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Form 10-Q Proto Labs Inc For: Jun 30

August 5, 2022 12:03 PM EDT

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Table of Contents

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 June 30, 2022

 

or

 

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)

 

(763479-3680

(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: 27,503,100 shares of Common Stock, par value $0.001 per share, were outstanding at July 29, 2022.

 

 

 
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 


 

  

June 30,

  

December 31,

 
  2022  2021 
  

(Unaudited)

     

Assets

        

Current assets

        

Cash and cash equivalents

 $54,666  $65,929 

Short-term marketable securities

  24,379   11,580 

Accounts receivable, net of allowance for doubtful accounts of $2,130 and $1,948 as of June 30, 2022, and December 31, 2021, respectively

  82,469   80,051 

Inventory

  15,051   13,161 

Income taxes receivable

  2,627   1,321 

Prepaid expenses and other current assets

  11,484   11,450 

Total current assets

  190,676   183,492 

Property and equipment, net

  260,631   280,346 

Goodwill

  390,354   400,610 

Other intangible assets, net

  34,026   37,998 

Long-term marketable securities

  31,068   14,340 

Operating lease assets

  4,037   5,578 

Finance lease assets

  1,649   1,898 

Long-term assets held for sale

  1,985   - 

Other long-term assets

  4,223   4,320 

Total assets

 $918,649  $928,582 
         

Liabilities and shareholders' equity

        

Current liabilities

        

Accounts payable

 $15,642  $25,364 

Accrued compensation

  16,687   13,704 

Accrued liabilities and other

  24,011   11,980 

Current operating lease liabilities

  2,140   3,298 

Current finance lease liabilities

  436   550 

Total current liabilities

  58,916   54,896 

Long-term operating lease liabilities

  1,886   2,245 

Long-term finance lease liabilities

  1,188   1,351 

Long-term deferred tax liabilities

  30,177   35,892 

Other long-term liabilities

  5,784   5,705 

Total liabilities

  97,951   100,089 
         

Shareholders' equity

        

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of June 30, 2022, and December 31, 2021

  -   - 

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,503,100 and 27,465,945 shares as of June 30, 2022, and December 31, 2021, respectively

  28   28 

Additional paid-in capital

  475,740   468,548 

Retained earnings

  381,079   376,734 

Accumulated other comprehensive loss

  (36,149)  (16,817)

Total shareholders' equity

  820,698   828,493 

Total liabilities and shareholders' equity

 $918,649  $928,582 

 


 

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

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 


 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Statements of Operations:

                

Revenue

 $126,902  $123,048  $251,070  $239,174 

Cost of revenue

  69,480   66,423   137,844   127,219 

Gross profit

  57,422   56,625   113,226   111,955 

Operating expenses

                

Marketing and sales

  21,055   21,044   41,641   40,524 

Research and development

  9,450   11,060   20,007   23,241 

General and administrative

  16,522   8,417   33,293   27,825 

Closure of Japan business

  5,194   -   5,194   - 

Total operating expenses

  52,221   40,521   100,135   91,590 

Income from operations

  5,201   16,104   13,091   20,365 

Other income (loss), net

  1   137   (299)  (176)

Income before income taxes

  5,202   16,241   12,792   20,189 

Provision for income taxes

  2,645   3,326   5,140   3,562 

Net income

 $2,557  $12,915  $7,652  $16,627 
                 

Net income per share:

                

Basic

 $0.09  $0.47  $0.28  $0.60 

Diluted

 $0.09  $0.47  $0.28  $0.60 
                 

Shares used to compute net income per share:

                

Basic

  27,530,739   27,735,732   27,515,583   27,600,684 

Diluted

  27,536,823   27,744,870   27,524,019   27,741,464 
                 

Comprehensive Income (Loss) (net of tax)

                

Comprehensive income (loss)

 $(11,287) $14,896  $(11,680) $11,932 

 


 

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

 

 

 

 

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 January 1, 2022

  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 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  122,705   -   1,158   -   -   1,158 

