Form 10-Q Proto Labs Inc For: Mar 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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| (Mark One) |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission File Number:
Proto Labs, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
(
(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 |
| | |
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. ☑
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). ☑
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.
| | ☑ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ |
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| 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).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| 1A. |
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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 | $ | $ | ||||||
| Short-term marketable securities | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $ as of March 31, 2023, and December 31, 2022, respectively | ||||||||
| Inventory | ||||||||
| Income taxes receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Long-term marketable securities | ||||||||
| Operating lease assets | ||||||||
| Finance lease assets | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued liabilities and other | ||||||||
| Current operating lease liabilities | ||||||||
| Current finance lease liabilities | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term deferred tax liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' equity | ||||||||
| Preferred stock, $ par value, authorized shares; issued and outstanding shares as of each of March 31, 2023, and December 31, 2022 | ||||||||
| Common stock, $ par value, authorized shares; issued and outstanding and shares as of March 31, 2023, and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
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 |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Statements of Operations: |
||||||||
| Revenue |
$ | $ | ||||||
| Cost of revenue |
||||||||
| Gross profit |
||||||||
| Operating expenses |
||||||||
| Marketing and sales |
||||||||
| Research and development |
||||||||
| General and administrative |
||||||||
| Closure of Japan business |
||||||||
| Total operating expenses |
||||||||
| Income from operations |
||||||||
| Other income (loss), net |
( |
) | ||||||
| Income before income taxes |
||||||||
| Provision for income taxes |
||||||||
| Net income |
$ | $ | ||||||
| Net income per share: |
||||||||
| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
| Shares used to compute net income per share: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
| Comprehensive Income (Loss) (net of tax) |
||||||||
| Comprehensive income (loss) |
$ | $ | ( |
) | ||||
| 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 December 31, 2022 |
( |
) | ||||||||||||||||||||||
| Common shares issued on exercise of options and other, net of shares withheld for tax obligations |
( |
) | ( |
) | ||||||||||||||||||||
| Stock-based compensation expense |
- | |||||||||||||||||||||||
| Repurchases of common stock and other |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Other comprehensive loss |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | |||||||||||||||||||||||
| Net unrealized gains (losses) on investments in securities |
- | |||||||||||||||||||||||
| Comprehensive loss |
||||||||||||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Common Stock |
Additional |
Accumulated Other |
||||||||||||||||||||||
| Paid-In |
Retained |
Comprehensive |
||||||||||||||||||||||
| Shares |
Amount |
Capital |
Earnings |
Loss |
Total |
|||||||||||||||||||
| Balance at December 31, 2021 |
( |
) | ||||||||||||||||||||||
| Common shares issued on exercise of options and other, net of shares withheld for tax obligations |
( |
) | ( |
) | ||||||||||||||||||||
| Stock-based compensation expense |
- | |||||||||||||||||||||||
| Repurchases of common stock |
||||||||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Other comprehensive loss |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
- | ( |
) | ( |
) | |||||||||||||||||||
| Net unrealized gains (losses) on investments in securities |
- | ( |
) | ( |
) | |||||||||||||||||||
| Comprehensive loss |
( |
) | ||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. |
| Proto Labs, Inc. |
| Consolidated Statements of Cash Flows |
| (In thousands) |
| (Unaudited) |
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Deferred taxes | ( | ) | ( | ) | ||||
| Interest on finance lease obligations | ||||||||
| Other | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other | ||||||||
| Income taxes | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities and other | ||||||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchases of property, equipment and other capital assets | ( | ) | ( | ) | ||||
