 9.0 |
| General and administrative | 12,521 | 11.7 | 13,209 | 11.4 | (688) | (5.2) | 26,629 | 12.0 | 26,031 | 11.3 | 598 | 2.3 |
| Total operating expenses | 38,105 | 35.8 | 40,663 | 35.1 | (2,558) | (6.3) | 79,380 | 35.8 | 80,075 | 34.9 | (695) | (0.9) |
| Income from operations | 14,351 | 13.5 | 19,573 | 16.9 | (5,222) | (26.7) | 31,176 | 14.1 | 39,021 | 17.0 | (7,845) | (20.1) |
| Other income, net | 767 | 0.7 | 1,125 | 1.0 | (358) | (31.8) | 1,821 | 0.8 | 1,338 | 0.6 | 483 | 36.1 |
| Income before income taxes | 15,118 | 14.2 | 20,698 | 17.9 | (5,580) | (27.0) | 32,997 | 14.9 | 40,359 | 17.6 | (7,362) | (18.2) |
| Provision for income taxes | 2,511 | 2.4 | 4,532 | 3.9 | (2,021) | (44.6) | 6,406 | 2.9 | 8,682 | 3.8 | (2,276) | (26.2) |
| Net income | $12,607 | 11.8% | $16,166 | 14.0% | $(3,559) | (22.0)% | $26,591 | 12.0% | $31,677 | 13.8% | $(5,086) | (16.1)% |

Stock-based compensation expense included in the statements of operations data above for the three and six months ended June 30, 2020 and 2019 was as follows:

*(dollars in thousands)*

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Stock options and restricted stock | $3,331 | $3,193 | $6,069 | $5,972 |
| Employee stock purchase plan | 308 | 293 | 603 | 554 |
| Total stock-based compensation expense | $3,639 | $3,486 | $6,672 | $6,526 |
| Cost of revenue | $594 | $485 | $1,115 | $906 |
| Operating expenses: |  |  |  |  |
| Marketing and sales | 750 | 614 | 1,368 | 1,163 |
| Research and development | 607 | 503 | 1,128 | 926 |
| General and administrative | 1,688 | 1,884 | 3,061 | 3,531 |
| Total stock-based compensation expense | $3,639 | $3,486 | $6,672 | $6,526 |

19

### Comparison of Three Months Ended June 30, 2020 and 2019

#### Revenue

Revenue by reportable segment and the related changes for the three months ended June 30, 2020 and 2019 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended June 30, 2020 $% of Total Revenue |  | 2019 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $86,823 | 81.5% | $91,149 | 78.6% | $(4,326) | (4.7)% |
| Europe | 16,729 | 15.7 | 20,940 | 18.1 | (4,211) | (20.1) |
| Japan | 3,023 | 2.8 | 3,843 | 3.3 | (820) | (21.3) |
| Total revenue | $106,575 | 100.0% | $115,932 | 100.0% | $(9,357) | (8.1)% |

Our revenue decreased $9.4 million, or 8.1%, for the three months ended June 30, 2020 compared to the same period in 2019. By reportable segment, revenue in the United States decreased $4.3 million, or 4.7%, for the three months ended June 30, 2020 compared to the same period in 2019. Revenue in Europe decreased $4.2 million, or 20.1%, and revenue in Japan decreased $0.8 million, or 21.3%, in each case for the three months ended June 30, 2020 compared to the same period in 2019. Our revenue in Europe was impacted by foreign currency exchange rates. Excluding the $0.4 million impact of the changes in foreign currency exchange rates, the decrease in Europe revenue would have been 18.1%. In addition, our revenue in each region was impacted by a decline in order activity driven by current economic conditions as a result of the COVID-19 pandemic.

