Annual Statements Open main menu

Proto Labs Inc - Quarter Report: 2021 September (Form 10-Q)

prlb20210930_10q.htm
 

 

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 September 30, 2021

 

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)

 

(763) 479-3680

(Registrant’s telephone number, including area code)

 

Not Applicable

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

  

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

PRLB

New York Stock Exchange

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

☐    

 

Smaller reporting company

Emerging growth company

    

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,589,649 shares of Common Stock, par value $0.001 per share, were outstanding at October 28, 2021.

 

 

 

Proto Labs, Inc.

TABLE OF CONTENTS

 

Item

 

Description

 

Page

 

 

 

 

 

PART I

1.

 

Financial Statements

 

2

2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

16

3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

26

4.

 

Controls and Procedures

 

27

PART II

1.

 

Legal Proceedings

 

28

1A.

 

Risk Factors

 

28

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

3.

 

Defaults Upon Senior Securities

 

28

4.

 

Mine Safety Disclosures

 

28

5.

 

Other Information

 

28

6.

 

Exhibits

 

29

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 


 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
  

(Unaudited)

     

Assets

        

Current assets

        

Cash and cash equivalents

 $47,802  $127,603 

Short-term marketable securities

  16,542   34,088 

Accounts receivable, net of allowance for doubtful accounts of $1,993 and $1,781 as of September 30, 2021 and December 31, 2020, respectively

  85,629   57,877 

Inventory

  9,813   10,862 

Income taxes receivable

  1,766   540 

Prepaid expenses and other current assets

  10,571   11,032 

Total current assets

  172,123   242,002 

Property and equipment, net

  283,019   282,666 

Goodwill

  404,240   128,752 

Other intangible assets, net

  39,816   14,350 

Long-term marketable securities

  19,557   59,357 

Operating lease assets

  5,197   9,855 

Finance lease assets

  2,022   2,396 

Other long-term assets

  4,337   4,826 

Total assets

 $930,311  $744,204 
         

Liabilities and shareholders' equity

        

Current liabilities

        

Accounts payable

 $22,735  $18,248 

Accrued compensation

  15,269   11,989 

Accrued liabilities and other

  12,636   16,193 

Current contingent consideration

  2,506   - 

Current operating lease liabilities

  2,362   3,272 

Current finance lease liabilities

  555   552 

Total current liabilities

  56,063   50,254 

Long-term contingent consideration

  2,294   - 

Long-term operating lease liabilities

  2,792   7,586 

Long-term finance lease liabilities

  1,498   1,919 

Long-term deferred tax liabilities

  36,331   33,854 

Other long-term liabilities

  6,712   6,235 

Total liabilities

  105,690   99,848 
         

Shareholders' equity

        

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2021 and December 31, 2020

  -   - 

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,603,649 and 26,776,796 shares as of September 30, 2021 and December 31, 2020, respectively

  28   27 

Additional paid-in capital

  464,900   284,848 

Retained earnings

  373,151   362,901 

Accumulated other comprehensive loss

  (13,458)  (3,420)

Total shareholders' equity

  824,621   644,356 

Total liabilities and shareholders' equity

 $930,311  $744,204 

 


 

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Statements of Operations:

                

Revenue

 $125,342  $107,504  $364,516  $329,187 

Cost of revenue

  70,018   52,861   197,237   163,988 

Gross profit

  55,324   54,643   167,279   165,199 

Operating expenses

                

Marketing and sales

  21,422   16,705   61,946   51,821 

Research and development

  10,614   7,915   33,855   25,550 

General and administrative

  16,361   12,354   44,186   38,983 

Total operating expenses

  48,397   36,974   139,987   116,354 

Income from operations

  6,927   17,669   27,292   48,845 

Other income (expense), net

  136   728   (40)  2,549 

Income before income taxes

  7,063   18,397   27,252   51,394 

Provision for income taxes

  2,228   3,700   5,790   10,106 

Net income

 $4,835  $14,697  $21,462  $41,288 
                 

Net income per share:

                

Basic

 $0.17  $0.55  $0.78  $1.54 

Diluted

 $0.17  $0.55  $0.77  $1.54 
                 

Shares used to compute net income per share:

                

Basic

  27,713,229   26,736,709   27,638,611   26,724,715 

Diluted

  27,730,105   26,886,433   27,707,784   26,861,647 
                 

Comprehensive Income (net of tax)

                

Comprehensive income

 $(508) $17,807  $11,424  $41,782 

 


 

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, 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 

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

  -   -   -   -   -   - 

Stock-based compensation expense

  -   -   4,978   -   -   4,978 

Repurchases of common stock

  (157,414)  -   (1,675)  (10,151)  -   (11,826)

Net income

  -   -   -   4,835   -   4,835 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (5,298)  (5,298)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (45)  (45)

Comprehensive loss

                      (508)

Balance at September 30, 2021

  27,603,649  $28  $464,900  $373,151  $(13,458) $824,621 

 

  

Common Stock

  

Additional

      