Stock-based compensation expense

  -   -   4,031   -   -   4,031 

Repurchases of common stock

  (113,266)  -   (1,932)  (3,307)  -   (5,239)

Net income

  -   -   -   2,557   -   2,557 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (13,515)  (13,515)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (329)  (329)

Comprehensive loss

                  (11,287)

Balance at June 30, 2022

  27,503,100  $28  $475,740  $381,079  $(36,149) $820,698 

 

  

Common Stock

  

Additional

      

Accumulated Other

     
          

Paid-In

  

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Total

 
                         

Balance at January 1, 2021

  26,776,796   27   284,848   362,901   (3,420)  644,356 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  48,955   -   (290)  -   -   (290)

Common shares issued for Hubs acquisition

  863,995   1   166,708   -      166,709 

Stock-based compensation expense

  -   -   5,620   -   -   5,620 

Repurchases of common stock

  -   -   -   -   -   - 

Net income

  -   -   -   3,712   -   3,712 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (6,842)  (6,842)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   166   166 

Comprehensive loss

                  (2,964)

Balance at March 31, 2021

  27,689,746  $28  $456,886  $366,613  $(10,096) $813,431 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  85,317   -   (81)  -   -   (81)

Stock-based compensation expense

  -   -   4,941   -   -   4,941 

Repurchases of common stock

  (14,000)  -   (149)  (1,061)  -   (1,210)

Net income

  -   -   -   12,915   -   12,915 

Other comprehensive income

                        

Foreign currency translation adjustment

  -   -   -   -   2,030   2,030 

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (49)  (49)

Comprehensive income

                  14,896 

Balance at June 30, 2021

  27,761,063  $28  $461,597  $378,467  $(8,115) $831,977 

 


 

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

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 


 

  

Six Months Ended

 
  

June 30,

 
  

2022

  

2021

 
         

Operating activities

        

Net income

 $7,652  $16,627 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  20,274   20,127 

Stock-based compensation expense

  8,428   10,561 

Deferred taxes

  (5,653)  419 

Fair value of contingent consideration

  -   (7,763)

Impairments related to closure of Japan business

  1,792   - 

Other

  32   269 

Changes in operating assets and liabilities:

        

Accounts receivable

  (5,748)  (23,296)

Inventories

  (1,783)  1,727 

Prepaid expenses and other

  (298)  1,810 

Income taxes

  (1,250)  (4,015)

Accounts payable

  (521)  5,011 

Accrued liabilities and other

  8,115   (748)

Net cash provided by operating activities

  31,040   20,729 
         

Investing activities

        

Purchases of property, equipment and other capital assets

  (6,030)  (23,929)

Cash used for acquisitions, net of cash acquired

  -   (127,413)

Purchases of marketable securities

  (38,882)  (15,159)

Proceeds from sales of marketable securities

  1,000   47,694 

Proceeds from call redemptions and maturities of marketable securities

  7,396   13,725 

Net cash used in investing activities

  (36,516)  (105,082)
         

Financing activities

        

Proceeds from exercises of stock options

  2,311   3,838 

Purchases of shares withheld for tax obligations

  (1,615)  (4,209)

Repurchases of common stock

  (5,239)  (1,210)

Principal repayments of finance lease obligations

  (278)  (275)

Net cash used in financing activities

  (4,821)  (1,856)

Effect of exchange rate changes on cash and cash equivalents

  (966)  515 

Net decrease in cash and cash equivalents

  (11,263)  (85,694)

Cash and cash equivalents, beginning of period

  65,929   127,603 

Cash and cash equivalents, end of period

 $54,666  $41,909 

 


 

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

 

 

 

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, 2021, as filed with the Securities and Exchange Commission (SEC) on February 18, 2022.

 

The accompanying Consolidated Balance Sheet as of December 31, 2021 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 Annual Report on Form 10-K filed on February 18, 2022 as referenced above.