Our revenue decline during the three months ended June 30, 2020 was the result of a decrease in the volume of product developers and engineers we served. During the three months ended June 30, 2020, we served 17,037 unique product developers and engineers, a decrease of 18.2% over the same period in 2019. The economic uncertainty arising from the COVID-19 pandemic has impacted the number of product developers and engineers who purchase our products. While we expect the number of product developers and engineers served to grow in the long-term, challenges posed by the COVID-19 pandemic on the global economy have continued through the date of this report. Steps taken by national and local governments to slow the spread of the virus, including business shutdowns and shelter in place orders, have hindered the ability and willingness of project developers and engineers to proceed with development and commercialization projects on the same scale as they have historically. At this time, it is difficult to predict the future given the current economic uncertainty and evolving market conditions.

Our revenue decreases were primarily driven by a decline in order activity as a result of the economic uncertainty created by the COVID-19 pandemic. International revenue was negatively impacted by $0.4 million during the three months ended June 30, 2020 compared to the same period in 2019 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the three months ended June 30, 2020 and 2019 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended June 30, 2020 $% of Total Revenue |  | 2019 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $57,894 | 54.3% | $55,457 | 47.8% | $2,437 | 4.4% |
| CNC Machining | 28,760 | 27.0 | 38,888 | 33.5 | (10,128) | (26.0) |
| 3D Printing | 14,236 | 13.3 | 15,266 | 13.2 | (1,030) | (6.7) |
| Sheet Metal | 4,669 | 4.4 | 5,472 | 4.7 | (803) | (14.7) |
| Other Revenue | 1,016 | 1.0 | 849 | 0.8 | 167 | 19.7 |
| Total revenue | $106,575 | 100.0% | $115,932 | 100.0% | $(9,357) | (8.1)% |

By product line, our revenue decrease was driven by a 26.0% decrease in CNC Machining revenue, a 6.7% decrease in 3D Printing revenue, and a 14.7% decrease in Sheet Metal revenue, which was partially offset by a 4.4% increase in Injection Molding revenue and a 19.7% increase in Other Revenue, in each case for the three months ended June 30, 2020 compared to the same period in 2019.

20

#### Cost of Revenue, Gross Profit and Gross Margin

*Cost of Revenue.* Cost of revenue decreased $1.6 million, or 2.8%, for the three months ended June 30, 2020 compared to the same period in 2019, which was less than the rate of revenue decrease of 8.1% for the three months ended June 30, 2020 compared to the same period in 2019. The decrease in cost of revenue was primarily driven by lower revenue volumes and cost saving measures implemented as a result of the COVID-19 pandemic. Specifically, the decreases were driven by a decrease in direct labor headcount and hours worked resulting in personnel and related cost decreases of $1.5 million and raw material and production cost decreases of $0.6 million, which were partially offset by equipment and facility-related cost increases of $0.5 million to support future growth of the business.

*Gross Profit and Gross Margin.* Gross profit decreased from $60.2 million in the three months ended June 30, 2019 to $52.5 million in the three months ended June 30, 2020. Gross margin decreased from 52.0% in the three months ended June 30, 2019 to 49.2% in the three months ended June 30, 2020 primarily due to the fixed cost structure of our facilities and equipment supporting lower revenue this quarter and the timing and mix of revenue.

#### Operating Expenses, Other Income, net and Provision for Income Taxes

*Marketing and Sales.* Marketing and sales expenses decreased $2.3 million, or 12.2%, during the three months ended June 30, 2020 compared to the same period in 2019 due primarily to personnel and related cost decreases of $1.0 million as well as marketing program cost decreases of $1.3 million.

*Research and Development.* Our research and development expenses increased $0.5 million, or 5.9%, during the three months ended June 30, 2020 compared to the same period in 2019 due to an increase in headcount resulting in personnel and related cost increases of $0.5 million.

*General and Administrative.* Our general and administrative expenses decreased $0.7 million, or 5.2%, during the three months ended June 30, 2020 compared to the same period in 2019 due to administrative cost decreases of $0.5 million, amortization cost decreases of $0.1 million and stock-based compensation cost decreases of $0.2 million, which were partially offset by professional service cost increases of $0.1 million.

*Other Income, net.* We recognized other income, net of $0.8 million for the three months ended June 30, 2020, a decrease of $0.4 million compared to other income, net of $1.1 million for the three months ended June 30, 2019. Other income, net for the three months ended June 30, 2020 primarily consisted of $0.4 million in interest income on investments and a $0.3 million gain on foreign currency. Other income, net for the three months ended June 30, 2019 primarily consisted of $0.5 million in interest income on investments and a $0.5 million gain on foreign currency.