Accumulated Other

     
          

Paid-In

  

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Total

 
                         

Balance at January 1, 2020

  26,786,459   27   268,059   324,722   (7,018)  585,790 

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

  23,525   -   (902)  -   -   (902)

Stock-based compensation expense

  -   -   3,033   -   -   3,033 

Repurchases of common stock

  (161,460)  -   (1,616)  (9,569)  -   (11,185)

Net income

  -   -   -   13,984   -   13,984 

Other comprehensive income

                        

Foreign currency translation adjustment

  -   -   -   -   (2,980)  (2,980)

Comprehensive income

                      11,004 

Balance at March 31, 2020

  26,648,524  $27  $268,574  $329,137  $(9,998) $587,740 

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

  96,186   -   400   -   -   400 

Stock-based compensation expense

  -   -   3,639   -   -   3,639 

Repurchases of common stock

  (38,154)  -   (382)  (3,119)  -   (3,501)

Net income

  -   -   -   12,607   -   12,607 

Other comprehensive income

                        

Foreign currency translation adjustment

  -      -   -   364   364 

Comprehensive income

                      12,971 

Balance at June 30, 2020

  26,706,556  $27  $272,231  $338,625  $(9,634) $601,249 

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

  46,989   -   2,820   -   -   2,820 

Stock-based compensation expense

  -   -   3,945   -   -   3,945 

Repurchases of common stock

  -   -   -   -   -   - 

Net income

  -   -   -   14,697   -   14,697 

Other comprehensive income

                        

Foreign currency translation adjustment

  -      -   -   3,110   3,110 

Comprehensive income

                  17,807 

Balance at September 30, 2020

  26,753,545  $27  $278,996  $353,322  $(6,524) $625,821 

 


 

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

 

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 


 

  

Nine Months Ended

 
  

September 30,

 
  

2021

  

2020

 
         

Operating activities

        

Net income

 $21,462  $41,288 

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

        

Depreciation and amortization

  30,231   23,891 

Stock-based compensation expense

  15,539   10,617 

Deferred taxes

  (139)  6,578 

Amortization of marketable securities

  374   202 

Realized gain on available-sale-securities

  (72)  - 

Fair value of contingent consideration

  (8,513)  - 

Other

  140   (865)

Changes in operating assets and liabilities:

        

Accounts receivable

  (25,615)  (3,812)

Inventories

  950   (316)

Prepaid expenses and other

  1,009   (1,008)

Income taxes

  (1,226)  (1,325)

Accounts payable

  1,978   (1,257)

Accrued liabilities and other

  (3,893)  8,382 

Net cash provided by operating activities

  32,225   82,375 
         

Investing activities

        

Purchases of property, equipment and other capital assets

  (27,956)  (40,489)

Cash used for acquisitions, net of cash acquired

  (127,413)  - 

Purchases of other assets and investments

  -   (3,000)

Purchases of marketable securities

  (15,159)  (90,596)

Proceeds from sales of marketable securities

  57,089   - 

Proceeds from maturities of marketable securities

  15,114   56,428 

Net cash used in investing activities

  (98,325)  (77,657)
         

Financing activities

        

Proceeds from exercises of stock options

  3,838   5,674 

Purchases of shares withheld for tax obligations

  (4,209)  (3,367)

Repurchases of common stock

  (13,036)  (14,686)

Principal repayments of finance lease obligations

  (413)  - 

Net cash used in financing activities

  (13,820)  (12,379)

Effect of exchange rate changes on cash and cash equivalents

  119   690 

Net decrease in cash and cash equivalents

  (79,801)  (6,971)

Cash and cash equivalents, beginning of period

  127,603   125,225 

Cash and cash equivalents, end of period

 $47,802  $118,254 

 


 

The accompanying notes are an integral part of these 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, 2020 as filed with the Securities and Exchange Commission (SEC) on February 19, 2021.

 

The accompanying Consolidated Balance Sheet as of December 31, 2020 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 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 19, 2021 as referenced above.

  

 

Note 2 – Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. The Company adopted ASU 2019-12 on January 1, 2021 and there was no 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, restricted stock units and restricted stock 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.

 

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

 


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands, except share and per share amounts)

 

2021

  

2020

  

2021

  

2020

 

Net income

 $4,835  $14,697  $21,462  $41,288 
                 

Basic - weighted-average shares outstanding:

  27,713,229   26,736,709   27,638,611   26,724,715 

Effect of dilutive securities:

                

Employee stock options and other

  16,876   149,724   69,173   136,932 

Diluted - weighted-average shares outstanding:

  27,730,105   26,886,433   27,707,784   26,861,647 

Net income per share:

                

Basic

 $0.17  $0.55  $0.78  $1.54 

Diluted

 $0.17  $0.55  $0.77  $1.54 

 


 

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 date of close. Up to an additional $52.8 million of contingent consideration is payable after closing, subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close.

