prlb20230331c

prlb20230331c_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number: 001-35435

Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	41-1939628
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5540 Pioneer Creek Drive
Maple Plain, Minnesota	55359
(Address of principal executive offices)	(Zip Code)

(763) 479-3680

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share	PRLB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,202,723 shares of Common Stock, par value $0.001 per share, were outstanding at May 2, 2023.

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Proto Labs, Inc.

TABLE OF CONTENTS

Item	Description	Page

PART I
1.	Financial Statements	2
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
3.	Quantitative and Qualitative Disclosures about Market Risk	23
4.	Controls and Procedures	24
PART II
1.	Legal Proceedings	25
1A.	Risk Factors	25
2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
3.	Defaults Upon Senior Securities	25
4.	Mine Safety Disclosures	25
5.	Other Information	25
6.	Exhibits	26

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	*March 31,*			*December 31,*
	*2023*			*2022*
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	62,051		$	56,558
Short-term marketable securities		22,851			23,568
Accounts receivable, net of allowance for doubtful accounts of $1,932 and $1,706 as of March 31, 2023, and December 31, 2022, respectively		77,619			76,225
Inventory		14,273			13,578
Income taxes receivable		821			4,042
Prepaid expenses and other current assets		11,101			12,597
Total current assets		188,716			186,568
Property and equipment, net		253,616			257,785
Goodwill		273,991			273,991
Other intangible assets, net		29,869			31,250
Long-term marketable securities		19,824			26,419
Operating lease assets		3,315			3,844
Finance lease assets		17,266			17,532
Other long-term assets		4,776			4,779
Total assets	$	791,373		$	802,168

Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	19,854		$	17,356
Accrued compensation		14,695			12,743
Accrued liabilities and other		23,156			22,384
Current operating lease liabilities		1,295			1,561
Current finance lease liabilities		17,452			17,537
Income taxes payable		1,928			-
Total current liabilities		78,380			71,581
Long-term operating lease liabilities		1,983			2,255
Long-term deferred tax liabilities		23,258			26,322
Other long-term liabilities		4,615			4,362
Total liabilities		108,236			104,520

Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of March 31, 2023, and December 31, 2022		-			-
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,202,723 and 26,888,425 shares as of March 31, 2023, and December 31, 2022, respectively		26			27
Additional paid-in capital		465,185			473,740
Retained earnings		251,420			258,236
Accumulated other comprehensive loss		(33,494	)		(34,355	)
Total shareholders' equity		683,137			697,648
Total liabilities and shareholders' equity	$	791,373		$	802,168

The accompanying notes are an integral part of these consolidated financial statements.

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Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2023*		*2022*

Statements of Operations:
Revenue	$	125,859	$	124,168
Cost of revenue		72,083		68,364
Gross profit		53,776		55,804
Operating expenses
Marketing and sales		22,451		20,586
Research and development		10,677		10,557
General and administrative		16,833		16,771
Closure of Japan business		66		-
Total operating expenses		50,027		47,914
Income from operations		3,749		7,890
Other income (loss), net		1,290		(300	)
Income before income taxes		5,039		7,590
Provision for income taxes		2,380		2,495
Net income	$	2,659	$	5,095

Net income per share:
Basic	$	0.10	$	0.19
Diluted	$	0.10	$	0.19

Shares used to compute net income per share:
Basic		26,580,279		27,502,941
Diluted		26,605,787		27,510,477

Comprehensive Income (Loss) (net of tax)
Comprehensive income (loss)	$	3,520	$	(393	)

The accompanying notes are an integral part of these consolidated financial statements.

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Proto Labs, Inc.

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

	*Common Stock*						*Additional*						*Accumulated Other*
							*Paid-In*			*Retained*			*Comprehensive*
	*Shares*			*Amount*			*Capital*			*Earnings*			*Loss*			*Total*

Balance at December 31, 2022		26,888,425			27			473,740			258,236			(34,355	)		697,648
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		26,798			-			(401	)		-			-			(401	)
Stock-based compensation expense		-			-			3,695			-			-			3,695
Repurchases of common stock and other		(712,500	)		(1	)		(11,849	)		(9,475	)		-			(21,325	)
Net income		-			-			-			2,659			-			2,659
Other comprehensive loss
Foreign currency translation adjustment		-			-			-			-			527			527
Net unrealized gains (losses) on investments in securities		-			-			-			-			334			334
Comprehensive loss																	3,520
Balance at March 31, 2023		26,202,723		$	26		$	465,185		$	251,420		$	(33,494	)	$	683,137

	*Common Stock*				*Additional*					*Accumulated Other*
					*Paid-In*			*Retained*		*Comprehensive*
	*Shares*		*Amount*		*Capital*			*Earnings*		*Loss*			*Total*

Balance at December 31, 2021		27,465,945		28		468,548			376,734		(16,817	)		828,493
Common shares issued on exercise of options and other, net of shares withheld for tax obligations		27,716		-		(462	)		-		-			(462	)
Stock-based compensation expense		-		-		4,397			-		-			4,397
Repurchases of common stock		-		-		-			-		-			-
Net income		-		-		-			5,095		-			5,095
Other comprehensive loss
Foreign currency translation adjustment		-		-		-			-		(4,972	)		(4,972	)
Net unrealized gains (losses) on investments in securities		-		-		-			-		(516	)		(516	)
Comprehensive loss														(393	)
Balance at March 31, 2022		27,493,661	$	28	$	472,483		$	381,829	$	(22,305	)	$	832,035

The accompanying notes are an integral part of these consolidated financial statements.