*Provision for Income Taxes.* Our effective tax rate of 16.6% for the three months ended June 30, 2020 decreased 5.3% compared to 21.9% for the same period in 2019. The decrease in the effective tax rate is primarily due to an increase in tax benefits from the vesting of restricted stock and the exercise of stock options and an increase in the research and development tax credit. Our income tax provision of $2.5 million for the three months ended June 30, 2020 decreased $2.0 million compared to our income tax provision of $4.5 million for the three months ended June 30, 2019.

21

### Comparison of Six Months Ended June 30, 2020 and 2019

#### Revenue

Revenue by reportable segment and the related changes for the six months ended June 30, 2020 and 2019 were as follows:

*(dollars in thousands)*

| Revenue | Six Months Ended June 30, 2020 $% of Total Revenue |  | 2019 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $176,899 | 79.8% | $178,960 | 78.0% | $(2,061) | (1.2)% |
| Europe | 37,516 | 16.9 | 42,194 | 18.4 | (4,678) | (11.1) |
| Japan | 7,268 | 3.3 | 8,230 | 3.6 | (962) | (11.7) |
| Total revenue | $221,683 | 100.0% | $229,384 | 100.0% | $(7,701) | (3.4)% |

Our revenue decreased $7.7 million, or 3.4%, for the six months ended June 30, 2020 compared to the same period in 2019. By reportable segment, revenue in the United States decreased $2.1 million, or 1.2%, for the six months ended June 30, 2020 compared to the same period in 2019. Revenue in Europe decreased $4.7 million, or 11.1%, and revenue in Japan decreased $1.0 million, or 11.7%, in each case for the six months ended June 30, 2020 compared to the same period in 2019. Our revenue in Europe was impacted by foreign currency exchange rates. Excluding the $1.1 million impact of the changes in foreign currency exchange rates, the decrease in Europe revenue would have been 8.6%. In addition, our revenue in each region was impacted by a decline in order activity driven by current economic conditions as a result of the COVID-19 pandemic.

Our revenue decline during the six months ended June 30, 2020 was the result of a decrease in the volume of product developers and engineers we served. During the six months ended June 30, 2020, we served 29,703 unique product developers and engineers, a decrease of 5.9% over the same period in 2019. The economic uncertainty arising from the COVID-19 pandemic has impacted the number of product developers and engineers who purchase our products. While we expect the number of product developers and engineers served to grow in the long-term, challenges posed by the COVID-19 pandemic on the global economy have continued through the date of this report. Steps taken by national and local governments to slow the spread of the virus, including business shutdowns and shelter in place orders, have hindered the ability and willingness of project developers and engineers to proceed with development and commercialization projects on the same scale as they have historically. At this time, it is difficult to predict the future given the current economic uncertainty and evolving market conditions.

Our revenue decreases were primarily driven by a decline in order activity as a result of the economic uncertainty created by the COVID-19 pandemic. International revenue was negatively impacted by $0.9 million during the six months ended June 30, 2020 compared to the same period in 2019 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the six months ended June 30, 2020 and 2019 were as follows:

*(dollars in thousands)*

| Revenue | Six Months Ended June 30, 2020 $% of Total Revenue |  | 2019 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $112,670 | 50.8% | $110,768 | 48.3% | $1,902 | 1.7% |
| CNC Machining | 66,645 | 30.1 | 76,760 | 33.5 | (10,115) | (13.2) |
| 3D Printing | 30,184 | 13.6 | 29,746 | 13.0 | 438 | 1.5 |
| Sheet Metal | 10,318 | 4.7 | 10,497 | 4.6 | (179) | (1.7) |
| Other Revenue | 1,866 | 0.8 | 1,613 | 0.6 | 253 | 15.7 |
| Total revenue | $221,683 | 100.0% | $229,384 | 100.0% | $(7,701) | (3.4)% |

By product line, our revenue decrease was driven by a 13.2% decrease in CNC Machining revenue and a 1.7% decrease in Sheet Metal revenue, which was partially offset by a 1.7% increase in Injection Molding revenue, a 1.5% increase in 3D Printing revenue and a 15.7% increase in Other Revenue, in each case for the six months ended June 30, 2020 compared to the same period in 2019.