| Proceeds from sales of property, equipment and other capital assets | ||||||||
| Purchases of marketable securities | ( | ) | ||||||
| Proceeds from call redemptions and maturities of marketable securities | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Proceeds from exercises of stock options | ||||||||
| Purchases of shares withheld for tax obligations | ( | ) | ( | ) | ||||
| Repurchases of common stock | ( | ) | ||||||
| Principal repayments of finance lease obligations | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| 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, 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,
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 | $ | $ | ||||||
| Basic - weighted-average shares outstanding: | ||||||||
| Effect of dilutive securities: | ||||||||
| Employee stock options and other | ||||||||
| Diluted - weighted-average shares outstanding: | ||||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
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 |
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| Non-compete agreement | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Software technology | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Software platform | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Tradenames | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Intangible assets allocated to the acquired Hubs entities consisted of intangible assets of million in Europe and $
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 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total estimated amortization expense | $ | |||
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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Money market mutual fund |
||||||||||||||||||||||||
| Marketable securities |
||||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 6 – 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 March 31, 2023 and December 31, 2022:
| March 31, 2023 |
||||||||||||||||
| (in thousands) |
Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| U.S. municipal securities |
$ | $ | $ | ( |
) | $ | ||||||||||
| Corporate debt securities |
( |
) | ||||||||||||||
| U.S. government agency securities |
( |
) | ||||||||||||||
| Certificates of deposit/time deposits |
( |
) | ||||||||||||||
| Total marketable securities |
$ | $ | $ | ( |
) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
| (in thousands) | Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| U.S. municipal securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Corporate debt securities | ( | ) | ||||||||||||||
| U.S. government agency securities | ( | ) | ||||||||||||||
| Certificates of deposit/time deposits | ( | ) | ||||||||||||||
| Total marketable securities | $ | $ | $ | ( | ) | $ | ||||||||||
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 March 31, 2023 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.
| March 31, |
||||
| (in thousands) |
2023 | |||
| Due in one year or less |
$ | |||
| Due after one year through five years |
||||
| Total marketable securities |
$ | |||
Note 7 – 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:
| March 31, |
December 31, |
|||||||
| (in thousands) |
2023 | 2022 | ||||||
| Total inventory |
$ | $ | ||||||
| Allowance for obsolescence |
( |
) | ( |
) | ||||
| Inventory, net of allowance |
$ | $ | ||||||
Note 8 – 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 was approved by the Company's shareholders at a Special Meeting of Shareholders on August 29, 2022. No awards were granted from February 23, 2022 to August 29, 2022. Awards outstanding under the 2012 Plan as of August 29, 2022 will continue to be subject to the terms of the 2012 Plan, but if those awards subsequently expire, are forfeited or cancelled or are settled in cash, the shares subject to those awards will become available for awards under the 2022 Plan. Under the 2022 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2022 Plan have a maximum term of 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 2022 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
Stock-Based Compensation Expense
Stock-based compensation expense was $
Stock Options
The following table summarizes stock option activity during the three months ended March 31, 2023:
| Weighted- |
||||||||
| Average |
||||||||
| Stock Options |
Exercise Price |
|||||||
| Options outstanding at December 31, 2022 |
$ | |||||||
| Granted |
||||||||
| Exercised |
||||||||
| Forfeited |
( |
) | ||||||
| Expired |
( |
) | ||||||
| Options outstanding at March 31, 2023 |
$ | |||||||
| Exercisable at March 31, 2023 |
$ | |||||||
The outstanding options generally have a term of years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period of years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company.