 

On May 27, 2022, the Company's board of directors approved a plan for the closure of the Company's manufacturing facility in Japan and announced an intention to cease operations in the region. Affected employees in Japan will receive severance and other transition assistance that meet or exceed local requirements. The Company expects to substantially complete the closure plan within the next year. The Company's decision to close the Japan business resulted in $5.2 million in operating expenses during the three and six months ended June 30, 2022. Operating expenses included $2.2 million of employee severance, $1.2 million related to the write-down of fixed assets, $0.9 million of facility-related charges, $0.6 million in goodwill impairment charges and $0.3 million in other closure related charges for the three and six months ended June 30, 2022. 

  

 

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 and six months ended June 30, 2022, 220,776 and 208,840 anti-dilutive options were excluded from the calculation of diluted weighted average shares outstanding.

 

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

 


 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

(in thousands, except share and per share amounts)

 

2022

  

2021

  

2022

  

2021

 

Net income

 $2,557  $12,915  $7,652  $16,627 
                 

Basic - weighted-average shares outstanding:

  27,530,739   27,735,732   27,515,583   27,600,684 

Effect of dilutive securities:

                

Employee stock options and other

  6,084   9,138   8,436   140,780 

Diluted - weighted-average shares outstanding:

  27,536,823   27,744,870   27,524,019   27,741,464 

Net income per share:

                

Basic

 $0.09  $0.47  $0.28  $0.60 

Diluted

 $0.09  $0.47  $0.28  $0.60 

 


 

6

 
 

Note 4 – Business Combinations

 

On  January 22, 2021, the Company acquired all of the outstanding shares of 3D Hubs, Inc. (Hubs), for $294.1 million, consisting of $127.4 million in cash and 863,995 shares of the Company's common stock valued at $166.7 million on the closing date. The purchase agreement included additional contingent consideration of up to $52.8 million subject to the achievement of performance-based targets during fiscal 2021 and fiscal 2022. The contingent consideration consisted of up to $25.0 million in cash and up to 143,983 shares of the Company's common stock valued at $27.8 million on the closing date. The Company initially recorded a liability of $13.6 million related to the contingent consideration, which was subsequently reversed when it was determined the performance based targets would not be met in 2021 and the expectation that those targets would not be met in fiscal 2022. The reversal of the contingent consideration was recorded as a decrease in general and administrative expense in the Consolidated Statements of Comprehensive Income.

 

Hubs is based in Amsterdam, Netherlands and is a leading online manufacturing platform that provides customers with on-demand access to a global network of premium manufacturing partners. The acquisition enhances the Company’s value proposition by expanding the customer offerings, enabling the Company to more holistically serve its customers.

 

The fair value of the consideration paid for this acquisition has been allocated to the assets purchased and liabilities assumed based on their fair values as of the acquisition date, with any excess recorded as goodwill.  The goodwill associated with the acquisition represents both the strategic and growth opportunities by significantly expanding the customer offering with a network of premium manufacturing partners. The goodwill related to the acquisition is not deductible for tax purposes. 

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. The final purchase price allocation was as follows:


 

(in thousands)

 Acquisition 

Assets acquired:

    

Current assets

 $2,497 

Intangible assets

  30,770 

Goodwill

  280,925 

Other long-term assets

  1,139 

Total assets acquired

  315,331 
     

Liabilities assumed:

    

Current contingent consideration

  7,093 

Current liabilities

  5,666 

Long-term contingent consideration

  6,507 

Long-term deferred tax liabilities

  1,688 

Other long-term liabilities

  255 

Total liabilities assumed

  21,209 

Net assets acquired

  294,122 
     

Cash paid

  133,847 

Cash acquired

  (6,434)

Net cash consideration

  127,413 

Equity portion of purchase price

  166,709 

Total purchase consideration

 $294,122 

 


 

7

 
 

Note 5 – Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill during the six months ended June 30, 2022 were as follows:

 


 

(in thousands)