 

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 on a preliminary basis to the assets purchased and liabilities assumed based on their estimated 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 Company recorded a contingent consideration liability of $13.6 million as of the acquisition date representing the estimated fair value of the amounts payable to former shareholders, as outlined under the terms of the merger agreement, payable subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close. The fair value of the contingent consideration (Level 3) is determined using a Monte Carlo pricing model. During the three and nine months ended September 30, 2021, the Company recorded a $0.8 million and $8.5 million decrease, respectively, to the estimated fair value of the contingent consideration liability, which was included as a decrease in general and administrative expense in the Consolidated Statements of Comprehensive Income. Fluctuations due to foreign currency translation have been recorded in the Consolidated Statements of Shareholders’ Equity.

 

The results of Hubs since the date of acquisition have been included with Protolabs' results. Pro forma disclosures of the consolidated results of the Company with the full year effects of Hubs, as if the acquisition had occurred on January 1, 2020, are not required and have not been separately presented since the impact to the Company's results of operations was not material.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. In the second quarter of 2021, the Company recorded adjustments to the preliminary allocation, including a $3.9 million decrease to intangible assets, a $6.4 million increase to goodwill, a $3.3 million increase to contingent consideration, a $0.5 million decrease to deferred tax liabilities, and a decrease to cash paid of $0.3 million. The adjustments were driven by changes to the preliminary valuation and finalization of the working capital calculation. No adjustments were made in the third quarter of 2021. As of September 30, 2021, the allocation of purchase price to assets and liabilities is preliminary. The purchase price allocation will be finalized in 2021. The preliminary allocation is as follows:


 

(in thousands)

 Acquisition 

Assets acquired:

    

Current assets

 $2,497 

Intangible assets

  30,770 

Goodwill

  281,845 

Other long-term assets

  1,139 

Total assets acquired

  316,251 
     

Liabilities assumed:

    

Current contingent consideration

  7,093 

Current liabilities

  5,666 

Long-term contingent consideration

  6,507 

Long-term deferred tax liabilities

  2,608 

Other long-term liabilities

  255 

Total liabilities assumed

  22,129 

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 nine months ended September 30, 2021 were as follows:

 


 

(in thousands)

 Nine Months Ended September 30, 2021 

Balance as of the beginning of the period

 $128,752 

Goodwill acquired during the period

  281,845 

Foreign currency translation adjustments

  (6,357)

Balance as of the end of the period

 $404,240 

 


 

Goodwill increased $281.8 million during the nine months ended September 30, 2021 as a result of our acquisition of Hubs. Goodwill has been allocated to the acquired Hubs entities consisting of goodwill of €106.5 million in Europe and $152.2 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  September 30, 2021 and December 31, 2020 were as follows:

 


 

  

September 30, 2021

  

December 31, 2020

  

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  $(690) $240  $930  $(620) $310  10.0 2.5

Non-compete agreement

 847  (330) 517  270  (238) 32  2.0 - 5.0 3.1

Software technology

 13,229  (4,672) 8,557  13,229  (3,645) 9,584  10.0 6.8

Software platform

 26,933  (1,672) 25,261  -  -  -  10.0 9.3

Tradenames

 362  (84) 278  -  -  -  3.0 2.3

Customer relationships

 12,269  (7,306) 4,963  10,070  (5,646) 4,424  3.0 - 9.0 2.1

Total intangible assets

 $54,570  $(14,754) $39,816  $24,499  $(10,149) $14,350     

 


 

Intangible assets increased $30.8 million during the nine months ended September 30, 2021 as a result of our acquisition of Hubs. 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 $0.7 million as of September 30, 2021. There was no foreign currency translation impact as of December 31, 2020. Amortization expense for intangible assets was $1.6 million and $0.8 million for the three months ended  September 30, 2021 and 2020, respectively, and $4.6 million and $2.3 million for the nine months ended September 30, 2021 and 2020, 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 2021

 $1,555 

2022

  6,225 

2023

  6,022 

2024

  3,806 

2025

  3,725 

Thereafter

  18,483 

Total estimated amortization expense

 $39,816 

 


 

8

 
 

Note 6 – 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, marketable securities and contingent consideration. The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist 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 Company's contingent consideration is the current fair value estimate of amounts owed to the former shareholders of Hubs and is determined using the Monte Carlo pricing model (Level 3).

 

The following table summarizes financial assets as of  September 30, 2021 and December 31, 2020 measured at fair value on a recurring basis: 

 


 

  

September 30, 2021

  

December 31, 2020

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                        

Cash and cash equivalents

 $47,337  $-  $-  $72,225  $-  $- 

Money market mutual fund

  465   -   -   55,378   -   - 

Marketable securities

  11,872   24,227   -   -   -   - 

Total

 $59,674  $24,227  $-  $127,603  $-  $- 

Financial Liabilities:

                        

Contingent consideration

 $-  $-  $4,800  $-  $-  $- 

Total

 $-  $-  $4,800  $-  $-  $- 

 


 

In the first quarter of 2021, the Company sold held-to-maturity securities in order to partially fund the acquisition of Hubs. As a result of the sale, all remaining marketable securities were reclassified to available-for-sale securities and reported at fair value.