The weighted-average grant date fair value of options that were granted during the three months ended March 31, 2023 was $
The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Risk-free interest rate |
|
|
||||||
| Expected life (years) |
||||||||
| Expected volatility |
|
|
||||||
| Expected dividend yield |
|
|
||||||
As of March 31, 2023, there was $
Restricted Stock
Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from to 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 three months ended March 31, 2023:
| Weighted- |
||||||||
| Average |
||||||||
| Grant Date |
||||||||
| Restricted |
Fair Value |
|||||||
| Stock |
Per Share |
|||||||
| Restricted stock at December 31, 2022 |
$ | |||||||
| Granted |
||||||||
| Restrictions lapsed |
( |
) | ||||||
| Forfeited |
( |
) | ||||||
| Restricted stock at March 31, 2023 |
$ | |||||||
As of March 31, 2023, there was $
Performance Stock
Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between percent and
The following table summarizes performance stock activity during the three months ended March 31, 2023:
| Weighted- |
||||||||
| Average |
||||||||
| Grant Date |
||||||||
| Performance |
Fair Value |
|||||||
| Stock |
Per Share |
|||||||
| Performance stock at December 31, 2022 |
$ | |||||||
| Granted |
||||||||
| Restrictions lapsed |
||||||||
| Performance change |
||||||||
| Forfeited |
||||||||
| Performance stock at March 31, 2023 |
$ | |||||||
The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Risk-free interest rate |
|
|
||||||
| Expected life (years) |
||||||||
| Expected volatility |
|
|
||||||
| Expected dividend yield |
|
|
||||||
As of March 31, 2023, there was $
Employee Stock Purchase Plan
The following table presents the assumptions used to estimate the fair value of the ESPP during the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Risk-free interest rate |
|
|
||||||
| Expected life (months) |
||||||||
| Expected volatility |
|
|
||||||
| Expected dividend yield |
|
|
||||||
Note 9 – 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 months ended March 31, 2023 and 2022:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Balance at beginning of period | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustments | ||||||||
| Other comprehensive income (loss) before reclassifications | ( | ) | ||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||
| Net current-period other comprehensive income (loss) | ( | ) | ||||||
| Net unrealized gains (losses) on investments in securities | ||||||||
| Other comprehensive income (loss) before reclassifications | ( | ) | ||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||
| Net current-period other comprehensive income (loss) | ( | ) | ||||||
| Balance at end of period | $ | ( | ) | $ | ( | ) | ||
Note 10 – 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 March 31, 2023 and 2022, the Company recorded an income tax provision of $
The effective income tax rate for the three months ended March 31, 2023 differs from the U.S. federal statutory rate of
The Company had unrecognized tax benefits totaling $
Note 11 – 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 months ended March 31, 2023 and 2022 were as follows:
| Three Months Ended March 31, |
||||||||
| (in thousands) |
2023 |
2022 |
||||||
| Revenue: |
||||||||
| United States |
$ | $ | ||||||
| Europe |
||||||||
| Japan |
||||||||
| Total revenue |
$ | $ | ||||||
| Three Months Ended March 31, |
||||||||
| (in thousands) |
2023 |
2022 |
||||||
| Income (Loss) from Operations: |
||||||||
| United States |
$ | $ | ||||||
| Europe |
( |
) | ( |
) | ||||
| Corporate Unallocated and Japan |
( |
) | ( |
) | ||||
| Total Income from Operations |
$ | $ | ||||||
Total long-lived assets at March 31, 2023 and December 31, 2022 were as follows:
| March 31, |
December 31, |
|||||||
| (in thousands) |
2023 | 2022 | ||||||
| Total long-lived assets: |
||||||||
| United States |
$ | $ | ||||||
| Europe |
||||||||
| Japan |
||||||||
| Total Long-lived Assets |
$ | $ | ||||||
Revenue by product line for the three months ended March 31, 2023 and 2022 were as follows:
| Three Months Ended March 31, |
||||||||
| (in thousands) |
2023 |
2022 |
||||||
| Revenue: |
||||||||
| Injection Molding |
$ | $ | ||||||
| CNC Machining |
||||||||
| 3D Printing |
||||||||
| Sheet Metal |
||||||||
| Other Revenue |
||||||||
| Total revenue |
$ | $ | ||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2022.