 Six Months Ended June 30, 2022 

Balance as of the beginning of the period

 $400,610 

Goodwill acquired during the period

  - 

Goodwill written off during the period

  (630)

Foreign currency translation adjustments

  (9,626)

Balance as of the end of the period

 $390,354 

 


 

Goodwill of $0.6 million was written off as of  June 30, 2022, as a result of the Company's decision to close the Japan manufacturing facility and exit the Japan market. The Japan business was in operations through the second quarter of 2022 and the assets are expected to be available for sale during the second half of 2022. Goodwill has been allocated to the acquired Hubs entities consisting of goodwill of €106.5 million in Europe and $151.3 million in the United States as of the date of the acquisition. The Euro denominated goodwill is 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.

 

Intangible assets other than goodwill at  June 30, 2022 and December 31, 2021 were as follows:

 


 

  

June 30, 2022

  

December 31, 2021

  

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

  $

(759

) $

171

  $

930

  $

(713

) $

217

  10.0  1.8 

Non-compete agreement

 822  (423) 399  842  (363) 479  2.0 - 5.0  2.5 

Software technology

 13,229  (5,699) 7,530  13,229  (5,014) 8,215  10.0  6.0 

Software platform

 25,777  (3,239) 22,538  26,725  (2,262) 24,463  12.0  10.6 

Tradenames

 346  (167) 179  359  (114) 245  3.0  1.6 

Customer relationships

 12,174  (8,965) 3,209  12,252  (7,873) 4,379  3.0 - 9.0  1.3 

Total intangible assets

 $53,278  $(19,252) $34,026  $54,337  $(16,339) $37,998       

 


 

Intangible assets have been allocated to the acquired Hubs entities consisting 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 $2.0 and $0.9 million as of June 30, 2022 and December 31, 2021, respectively. Amortization expense for intangible assets was $1.5 million for each of the three months ended  June 30, 2022 and 2021, and $3.1 million and $3.0 million for the six months ended June 30, 2022 and 2021, respectively.

 

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 2022

 $3,029 

2023

  5,855 

2024

  3,706 

2025

  3,608 

2026

  3,508 

Thereafter

  14,320 

Total estimated amortization expense

 $34,026 

 


 

8

 
 

 Note 6 Assets Held for Sale

 

Assets are classified as held for sale and presented separately on the Consolidated Balance Sheet when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. The assets are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.

 

During the first quarter of 2022, a facility the Company owns in Maple Plain, Minnesota, encompassing approximately 35,000 square feet of manufacturing and office space, met the criteria to be held for sale. The assets held for sale were $2.0 million as of June 30, 2022 and are presented on the Company's Consolidated Balance Sheet as Long-term assets held for sale.  The assets held for sale had no impact on the Company’s Consolidated Statements of Operations during the three or six months ended June 30, 2022. 

 

 

Note 7 – 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. 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  June 30, 2022 and December 31, 2021 measured at fair value on a recurring basis: 

 


 

  

June 30, 2022

  

December 31, 2021

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                        

Cash

 $44,886  $-  $-  $65,637  $-  $- 

Money market mutual fund

  9,780   -   -   292   -   - 

Marketable securities

  15,851   39,596   -   7,602   18,318   - 

Total

 $70,517  $39,596  $-  $73,531  $18,318  $- 

 

 

Note 8 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as available-for-sale and are recorded at fair value. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of  June 30, 2022 and December 31, 2021:

 


 

  

June 30, 2022

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $17,893  $-  $(365) $17,528 

Corporate debt securities

  12,299   -   (234)  12,065 

U.S. government agency securities

  22,284   2   (355)  21,931 

Certificates of deposit/time deposits

  941   -   (6)  935 

Commercial paper

  2,994   -   (6)  2,988 

Total marketable securities

 $56,411  $2  $(966) $55,447 

 


 

9

 

 

  

December 31, 2021

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $12,549  $-  $(70) $12,479 

Corporate debt securities

  9,303   -   (44)  9,259 

U.S. government agency securities

  2,500   -   (12)  2,488 

Certificates of deposit/time deposits

  1,687   7   -   1,694 

Commercial paper

  -   -   -   - 

Total marketable securities

 $26,039  $7  $(126) $25,920 

 


 

Fair values for the corporate debt securities are 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).