 

The Company recorded a contingent consideration liability at the acquisition date of Hubs representing the amounts payable to former shareholders, as outlined under the terms of the merger agreement, payable subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close. The fair value of the contingent consideration (Level 3) is determined using a Monte Carlo pricing model. Subsequent changes in the fair value of the contingent consideration liabilities have been recorded in the Consolidated Statements of Comprehensive Income. Fluctuations due to foreign currency translation have been recorded in the Consolidated Statements of Shareholders’ Equity.

 

 

Note 7 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. As of September 30, 2021, the securities are categorized as available-for-sale and are recorded at fair value. As of December 31, 2020, the securities were categorized as held-to-maturity and were recorded at amortized cost, net of an allowance for credit losses. The change in categorization was a result of the sale of securities in the first quarter of 2021 in order to partially fund the acquisition of Hubs and did not have a material impact on our financial statements. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of  September 30, 2021 and December 31, 2020:

 


 

  

September 30, 2021

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $18,515  $28  $(13) $18,530 

Corporate debt securities

  11,852   34   (14)  11,872 

U.S. government agency securities

  1,500   -   (1)  1,499 

Certificates of deposit/time deposits

  4,160   38   -   4,198 

Total marketable securities

 $36,027  $100  $(28) $36,099 

 


 

9

 

 

  

December 31, 2020

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $25,003  $83  $(2) $25,084 

Corporate debt securities

  42,048   211   (11)  42,248 

U.S. government agency securities

  18,500   6   (10)  18,496 

Certificates of deposit/time deposits

  5,395   93   -   5,488 

Commercial paper

  2,499   -   -   2,499 

Total marketable securities

 $93,445  $393  $(23) $93,815 

 


 

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).

 

During the first quarter of 2020, the Company adopted the FASB ASU 2016-13, Financial Instruments – Credit Losses. The Company calculated the expected credit loss for each security in its portfolio using the probability-of-default method. The Company concluded the adoption of the guidance had no material impact on its consolidated financial statements. 

 

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  September 30, 2021 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.

 


 

  

September 30,

 

(in thousands)

 

2021

 

Due in one year or less

 $16,542 

Due after one year through five years

  19,557 

Total marketable securities

 $36,099 

 


 

 

Note 8 – Inventory

 

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market 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:

 


 

  

September 30,

  

December 31,

 

(in thousands)

 

2021

  

2020

 

Total inventory

 $10,102  $11,122 

Allowance for obsolescence

  (289)  (260)

Inventory, net of allowance

 $9,813  $10,862 

 


 

10

 
 

Note 9 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 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 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 $5.0 million and $3.9 million for the three months ended  September 30, 2021 and 2020, respectively, and $15.5 million and $10.6 million for the nine months ended September 30, 2021 and 2020, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2021:

 


 

      

Weighted-

 
      

Average

 
  

Stock Options

  

Exercise Price

 

Options outstanding at December 31, 2020

  229,531  $86.46 

Granted

  57,901   128.14 

Exercised

  (28,991)  58.78 

Forfeited

  (9,893)  100.58 

Options outstanding at September 30, 2021

  248,548  $98.84 
         

Exercisable at September 30, 2021

  116,088  $81.47 

 


 

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 nine months ended September 30, 2021 was $57.26.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2021 and 2020:

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.80 - 1.12%

   

0.50 - 1.47%

 

Expected life (years)

  6.25   6.25 

Expected volatility

  

45.28 - 45.53%

   

42.40 - 43.83%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2021, there was $5.4 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 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 nine months ended September 30, 2021:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Restricted

  

Fair Value

 
  

Stock

  

Per Share

 

Restricted stock at December 31, 2020

  307,199  $98.87 

Granted

  180,798   132.84 

Restrictions lapsed

  (113,315)  91.10 

Forfeited

  (22,908)  120.01 

Restricted stock at September 30, 2021

  351,774  $117.51 

 


 

As of September 30, 2021, there was $31.7 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.6 years. 

 

12

 

Performance Stock

 

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 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 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 nine months ended September 30, 2021:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Performance

  

Fair Value

 
  

Stock

  

Per Share

 

Performance stock at December 31, 2020

  19,956  $118.66 

Granted

  15,078   203.64 

Restrictions lapsed

  -   - 

Performance change

  (8,226)  192.95 

Forfeited

  (4,184)  99.59 

Performance stock at September 30, 2021

  22,624  $148.28 

 


 

The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the nine months ended September 30, 2021 and 2020

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.22%

   

1.41%

 

Expected life (years)

  2.87   2.88 

Expected volatility

  

51.40%

   

38.70%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2021, there was $2.0 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.0 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2021 and 2020

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.06 - 0.12%

   

0.17 - 1.59%

 

Expected life (months)

  6.00   6.00 

Expected volatility

  

50.85 - 65.53%

   

42.63 - 59.99%

 