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 Securities and Exchange Commission (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 one of the world’s largest and fastest digital manufacturers of custom prototypes and on-demand production parts. Our mission is to empower companies to bring new ideas to market by offering the fastest and most comprehensive digital manufacturing service in the world. Our automated quoting and manufacturing systems allow us to produce commercial-grade plastic, metal, and liquid silicone rubber parts in as fast as one day. We manufacture prototype 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. For most of our offerings, 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. In addition, we serve procurement and supply chain professionals seeking to manufacture custom parts on-demand. Through the acquisition of Hubs (formerly 3D Hubs, Inc.) (Hubs) in 2021, we are able to provide our customers access to a global network of premium manufacturing partners who reside across North America, Europe and Asia, complementing our in-house manufacturing. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many customers and is the primary reason we have become a leading supplier of custom parts.
On May 27, 2022, our board of directors approved a plan for the closure of our 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. We expect to complete the closure plan within the year.
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. In 2021, we augmented our internal manufacturing operations through our acquisition of Hubs to expand the envelope of custom parts we can provide to our customers through a network of premium manufacturing partners in each of our product lines.
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 molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Because we retain possession of the molds, customers who need short-run production often come back to Proto Labs’ 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 service. This service utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs.
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 customer. CNC turning is a subtractive manufacturing process that rotates a metal rod while a cutting tool is used to remove material and create final parts. Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications.
Industrial 3D Printing
Our Industrial 3D Printing product line includes SL, SLS, DMLS, MJF, PolyJet, Carbon DLS and fused deposition modeling (FDM) processes, which offers 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.
Sheet Metal
Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, providing 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 customer to fabricate rapid prototyping sheet metal or end-use production parts and assemblies.
Key Financial Measures and Trends
Revenue
Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. On May 27, 2022, our board of directors approved a plan for the closure of our manufacturing facility in Japan and announced an intention to cease operations in the region. 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 gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including:
| ● |
expanding the breadth and scope of our products by adding more sizes and materials to our offerings; |
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| ● |
the introduction of our 3D Printing product line through our acquisition of FineLine in 2014; |
|
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| ● |
expanding 3D Printing to Europe through our acquisition of Alphaform in 2015; |
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| ● |
the introduction of our Sheet Metal product line through our acquisition of Rapid Manufacturing Group, LLC in 2017; |
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| ● |
continuously improving the usability of our product lines such as our web-centric applications; and |
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| ● | providing customers with on-demand access to a global network of premium manufacturing partners through our acquisition of Hubs in 2021. |
During the three months ended March 31, 2023, we served 23,287 unique product developers and engineers who purchased our products through our web-based customer interface, which is consistent with the same period in 2022.
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 customer 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.
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, the mix between revenue produced in our internal manufacturing operations and outsourced to our external manufacturing partners, the mix between premium expedited manufacturing and longer lead times, and foreign currency exchange rates.
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 business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand injection-molded, CNC-machined, 3D-printed and sheet metal custom parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses in the future.
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, which includes an allocation of information technology expense including amortization of Protolabs 2.0 software assets. 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, which includes an allocation of information technology expense including amortization of Protolabs 2.0 software assets. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.
Closure of Japan business. Closure of Japan business expense is driven by our decision to close the Japan manufacturing facility and exit the Japan market. The expenses consist primarily of operating expense, including employee severance, write-down of fixed assets, facility-related charges and goodwill impairment charges.
Other Income (Loss), net
Other income (loss), 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 foreign currency 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, our effective tax rate for 2023 and beyond may differ from historical effective tax rates due to increases in losses in foreign operations that are not eligible for tax benefits on account of valuation allowances, as well as any future tax law changes that may impact our effective tax rate.