 

Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.

 

The  June 30, 2022 balance of available-for-sale debt securities by contractual maturity is shown in the following table at fair value. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 


 

  

June 30,

 

(in thousands)

 2022 

Due in one year or less

 $24,379 

Due after one year through five years

  31,068 

Total marketable securities

 $55,447 

 


 

 

Note 9 – Inventory

 

Inventory consists primarily of raw materials, which are recorded at the lower of cost and net realizable value using the standard cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

 

The Company’s inventory consisted of the following as of the dates indicated:

 


 

  

June 30,

  

December 31,

 

(in thousands)

 2022  2021 

Total inventory

 $15,817  $13,474 

Allowance for obsolescence

  (766)  (313)

Inventory, net of allowance

 $15,051  $13,161 

 


 

10

 
 

Note 10 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company had the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards through February 23, 2022. On July 8, 2022, the board of directors approved the Proto Labs, Inc. 2022 Long-Term Incentive Plan (the 2022 Plan), which will take effect on August 29, 2022 subject to approval by the Company's shareholders at our previously noticed Special Meeting of Shareholders on August 29, 2022. No awards have been granted since February 23, 2022 or will be granted under the 2012 Plan until a new long-term incentive plan is approved by shareholders. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

 

Employee Stock Purchase Plan

 

The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense was $4.0 million and $4.9 million for the three months ended  June 30, 2022 and 2021, respectively, and $8.4 and $10.6 million for the six months ended June 30, 2022 and 2021, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the six months ended June 30, 2022:

 


 

      

Weighted-

 
      

Average

 
  

Stock Options

  

Exercise Price

 

Options outstanding at December 31, 2021

  233,384  $97.78 

Granted

  52,992   59.40 

Exercised

  (3,114)  30.58 

Forfeited

  (34,075)  90.61 

Expired

  (28,411)  84.92 

Options outstanding at June 30, 2022

  220,776  $92.28 
         

Exercisable at June 30, 2022

  113,652  $92.57 

 


 

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period of four to five years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For the board of directors, options generally become exercisable in full on the first anniversary of the grant date.

 

The weighted-average grant date fair value of options that were granted during the six months ended June 30, 2022 was $27.84.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the six months ended June 30, 2022 and 2021:

 


 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Risk-free interest rate

  

1.94%

   

0.80% - 1.12%

 

Expected life (years)

  6.25   6.25 

Expected volatility

  

45.95%

   

45.28 - 45.35%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of June 30, 2022, there was $4.0 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.7 years.

 

11

 

Restricted Stock

 

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from three to five years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For the board of directors, restrictions generally lapse in full on the first anniversary of the grant date. 

 

The following table summarizes restricted stock activity during the six months ended June 30, 2022:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Restricted

  

Fair Value

 
  

Stock

  

Per Share

 

Restricted stock at December 31, 2021

  343,782  $111.79 

Granted

  44,782   59.40 

Restrictions lapsed

  (119,315)  105.06 

Forfeited

  (32,814)  107.48 

Restricted stock at June 30, 2022

  236,435  $105.90 

 


 

As of June 30, 2022, there was $18.8 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.3 years. 

 

12

 

Performance Stock

 

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 200 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. The Company’s PSUs granted from 2017 to 2019 and certain PSUs granted in 2021 are based on performance conditions and the related compensation cost is based on the probability that the performance conditions will be achieved. The Company’s PSUs granted in 2020 and 2022 and certain PSUs granted in 2021 are based on market conditions and the related compensation cost is based on the fair value at grant date calculated using a Monte Carlo pricing model.