Expected dividend yield

  

0%

   

0%

 

 


 

13

 
 

 Note 10 – 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 nine months ended September 30, 2021 and 2020:

 


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Balance at beginning of period

 $(8,115) $(9,634) $(3,420) $(7,018)

Foreign currency translation adjustments

                

Other comprehensive income (loss) before reclassifications

  (5,298)  3,110   (10,110)  494 

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (5,298)  3,110   (10,110)  494 

Net unrealized gains (losses) on investments in securities

                

Other comprehensive income (loss) before reclassifications

  (45)  -   72   - 

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (45)  -   72   - 

Balance at end of period

 $(13,458) $(6,524) $(13,458) $(6,524)

 


 

 

Note 11 – 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  September 30, 2021 and 2020, the Company recorded an income tax provision of $2.2 million and $3.7 million, respectively. For the nine months ended  September 30, 2021 and 2020, the Company recorded an income tax provision of $5.8 million and $10.1 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  September 30, 2021 was 31.5 percent compared to 20.1 percent in the same period of the prior year. The effective tax rate increased by 11.4 percent for the three months ended  September 30, 2021 when compared to the same period in 2020, primarily due to an increase in losses in jurisdictions that are not eligible for tax benefits due to valuation allowances. The effective income tax rate for the nine months ended  September 30, 2021 was 21.2 percent compared to 19.7 percent in the same period of the prior year. The effective tax rate increased by 1.5 percent for the nine months ended  September 30, 2021 when compared to the same period in 2020, primarily due to an increase in losses in jurisdictions that are not eligible for tax benefits due to valuation allowances.

 

The effective income tax rate for the nine months ended September 30, 2021 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 $5.0 million as of September 30, 2021 and $4.8 million as of  December 31, 2020, respectively, all of which, if recognized, would affect the Company’s effective tax rate. 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.

 

On March 11, 2021, the President signed into law the ARP Act, a legislative package which is generally not significant to the Company's current tax footprint; however, the Company will continue to assess the ARP Act on an ongoing basis. Similar tax provisions and other stimulus measures have been granted either before or after June 30, 2021 by certain foreign and U.S. state jurisdictions, which the Company continues to evaluate and apply, if applicable.

 

14

 
 

Note 12 – 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 nine months ended September 30, 2021 and 2020 were as follows:

 


 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Revenue:

                

United States

 $100,127  $85,608  $286,524  $262,507 

Europe

  22,155   18,897   68,259   56,413 

Japan

  3,060   2,999   9,733   10,267 

Total revenue

 $125,342  $107,504  $364,516  $329,187 

 


 


 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Income from Operations:

                

United States

 $23,475  $25,164  $72,258  $74,602 

Europe

  (2,223)  3,764   1,469   10,389 

Corporate Unallocated and Japan

  (14,325)  (11,259)  (46,435)  (36,146)

Total Income from Operations

 $6,927  $17,669  $27,292  $48,845 

 


 

Total long-lived assets at  September 30, 2021 and December 31, 2020 were as follows:

 


 

  

September 30,

  

December 31,

 

(in thousands)

 

2021

  

2020

 

Total long-lived assets:

        

United States

 $216,996  $215,721 

Europe

  60,187   59,388 

Japan

  5,836   7,557 

Total Long-lived Assets

 $283,019  $282,666 

 


 

Revenue by product line for the three and nine months ended September 30, 2021 and 2020 were as follows:

 


 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Revenue:

                

Injection Molding

 $57,685  $53,257  $172,212  $165,927 

CNC Machining

  43,658   33,115   121,953   99,760 

3D Printing

  18,589   16,294   53,994   46,478 

Sheet Metal

  4,854   3,988   14,790   14,306 

Other Revenue

  556   850   1,567   2,716 

Total revenue

 $125,342  $107,504  $364,516  $329,187 

 


 

15

 
 

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, 2020.

 

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 the world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts. We manufacture prototypes and low-volume production parts for companies worldwide that are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. In January 2021, we acquired Hubs, a leading online manufacturing platform based in Amsterdam, Netherlands, that provides customers with on-demand access to a global network of premium manufacturing partners. This acquisition creates the world's most comprehensive digital manufacturing offer, offering the broadest set of manufacturing services with the help of a global network of premium manufacturing providers. Our customers conduct nearly all of their business with us over the Internet. We target our products at the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.

 

Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support, and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers. The acquisition of Hubs broadens our offer beyond our current manufacturing capabilities and provides a broader range of price and lead time options by leveraging a network of manufacturing partners to meet the holistic needs of our customers.

 

Injection Molding

 

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

 

CNC Machining

 

Our CNC Machining product line uses commercially available CNC machines to manufacture custom metal and plastic parts through processes such as CNC milling and CNC 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 with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process.

 

Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications.