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.
| Three Months Ended March 31, |
Change |
|||||||||||||||||||||||
| (dollars in thousands) |
2023 |
2022 |
$% |
|||||||||||||||||||||
| Revenue |
$ | 125,859 | 100.0 | $ | 124,168 | 100.0 | $ | 1,691 | 1.4 | |||||||||||||||
| Cost of revenue |
72,083 | 57.3 | 68,364 | 55.1 | 3,719 | 5.4 | ||||||||||||||||||
| Gross profit |
53,776 | 42.7 | 55,804 | 44.9 | (2,028 | ) | (3.6 | ) | ||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||
| Marketing and sales |
22,451 | 17.8 | 20,586 | 16.6 | 1,865 | 9.1 | ||||||||||||||||||
| Research and development |
10,677 | 8.5 | 10,557 | 8.5 | 120 | 1.1 | ||||||||||||||||||
| General and administrative |
16,833 | 13.4 | 16,771 | 13.5 | 62 | 0.4 | ||||||||||||||||||
| Closure of Japan business |
66 | 0.1 | - | - | 66 | 100.0 | ||||||||||||||||||
| Total operating expenses |
50,027 | 39.7 | 47,914 | 38.6 | 2,113 | 4.4 | ||||||||||||||||||
| Income from operations |
3,749 | 3.0 | 7,890 | 6.3 | (4,141 | ) | (52.5 | ) | ||||||||||||||||
| Other income (loss), net |
1,290 | 1.0 | (300 | ) | (0.2 | ) | 1,590 | (530.0 | ) | |||||||||||||||
| Income before income taxes |
5,039 | 4.0 | 7,590 | 6.1 | (2,551 | ) | (33.6 | ) | ||||||||||||||||
| Provision for income taxes |
2,380 | 1.9 | 2,495 | 2.0 | (115 | ) | (4.6 | ) | ||||||||||||||||
| Net income |
$ | 2,659 | 2.1 | % | $ | 5,095 | 4.1 | % | $ | (2,436 | ) | (47.8 | )% | |||||||||||
Stock-based compensation expense included in the statements of operations data above for the three months ended March 31, 2023 and 2022 were as follows:
| Three Months Ended March 31, |
||||||||
| (dollars in thousands) |
2023 |
2022 |
||||||
| Stock options, restricted stock and performance stock |
$ | 3,321 | $ | 4,006 | ||||
| Employee stock purchase plan |
374 | 391 | ||||||
| Total stock-based compensation expense |
$ | 3,695 | $ | 4,397 | ||||
| Cost of revenue |
$ | 466 | $ | 587 | ||||
| Operating expenses: |
||||||||
| Marketing and sales |
693 | 737 | ||||||
| Research and development |
572 | 629 | ||||||
| General and administrative |
1,964 | 2,444 | ||||||
| Total stock-based compensation expense |
$ | 3,695 | $ | 4,397 | ||||
Comparison of Three Months Ended March 31, 2023 and 2022
Revenue
Revenue by reportable segment and the related changes for the three months ended March 31, 2023 and 2022 were as follows:
| Three Months Ended March 31, |
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| 2023 |
2022 |
Change |
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| (dollars in thousands) |
$ |
% of Total Revenue |
$ |
% of Total Revenue |
$ |
% |
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| Revenue |
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| United States |
$ | 97,746 | 77.7 | % | $ | 95,496 | 76.9 | % | $ | 2,250 | 2.4 | % | ||||||||||||
| Europe |
28,113 | 22.3 | 24,586 | 19.8 | 3,527 | 14.3 | ||||||||||||||||||
| Japan |
- | - | 4,086 | 3.3 | (4,086 | ) | (100.0 | ) | ||||||||||||||||
| Total revenue |
$ | 125,859 | 100.0 | % | $ | 124,168 | 100.0 | % | $ | 1,691 | 1.4 | % | ||||||||||||
Our revenue increased $1.7 million, or 1.4%, for the three months ended March 31, 2023 compared to the same period in 2022. By reportable segment, revenue in the United States increased $2.3 million, or 2.4%, for the three months ended March 31, 2023 compared to the same period in 2022. Revenue in Europe increased $3.5 million, or 14.3%, and revenue in Japan decreased $4.1 million, or 100.0%, in each case for the three months ended March 31, 2023 compared to the same period in 2022. The decrease in Japan revenue was driven by our decision in the second quarter of 2022 to close our Japan operations. Our acquisition of Hubs provided revenue of $9.4 million and $4.8 million in the United States, and $7.8 million and $5.5 million in Europe, for each of the three months ended March 31, 2023 and 2022. International revenue was negatively impacted by $2.5 million during the three months ended March 31, 2023 compared to the same period in 2022 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.