 

The following table summarizes performance stock activity during the six months ended June 30, 2022:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Performance

  

Fair Value

 
  

Stock

  

Per Share

 

Performance stock at December 31, 2021

  16,839  $115.56 

Granted

  32,620   100.33 

Restrictions lapsed

  -   - 

Performance change

  -   - 

Forfeited

  (3,578)  121.79 

Performance stock at June 30, 2022

  45,881  $113.25 

 


 

The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the six months ended June 30, 2022 and 2021

 


 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Risk-free interest rate

  

1.76%

   

0.22%

 

Expected life (years)

  2.87   2.87 

Expected volatility

  

53.50%

   

51.40%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of June 30, 2022, there was $3.0 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.5 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the six months ended June 30, 2022 and 2021

 


 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Risk-free interest rate

  

0.17 - 2.06%

   

0.06 - 0.12%

 

Expected life (months)

  6.00   6.00 

Expected volatility

  

47.05 - 53.44%

   

50.85 - 65.53%

 

Expected dividend yield

  

0%

   

0%

 

 


 

13

 
 

 Note 11 – Accumulated Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) is comprised of foreign currency translation adjustments and net unrealized gains (losses) on investments in securities. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and six months ended June 30, 2022 and 2021:

 


 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 
                 

Balance at beginning of period

 $(22,305) $(10,096) $(16,817) $(3,420)

Foreign currency translation adjustments

                

Other comprehensive income (loss) before reclassifications

  (13,515)  2,030   (18,487)  (4,812)

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (13,515)  2,030   (18,487)  (4,812)

Net unrealized gains (losses) on investments in securities

                

Other comprehensive income (loss) before reclassifications

  (329)  (49)  (845)  117 

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (329)  (49)  (845)  117 

Balance at end of period

 $(36,149) $(8,115) $(36,149) $(8,115)

 


 

 

Note 12 – Income Taxes

 

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended  June 30, 2022 and 2021, the Company recorded an income tax provision of $2.6 million and $3.3 million, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded an income tax provision of $5.1 million and $3.6 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended  June 30, 2022 was 50.8 percent compared to 20.5 percent in the same period of the prior year. The effective tax rate increased by 30.3 percent for the three months ended  June 30, 2022 when compared to the same period in 2021, primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options, as well as an increase in losses in jurisdictions, primarily Japan, that are not eligible for tax benefits due to valuation allowances. The effective income tax rate for the six months ended  June 30, 2022 was 40.2 percent compared to 17.6 percent in the same period of the prior year. The effective tax rate increased by 22.6 percent for the six months ended  June 30, 2022 when compared to the same period in 2021, primarily due to a decrease in tax benefits from the vesting of restricted stock and the exercise of stock options, as well as an increase in losses in jurisdictions, primarily Japan, that are not eligible for tax benefits due to valuation allowances. 

 

The effective income tax rate for the six months ended June 30, 2022 differs from the U.S. federal statutory rate of 21.0 percent due to various factors, including operating in multiple state and foreign jurisdictions and tax credits for which the Company qualifies.

 

The Company had unrecognized tax benefits totaling $4.3 million as of June 30, 2022 and $4.4 million as of  December 31, 2021, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term income taxes payable as appropriate. 

 

14

 
 

Note 13 – Segment Reporting

 

The Company’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does not allocate directly to its operating segments.

 

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. 

 

Revenue and income from operations by reportable segment for the three and six months ended June 30, 2022 and 2021 were as follows:

 


 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Revenue:

                

United States

 $100,655  $95,344  $196,151  $186,397 

Europe

  23,391   24,655   47,977   46,104 

Japan

  2,856   3,049   6,942   6,673 

Total revenue

 $126,902  $123,048  $251,070  $239,174 

 


 


 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Income (Loss) from Operations:

                

United States

 $26,168  $26,280  $48,691  $48,783 

Europe

  (2,249)  5,063   (3,928)  3,692 

Corporate Unallocated and Japan

  (18,718)  (15,239)  (31,672)  (32,110)

Total Income from Operations

 $5,201  $16,104  $13,091  $20,365