 

 

3D Printing

 

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

 

Sheet Metal

 

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

 

Key Financial Measures and Trends

 

Revenue

 

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

 

 

expanding the breadth and scope of each of our product lines by adding more sizes and materials to our offerings;

 

 

 

 

the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;

 

 

 

 

expanding 3D Printing to Europe through our acquisition of Alphaform in October 2015;

 

 

 

 

the introduction of our Sheet Metal product line through our acquisition of Rapid Manufacturing Group, LLC in 2017;

 

 

 

 

continuously improving the usability of our product lines such as our web-centric applications; and

     
  providing customers with on-demand access to a global network of premium manufacturing partners through our acquisition of Hubs in January 2021.

 

During the three months ended September 30, 2021, we served 23,457 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 24.8% over the same period in 2020. The increase in product developers was driven primarily by our acquisition of Hubs. Excluding the impact of Hubs, our product developers increased 7.3% during the three months ended September 30, 2021 when compared to the same period in 2020. During the nine months ended September 30, 2021, we served 49,300 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 31.5% over the same period in 2020. The increase in unique product developers served was driven primarily by our acquisition of Hubs. Excluding the impact of Hubs, unique product developers served increased 10.7% during the nine months ended September 30, 2021 when compared to the same period in 2020.

 

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, overhead allocations and outsourced manufacturing costs associated with the manufacturing process for molds and custom parts. We expect our personnel-related costs to increase in order to retain and attract top talent and remain competitive in the market. Overall, we expect cost of revenue to increase in absolute dollars.

 

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. We expect our gross profit to increase in absolute dollars, however our gross margin may fluctuate based on the business mix in each reporting period. 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 and foreign 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 recent growth in operating expenses is mainly due to the launch of our Protolabs 2.0 project, an internal business systems project impacting both external customer-facing and internal back-end systems, in the fourth quarter of 2020. During the development of Protolabs 2.0, certain research and development personnel costs were capitalizable as a software development asset. Since the system was placed in service in November 2020, the personnel costs have been expensed as incurred. In addition, amortization expense for the software asset is now being recorded over the systems’ estimated useful lives of seven to 10 years. 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.

 

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.

 

Other Income, net

 

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

 

Provision for Income Taxes

 

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. Overall, we expect our effective tax rate for 2021 and beyond will remain consistent based on the current tax laws.

 

 

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 September 30,

   

Change

   

Nine Months Ended September 30,

   

Change

 

(dollars in thousands)

 

2021

   

2020

   

$

   

%

   

2021

   

2020

   

$

   

%

 

Revenue

  $ 125,342       100.0     $ 107,504       100.0     $ 17,838       16.6     $ 364,516       100.0     $ 329,187       100.0     $ 35,329       10.7  

Cost of revenue

    70,018       55.9       52,861       49.2       17,157       32.5       197,237       54.1       163,988       49.8       33,249       20.3  

Gross profit

    55,324       44.1       54,643       50.8       681       1.2       167,279       45.9       165,199       50.2       2,080       1.3  

Operating expenses:

                                                                                               

Marketing and sales

    21,422       17.1       16,705       15.5       4,717       28.2       61,946       17.0       51,821       15.7       10,125       19.5  

Research and development

    10,614       8.5       7,915       7.4       2,699       34.1       33,855       9.3       25,550       7.9       8,305       32.5  

General and administrative

    17,111       13.6       12,354       11.5       4,757       38.5       52,699       14.4       38,983       11.8       13,716       35.2  

Changes in fair value of contingent consideration

    (750 )     (0.6 )     -       -       (750 )     *       (8,513 )     (2.3 )     -       -       (8,513 )     *  

Total operating expenses

    48,397       38.6       36,974       34.4       11,423       30.9       139,987       38.4       116,354       35.4       23,633       20.3  

Income from operations

    6,927       5.5       17,669       16.4       (10,742 )     (60.8 )     27,292       7.5       48,845       14.8       (21,553 )     (44.1 )

Other income (expense), net

    136       0.1       728       0.7       (592 )     (81.3 )     (40 )     -       2,549       0.8       (2,589 )     (101.6 )

Income before income taxes

    7,063       5.6       18,397       17.1       (11,334 )     (61.6 )     27,252       7.5       51,394       15.6       (24,142 )     (47.0 )

Provision for income taxes

    2,228       1.7       3,700       3.4       (1,472 )     (39.8 )     5,790       1.6       10,106       3.1       (4,316 )     (42.7 )

Net income

  $ 4,835       3.9 %   $ 14,697       13.7 %   $ (9,862 )     (67.1 )%   $ 21,462       5.9 %   $ 41,288       12.5 %   $ (19,826 )     (48.0 )%

 


*Percentage change not meaningful

 

Stock-based compensation expense included in the statements of operations data above for the three and nine months ended September 30, 2021 and 2020 was as follows:

 


 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

   

2020

   

2021

   

2020

 

Stock options, restricted stock and performance stock

  $ 4,551     $ 3,624     $ 14,405     $ 9,693  

Employee stock purchase plan

    427       321       1,134       924  

Total stock-based compensation expense

  $ 4,978     $ 3,945     $ 15,539     $ 10,617  
                                 

Cost of revenue

  $ 644     $ 646     $ 1,947     $ 1,761  

Operating expenses:

                               

Marketing and sales

    1,059       865       2,841       2,233  

Research and development

    776       638       2,144       1,766  

General and administrative

    2,499       1,796       8,607       4,857  

Total stock-based compensation expense

  $ 4,978     $ 3,945     $ 15,539     $ 10,617  

 


 

 

Comparison of Three Months Ended September 30, 2021 and 2020

 

Revenue

 

Revenue by reportable segment and the related changes for the three months ended September 30, 2021 and 2020 were as follows:

 


 

   

Three Months Ended September 30,

                 
   

2021

   

2020

   

Change

 

(dollars in thousands)

 

$

   

% of Total Revenue

   

$

   

% of Total Revenue

   

$

   

%

 

Revenue

                                               

United States

  $ 100,127       79.9 %   $ 85,608       79.6 %   $ 14,519       17.0 %

Europe

    22,155       17.7       18,897       17.6       3,258       17.2  

Japan

    3,060       2.4       2,999       2.8       61       2.0  

Total revenue

  $ 125,342       100.0 %   $ 107,504       100.0 %   $ 17,838       16.6 %

 


 

Our revenue increased $17.8 million, or 16.6%, for the three months ended September 30, 2021 compared to the same period in 2020. Our revenue for the three months ended September 30, 2021 includes revenue of $8.8 million provided by our acquisition of Hubs. By reportable segment, revenue in the United States increased $14.5 million, or 17.0%, for the three months ended September 30, 2021 compared to the same period in 2020. Revenue in Europe increased $3.3 million, or 17.2%, and revenue in Japan increased $0.1 million, or 2.0%, in each case for the three months ended September 30, 2021 compared to the same period in 2020. Excluding Hubs, revenue in the United States increased $9.8 million, or 11.4%, and revenue in Europe decreased $0.8 million, or 4.0%, in each case for the three months ended September 30, 2021 compared to the same period in 2020. International revenue was positively impacted by $0.4 million during the three months ended September 30, 2021 compared to the same period in 2020 as a result of foreign currency movements, primarily the strengthening of the British Pound and Euro relative to the United States Dollar.

 

During the three months ended September 30, 2021, we served 23,457 unique product developers and engineers, an increase of 24.8% over the same period in 2020. The increase in unique product developers served was primarily driven by our acquisition of Hubs. Excluding the impact of Hubs, unique product developers served increased 7.3% during the three months ended September 30, 2021 when compared to the same period in 2020. Our growth in product developers and engineers served increased at a greater rate than our revenue growth, resulting in a decrease in the average spend per product developer and engineer. The decrease in average spend per product developer and engineer was driven by a change in the mix of products with a lower average order size purchased during the quarter by product developers and engineers we serve.

 

Revenue by product line and the related changes for the three months ended September 30, 2021 and 2020 were as follows:

 


 

   

Three Months Ended September 30,

                 
   

2021

   

2020

   

Change

 

(dollars in thousands)

 

$

   

% of Total Revenue

   

$

   

% of Total Revenue

   

$

   

%

 

Revenue

                                               

Injection Molding

  $ 57,685       46.0 %   $ 53,257       49.5 %   $ 4,428       8.3 %

CNC Machining

    43,658       34.8       33,115       30.8       10,543       31.8  

3D Printing

    18,589       14.8       16,294       15.2       2,295       14.1  

Sheet Metal

    4,854       3.9       3,988       3.7       866       21.7  

Other Revenue

    556       0.5       850       0.8       (294 )     (34.6 )

Total revenue

  $ 125,342       100.0 %   $ 107,504       100.0 %   $ 17,838       16.6 %

 


 

By product line, our revenue increase was driven by a 31.8% increase in CNC Machining revenue, an 8.3% increase in Injection Molding revenue, a 14.1% increase in 3D Printing revenue, and a 21.7% increase in Sheet Metal revenue, which was partially offset by a 34.6% decrease in Other Revenue, in each case for the three months ended September 30, 2021 compared to the same period in 2020.

 

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $17.2 million, or 32.5%, for the three months ended September 30, 2021 compared to the same period in 2020, which was greater than the rate of revenue increase of 16.6% for the three months ended September 30, 2021 compared to the same period in 2020. The increase in cost of revenue was driven by a $7.2 million increase resulting from our acquisition of Hubs. The $10.0 million increase in cost of revenue in our legacy business was driven by increased volumes and a labor shortage resulting in wage inflation, increased overtime and increased recruiting costs resulting in personnel and related cost increases of $7.0 million and an increase in raw material and product costs of $3.6 million driven by materials cost inflation and higher logistics costs, which were partially offset by a decrease in equipment and facility related costs of $0.6 million.

 

Gross Profit and Gross Margin. Gross profit increased from $54.6 million in the three months ended September 30, 2020 to $55.3 million in the three months ended September 30, 2021. Gross margin decreased from 50.8% in the three months ended September 30, 2020 to 44.1% in the three months ended September 30, 2021, primarily due to labor and materials cost inflation and the mix of revenue.