During the three months ended March 31, 2023, we served 23,287 unique product developers and engineers, which is consistent with the same period in 2022. Our growth in product developers and engineers served increased at a lesser rate than our revenue growth, resulting in an increase in the average spend per product developer and engineer.
Revenue by product line and the related changes for the three months ended March 31, 2023 and 2022 were as follows:
| Three Months Ended March 31, |
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| 2023 |
2022 |
Change |
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| (dollars in thousands) |
$ |
% of Total Revenue |
$ |
% of Total Revenue |
$ |
% |
||||||||||||||||||
| Revenue |
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| Injection Molding |
$ | 51,948 | 41.3 | % | $ | 53,398 | 43.0 | % | $ | (1,450 | ) | (2.7 | )% | |||||||||||
| CNC Machining |
48,104 | 38.2 | 46,098 | 37.1 | 2,006 | 4.4 | ||||||||||||||||||
| 3D Printing |
21,325 | 16.9 | 19,672 | 15.8 | 1,653 | 8.4 | ||||||||||||||||||
| Sheet Metal |
4,248 | 3.4 | 4,687 | 3.8 | (439 | ) | (9.4 | ) | ||||||||||||||||
| Other Revenue |
234 | 0.2 | 313 | 0.3 | (79 | ) | (25.2 | ) | ||||||||||||||||
| Total revenue |
$ | 125,859 | 100.0 | % | $ | 124,168 | 100.0 | % | $ | 1,691 | 1.4 | % | ||||||||||||
By product line, our revenue increase was driven by a 4.4% increase in CNC Machining revenue and an 8.4% increase in 3D Printing revenue, which was partially offset by a 2.7% decrease in Injection Molding revenue, a 9.4% decrease in Sheet Metal revenue and a 25.2% decrease in Other Revenue, in each case for the three months ended March 31, 2023 compared to the same period in 2022.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $3.7 million, or 5.4%, for the three months ended March 31, 2023 compared to the same period in 2022, which was higher than the rate of revenue increase of 1.4% for the three months ended March 31, 2023 compared to the same period in 2022. Cost of revenue decreased $1.9 million in our digital manufacturing business, which was driven by decreases in overtime and contract labor expense and led to lower personnel and related costs of $2.1 million, and an increase in raw material and product costs of $0.2 million. Hubs provided a $5.6 million increase in cost of revenue due to higher revenue volume for the three months ended March 31, 2023 compared to the same period in 2022.
Gross Profit and Gross Margin. Gross profit decreased from $55.8 million in the three months ended March 31, 2022 to $53.8 million in the three months ended March 31, 2023. Gross margin decreased from 44.9% in the three months ended March 31, 2022 to 42.7% in the three months ended March 31, 2023.
Operating Expenses, Other Income (Loss), net and Provision for Income Taxes
Marketing and Sales. Marketing and sales expenses increased $1.9 million, or 9.1%, during the three months ended March 31, 2023 compared to the same period in 2022. The increase was driven by marketing program cost increases in our digital manufacturing business of $0.2 million and increases in Hubs' marketing and sales expenses of $1.7 million during the three months ended March 31, 2023 when compared to the same period in 2022.
Research and Development. Our research and development expenses increased $0.1 million, or 1.1%, during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to increases of $0.7 million in Hubs' research and development expenses, which were partially offset by personnel and related cost decreases of $0.2 million and decreases in professional services and other operating costs of $0.4 million in our digital manufacturing business.