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#### Cost of Revenue, Gross Profit and Gross Margin

*Cost of Revenue.* Cost of revenue increased $0.8 million, or 0.8%, for the six months ended June 30, 2020 compared to the same period in 2019, despite the rate of revenue decrease of 3.4% for the six months ended June 30, 2020 compared to the same period in 2019. The increases were driven by a $1.6 million increase in equipment and facility-related costs to support future growth of the business, which was partially offset by personnel and related cost decreases of $0.8 million.

*Gross Profit and Gross Margin.* Gross profit decreased from $119.1 million in the six months ended June 30, 2019 to $110.6 million in the six months ended June 30, 2020 primarily due to a decrease in revenue. Gross margin decreased from 51.9% in the six months ended June 30, 2019 to 49.9% in the six months ended June 30, 2020 due to the fixed cost structure of our facilities and equipment supporting lower revenue this year and the timing and mix of revenue.

#### Operating Expenses, Other Income, net and Provision for Income Taxes

*Marketing and Sales.* Marketing and sales expenses decreased $2.7 million, or 7.3%, during the six months ended June 30, 2020 compared to the same period in 2019 due primarily to personnel and related cost decreases of $1.2 million as well as marketing program cost decreases of $1.5 million.

*Research and Development.* Our research and development expenses increased $1.5 million, or 9.0%, during the six months ended June 30, 2020 compared to the same period in 2019 due to an increase in headcount resulting in personnel and related cost increases of $1.4 million and operating cost increases of $0.1 million.

*General and Administrative.* Our general and administrative expenses increased $0.6 million, or 2.3%, during the six months ended June 30, 2020 compared to the same period in 2019 due to personnel and related cost increases of $1.2 million and professional services increases of $0.2 million, which were partially offset by stock-based compensation decreases of $0.5 million, as well as a $0.3 million decrease in amortization cost.

*Other Income, net.* We recognized other income, net of $1.8 million for the six months ended June 30, 2020, an increase of $0.5 million compared to other income, net of $1.3 million for the six months ended June 30, 2019. Other income, net for the six months ended June 30, 2020 primarily consisted of $0.9 million in interest income on investments and a $0.9 million gain on foreign currency. Other income, net for the six months ended June 30, 2019 primarily consisted of $1.1 million in interest income on investments and a $0.1 million gain on foreign currency.

*Provision for Income Taxes.* Our effective tax rate of 19.4% for the six months ended June 30, 2020 decreased 2.1% compared to 21.5% for the same period in 2019. The decrease in the effective tax rate is primarily due to an increase in tax benefits from the vesting of restricted stock and the exercise of stock options and an increase in the research and development tax credit. Our income tax provision of $6.4 million for the six months ended June 30, 2020 decreased $2.3 million compared to our income tax provision of $8.7 million for the six months ended June 30, 2019.

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### Liquidity and Capital Resources

#### Cash Flows

The following table summarizes our cash flows during the six months ended June 30, 2020 and 2019:

*(dollars in thousands)*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $53,417 | $54,888 |
| Net cash used in investing activities | (65,292) | (17,949) |
| Net cash used in financing activities | (15,198) | (21,585) |
| Effect of exchange rates on cash and cash equivalents | (149) | 135 |
| Net (decrease) increase in cash and cash equivalents | $(27,222) | $15,489 |

#### Sources of Liquidity

Historically, we have primarily financed our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $98.0 million as of June 30, 2020, a decrease of $27.2 million from December 31, 2019. The decrease in our cash was primarily due to cash used in investing activity including net investments in marketable securities of $29.0 million and purchases of property, equipment and other capital assets of $33.3 million and repurchases of common stock of $14.7 million, which were partially offset by cash generated through operations of $53.4 million.