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Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2023*			*2022*

Operating activities
Net income	$	2,659		$	5,095
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,388			10,232
Stock-based compensation expense		3,695			4,397
Deferred taxes		(3,096	)		(3,213	)
Interest on finance lease obligations		287			-
Other		(46	)		79
Changes in operating assets and liabilities:
Accounts receivable		(2,328	)		(6,329	)
Inventories		(641	)		(675	)
Prepaid expenses and other		1,464			1,110
Income taxes		5,160			4,519
Accounts payable		2,536			(326	)
Accrued liabilities and other		3,500			2,894
Net cash provided by operating activities		22,578			17,783

Investing activities
Purchases of property, equipment and other capital assets		(3,441	)		(3,069	)
Proceeds from sales of property, equipment and other capital assets		194			-
Purchases of marketable securities		-			(29,366	)
Proceeds from call redemptions and maturities of marketable securities		7,630			6,600
Net cash provided by (used in) investing activities		4,383			(25,835	)

Financing activities
Proceeds from exercises of stock options		-			6
Purchases of shares withheld for tax obligations		(401	)		(468	)
Repurchases of common stock		(21,119	)		-
Principal repayments of finance lease obligations		(82	)		(139	)
Net cash used in financing activities		(21,602	)		(601	)
Effect of exchange rate changes on cash and cash equivalents		134			(37	)
Net increase (decrease) in cash and cash equivalents		5,493			(8,690	)
Cash and cash equivalents, beginning of period		56,558			65,929
Cash and cash equivalents, end of period	$	62,051		$	57,239

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (SEC) on February 21, 2023.

The accompanying Consolidated Balance Sheet as of December 31, 2022 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Company's Annual Report on Form 10-K filed on February 21, 2023 as referenced above.

Note 2 – Recent Accounting Pronouncements

The Company did not recently adopt any accounting pronouncements that had a material impact on the Company's Consolidated Financial Statements. There are no pending accounting pronouncements that are expected to have a material impact on the Company's Consolidated Financial Statements.

Note 3 – Net Income per Common Share

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied. For the three months ended March 31, 2023 and 2022, 382,906 and 233,380 anti-dilutive options were excluded from the calculation of diluted weighted average shares outstanding, respectively.

The table below sets forth the computation of basic and diluted net income per share:

	*Three Months Ended*
	*March 31,*
(in thousands, except share and per share amounts)	*2023*		*2022*
Net income	$	2,659	$	5,095

Basic - weighted-average shares outstanding:		26,580,279		27,502,941
Effect of dilutive securities:
Employee stock options and other		25,508		7,536
Diluted - weighted-average shares outstanding:		26,605,787		27,510,477
Net income per share:
Basic	$	0.10	$	0.19
Diluted	$	0.10	$	0.19

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Note 4 – Goodwill and Other Intangible Assets

There were no changes in the carrying amount of goodwill during the three months ended March 31, 2023.

Intangible assets other than goodwill at March 31, 2023 and December 31, 2022 were as follows:

	*March 31, 2023*							*December 31, 2022*							*Useful*	*Weighted Average*
(in thousands)	*Gross*		*Accumulated Amortization*			*Net*		*Gross*		*Accumulated Amortization*			*Net*		*Life (in years)*	*Useful Life Remaining (in years)*
Intangible assets with finite lives:
Marketing assets		$ 930		$ (829)			$ 101		$ 930		$ (806)			$ 124	10.0	1.1
Non-compete agreement	831		(516		)	315		828		(487		)	341		2.0 - 5.0	1.9
Software technology	13,229		(6,725		)	6,504		13,229		(6,383		)	6,846		10.0	4.8
Software platform	26,200		(4,886		)	21,314		26,054		(4,337		)	21,717		12.0	9.8
Tradenames	352		(256		)	96		350		(227		)	123		3.0	0.8
Customer relationships	12,209		(10,670		)	1,539		12,197		(10,098		)	2,099		3.0 - 9.0	0.6
Total intangible assets	$	53,751	$	(23,882	)	$	29,869	$	53,588	$	(22,338	)	$	31,250

Intangible assets allocated to the acquired Hubs entities consisted of intangible assets of €11.6 million in Europe and $16.6 million in the United States as of the date of the acquisition. The Euro denominated intangible assets are translated at the end of each period using the current exchange rates resulting in a foreign currency translation adjustment that is recorded as a component of Other Comprehensive Income. Foreign currency losses related to intangible assets were $1.5 million and $1.7 million as of March 31, 2023 and December 31, 2022, respectively. Amortization expense for intangible assets was $1.5 million for each of the three months ended March 31, 2023 and 2022.

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets and current exchange rates is as follows:

(in thousands)	*Estimated Amortization Expense*
Remaining 2023	$	4,376
2024		3,746
2025		3,648
2026		3,546
2027		3,537
Thereafter		11,016
Total estimated amortization expense	$	29,869

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Note 5 – Fair Value Measurements

Accounting Standards Codification, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company's assets and liabilities that are required to be measured or disclosed at fair value on a recurring basis include cash and cash equivalents and marketable securities. The Company’s cash consists of bank deposits and cash equivalents consist primarily of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs. The Company's marketable securities consist of short-term and long-term agency, municipal, corporate and other debt securities. Fair value for the corporate debt securities is primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

The following table summarizes financial assets as of March 31, 2023 and December 31, 2022 measured at fair value on a recurring basis:

March 31, 2023

December 31, 2022

(in thousands)

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Financial Assets:

Cash

50,165

SEC Form 10-Q filed by Proto Labs Inc.