General and Administrative. Our general and administrative expenses increased $0.1 million, or 0.4%, during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an increase of $0.3 million in personnel and related costs, an increase of professional services of $0.4 million, an increase in stock based compensation costs of $0.1 million, which were partially offset by a decrease of $0.5 million in administrative costs and decreases of $0.2 million in Hubs' general and administrative expenses.
Closure of Japan business. Our decision to close our Japan business resulted in $0.1 million in operating expenses during the three months ended March 31, 2023. We had no expenses related to the closure of our Japan business in the three months ended March 31, 2022.
Other income (loss), net. We recognized other income, net of $1.3 million for the three months ended March 31, 2023, an increase of $1.6 million compared to other loss, net of $0.3 million for the three months ended March 31, 2022. Other income, net for the three months ended March 31, 2023 primarily consisted of a $0.1 million gain on foreign currency and $1.2 million in interest income on investments and other income. Other income, net for the three months ended March 31, 2022 primarily consisted of a $0.3 million loss on foreign currency.
Provision for Income Taxes. Our effective tax rate of 47.2% for the three months ended March 31, 2023 increased 14.3% compared to 32.9% for the same period in 2022. The increase in the effective tax rate is primarily due to a decrease in tax benefits from the vesting of restricted stock, the cancellation of performance stock units and the exercise of stock options, as well as an increase in the rate impact of losses in jurisdictions that are not eligible for tax benefits due to valuation allowances. Our income tax provision of $2.4 million for the three months ended March 31, 2023 decreased $0.1 million compared to our income tax provision of $2.5 million for the three months ended March 31, 2022.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows during the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
||||||||
| (dollars in thousands) |
2023 | 2022 | ||||||
| Net cash provided by operating activities |
$ | 22,578 | $ | 17,783 | ||||
| Net cash provided by (used in) investing activities |
4,383 | (25,835 | ) | |||||
| Net cash used in financing activities |
(21,602 | ) | (601 | ) | ||||
| Effect of exchange rates on cash and cash equivalents |
134 | (37 | ) | |||||
| Net increase (decrease) in cash and cash equivalents |
$ | 5,493 | $ | (8,690 | ) | |||
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 $62.1 million as of March 31, 2023, an increase of $5.5 million from December 31, 2022. The increase in our cash was primarily due to cash provided by operating activities of $22.6 million and proceeds from call redemptions and maturities of marketable securities of $7.7 million, which were partially offset by $3.4 million for purchases of property, equipment and other capital assets, and $21.1 million in repurchases of common stock.
We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Cash Flows from Operating Activities
Cash flows from operating activities were $22.6 million during the three months ended March 31, 2023 and primarily consisted of net income of $2.7 million, adjusted for certain non-cash items, including depreciation and amortization of $9.4 million, stock-based compensation expense of $3.7 million, interest on finance lease obligations of $0.3 million and changes in operating assets and liabilities and other items totaling $9.6 million, which were partially offset by deferred taxes of $3.1 million. Cash flows from operating activities were $17.8 million during the three months ended March 31, 2022 and primarily consisted of net income of $5.1 million, adjusted for certain non-cash items, including depreciation and amortization of $10.2 million and stock-based compensation expense of $4.4 million, which were partially offset by changes in operating assets and liabilities and other items totaling $1.9 million.
Cash flows from operating activities increased $4.8 million during the three months ended March 31, 2023 compared to the same period in 2022, primarily due to increases in interest on finance lease obligations of $0.3 million and changes in operating assets and liabilities totaling $8.4 million, which were partially offset by decreases in net income of $2.4 million, stock-based compensation of $0.7 million, and depreciation and amortization of $0.8 million.
Cash Flows from Investing Activities
Cash provided by investing activities was $4.4 million during the three months ended March 31, 2023, consisting of $7.7 million in proceeds from call redemptions and maturities of marketable securities, which were partially offset by $3.3 million for net purchases of property, equipment and other capital assets.