#### Cash Flows from Operating Activities

Cash flows from operating activities were $53.4 million during the six months ended June 30, 2020 and primarily consisted of net income of $26.6 million, adjusted for certain non-cash items, including depreciation and amortization of $15.9 million, stock-based compensation expense of $6.7 million and deferred taxes of $5.7 million, which were partially offset by changes in operating assets and liabilities and other items totaling $1.5 million. Cash flows from operating activities were $54.9 million during the six months ended June 30, 2019 and primarily consisted of net income of $31.7 million, adjusted for certain non-cash items, including depreciation and amortization of $15.0 million, stock-based compensation expense of $6.5 million, deferred taxes of $1.6 million and changes in operating assets and liabilities and other items totaling $0.1 million.

Cash flows from operating activities decreased $1.5 million during the six months ended June 30, 2020 compared to the same period in 2019, primarily due to decreases in net income of $5.1 million, decreases in changes in operating assets and liabilities of $1.0 million driven by timing of cash receipts and payments, and decreases of $0.4 million in other items, which were partially offset by increases in deferred taxes of $4.1 million and increases in depreciation and amortization of $0.9 million.

#### Cash Flows from Investing Activities

Cash used in investing activities was $65.3 million during the six months ended June 30, 2020, consisting of $29.0 million in net investments in marketable securities, $33.3 million for the purchases of property, equipment and other capital assets and $3.0 million for purchases of other assets and investments.

Cash used in investing activities was $17.9 million during the six months ended June 30, 2019, consisting of $34.1 million for the purchases of property, equipment and other capital assets, $9.0 million for purchases of marketable securities and $4.0 million for purchases of other assets and investments, which were partially offset by $29.2 million in proceeds from maturities of marketable securities.

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#### Cash Flows from Financing Activities

Cash used in financing activities was $15.2 million during the six months ended June 30, 2020, consisting of $14.7 million in repurchases of common stock and $3.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which were partially offset by $2.9 million in proceeds from the exercise of stock options.

Cash used in financing activities was $21.6 million during the six months ended June 30, 2019, consisting of $21.4 million in repurchases of common stock and $2.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which were partially offset by $2.2 million in proceeds from the exercise of stock options.

### Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

### Critical Accounting Policies and Use of Estimates

We have adopted various accounting policies to prepare the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

### Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.

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## Market risk

As filed, 1,654 characters.

### Foreign Currency Risk

As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incur production costs and operating expenses in British Pounds, Euros and Japanese Yen.

Our operating results and cash flows are adversely impacted when the United States Dollar appreciates relative to foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign currency exchange rates.

We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be assessed by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency gains of $0.3 million and $0.9 million during the three and six months ended June 30, 2020, respectively. We recognized foreign currency gains of $0.5 million and $0.1 million during the three and six months ended June 30, 2019, respectively. The changes in foreign exchange rates had a negative impact on consolidated revenue of $0.4 million for the three months ended June 30, 2020 and $0.9 million for the six months ended June 30, 2020 as compared to the same periods in 2019.

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## Controls and procedures

As filed, 1,440 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures are effective and provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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## Risk factors

As filed, 1,832 characters.

Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

***Economic uncertainty arising from the recent COVID-19 pandemic could adversely affect our business and results of operations.***

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a pandemic. The COVID-19 outbreak and associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty, could adversely affect our business and results of operations. At this time, the Company is monitoring the global outbreak of the COVID-19 and is taking steps to mitigate the risks to our employees, customers, suppliers and other stakeholders. The Company has been deemed an essential business and all of our global manufacturing operations have remained open. The current business environment and quickly evolving market conditions require significant management judgment to interpret and quantify the potential impact on our assumptions about future financial performance and operating cash flows. To the extent that changes in the current business environment impact our ability to achieve levels of forecasted operating results and cash flows, if our stock price were to trade below book value per share for an extended period of time and/or should other events occur indicating the carrying value of our assets might be impaired, we may be required to recognize impairment losses on goodwill, intangible and tangible assets.

Filed Jul 31, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-016139. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.