Cash used in investing activities was $25.8 million during the three months ended March 31, 2022, consisting of $22.7 million for net purchases of marketable securities and $3.1 million for the purchases of property, equipment and other capital assets.
Cash Flows from Financing Activities
Cash used in financing activities was $21.6 million during the three months ended March 31, 2023, consisting of $21.1 million in repurchases of common stock, $0.4 million in purchases of shares withheld for tax obligations associated with equity transactions, and $0.1 million for repayments of finance lease obligations.
Cash used in financing activities was $0.6 million during the three months ended March 31, 2022, consisting of $0.5 million in purchases of shares withheld for tax obligations associated with equity transactions, and $0.1 million for repayments of finance lease obligations.
Critical Accounting 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). The preparation of these financial statements requires us to make estimates, judgements and assumptions. Our significant accounting policies and estimates are disclosed in Note 2 to the Consolidated Financial Statements included Pat II, Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to our critical accounting policies and estimates during the three months ended March 31, 2023.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 $0.1 million and foreign currency losses of $0.3 million during the three months ended March 31, 2023 and 2022, respectively. The changes in foreign exchange rates had a negative impact on consolidated revenue of $2.5 million for the three months ended March 31, 2023 as compared to the same period in 2022.
Item 4. Controls and Procedures
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.
From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of these financial statements, we do not believe we are party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business.
Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 includes a discussion of our risk factors. There have been no material changes from the risk factors described in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 9, 2017, our board of directors authorized the repurchase of shares of our common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million. On May 16, 2019, we announced that our board of directors approved a $50 million increase in our authorized stock repurchase program and extended the term of the program through December 31, 2023, which increased the stock repurchase program to $100 million. On December 8, 2021, our board of directors approved another $50 million increase in our authorized stock repurchase program, which increased the total repurchases authorized to $150 million. On November 17, 2022, our board of directors approved a $50 million increase in our authorized stock repurchase program, which increased the total repurchases authorized to $200 million and extended the term of the program through December 31, 2024. On February 7, 2023 our board of directors approved a $50 million increase in our authorized stock repurchase program, which increased the stock repurchase authorized to $250 million. We have $111.2 million remaining under this authorization. The timing and amount of any share repurchases will be determined by our management based on market conditions and other factors.
During the three months ended March 31, 2023, we repurchased 672,500 shares of our common stock at a total purchase price of $21.1 million under this program. Common stock repurchase activity through March 31, 2023 was as follows:
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1) |
||||||||||||
| January 1, 2023 through January 31, 2023 |
200,000 | $ | 27.58 | 200,000 | $ | 76,757 | ||||||||||
| February 1, 2023 through February 28, 2023 |
292,500 | $ | 32.59 | 292,500 | $ | 117,224 | ||||||||||
| March 1, 2023 through March 31, 2023 |
180,000 | $ | 33.60 | 180,000 | $ | 111,176 | ||||||||||
| 672,500 | $ | 31.37 | 672,500 | $ | 111,176 | |||||||||||
Item 3. Defaults Upon Senior Securities
No matters to disclose.
Item 4. Mine Safety Disclosures
No matters to disclose.
No matters to disclose.
The following documents are filed as part of this report:
| Exhibit Number |
Description of Exhibit |
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| 3.1 |
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| 3.2 |
Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K, filed with the Commission on May 21, 2015). | ||
| 3.3 |
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| 31.1 |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act* |
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| 31.2 |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act* |
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| 32.1 |
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| 101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | ||
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||
* Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Proto Labs, Inc. |
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| Date: May 5, 2023 |
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/s/ Robert Bodor |
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Robert Bodor |
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President and Chief Executive Officer (Principal Executive Officer) |
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| Date: May 5, 2023 |
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/s/ Daniel Schumacher |
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Daniel Schumacher |
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Chief Financial Officer (Principal Financial Officer) |
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ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
XBRL TAXONOMY EXTENSION LABEL LINKBASE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
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