 

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

 

Marketing and Sales. Marketing and sales expenses increased $4.7 million, or 28.2%, during the three months ended September 30, 2021 compared to the same period in 2020. The increase is primarily driven by personnel and related cost increases in our legacy business of $1.6 million, information technology allocation cost increases, including amortization of Protolabs 2.0 software assets, of $1.1 million and marketing program cost increases of $0.4 million. In addition, our acquisition of Hubs provided $1.6 million in marketing and sales expenses during the three months ended September 30, 2021.

 

Research and Development. Our research and development expenses increased $2.7 million, or 34.1%, during the three months ended September 30, 2021 compared to the same period in 2020 primarily due to personnel and related cost increases of $1.7 million driven by personnel and contractor resources dedicated to the launch of our Protolabs 2.0 system. During the development of Protolabs 2.0, certain research and development personnel costs were capitalizable as a software development asset. Since the system was placed in service in November 2020, the personnel costs have been expensed as incurred. Other legacy operating costs increased $0.1 million during the three months ended September 30, 2021. In addition, increases of $0.9 million resulted from our acquisition of Hubs.

 

General and Administrative. Our general and administrative expenses increased $4.8 million, or 38.5%, during the three months ended September 30, 2021 compared to the same period in 2020 primarily due to an increase of $0.3 million in professional service costs, an increase of $0.7 million of personnel and related costs and an increase of $1.0 million in administrative costs. In addition, our acquisition of Hubs provided $2.8 million in general and administrative expense during the three months ended September 30, 2021.

 

Changes in fair value of contingent consideration. The fair value of contingent consideration associated with the acquisition of Hubs decreased $0.8 million during the three months ended September 30, 2021 compared to the same period in 2020. We had no contingent consideration liabilities recorded during the three months ended September 30, 2020.

  

Other Income, net. We recognized other income, net of $0.1 million for the three months ended September 30, 2021, a decrease of $0.6 million compared to other income, net of $0.7 million for the three months ended September 30, 2020. Other income, net for the three months ended September 30, 2021 primarily consisted of $0.3 million in interest income on investments and other income, which was partially offset by a $0.2 million loss on foreign currency. Other income, net for the three months ended September 30, 2020 primarily consisted of $0.3 million in interest income on investments, a $0.3 million gain on foreign currency and $0.1 million in other income.

 

Provision for Income Taxes. Our effective tax rate of 31.5% for the three months ended September 30, 2021 increased 11.4% compared to 20.1% for the same period in 2020. The increase in the effective tax rate is primarily due to an increase in losses in jurisdictions that are not eligible for tax benefits due to valuation allowances. Our income tax provision of $2.2 million for the three months ended September 30, 2021 decreased $1.5 million compared to our income tax provision of $3.7 million for the three months ended September 30, 2020, primarily due to a lower pre-tax income.

 

 

Comparison of Nine Months Ended September 30, 2021 and 2020

 

Revenue

 

Revenue by reportable segment and the related changes for the nine months ended September 30, 2021 and 2020 were as follows:

 


 

   

Nine Months Ended September 30,

                 
   

2021

   

2020

   

Change

 

(dollars in thousands)

 

$

   

% of Total Revenue

   

$

   

% of Total Revenue

   

$

   

%

 

Revenue

                                               

United States

  $ 286,524       78.6 %   $ 262,507       79.8 %   $ 24,017       9.1 %

Europe

    68,259       18.7       56,413       17.1       11,846       21.0  

Japan

    9,733       2.7       10,267       3.1       (534 )     (5.2 )

Total revenue

  $ 364,516       100.0 %   $ 329,187       100.0 %   $ 35,329       10.7 %

 


 

Our revenue increased $35.3 million, or 10.7%, for the nine months ended September 30, 2021 compared to the same period in 2020. Our revenue for the nine months ended September 30, 2021 includes revenue of $23.5 million provided by our acquisition of Hubs. By reportable segment, revenue in the United States increased $24.0 million, or 9.1%, for the nine months ended September 30, 2021 compared to the same period in 2020. Revenue in Europe increased $11.8 million, or 21.0% and revenue in Japan decreased $0.5 million, or 5.2%, in each case for the nine months ended September 30, 2021 compared to the same period in 2020. Excluding Hubs, revenue in the United States increased $11.5 million, or 4.4%, and revenue in Europe increased $0.9 million, or 1.6%, in each case for the nine months ended September 30, 2021 compared to the same period in 2020. International revenue was positively impacted by $3.9 million during the nine months ended September 30, 2021 compared to the same period in 2020 as a result of foreign currency movements, primarily the strengthening of the British Pound and Euro relative to the United States Dollar.

 

During the nine months ended September 30, 2021, we served 49,300 unique product developers and engineers, an increase of 31.5% over the same period in 2020. The increase in unique product developers served was primarily driven by our acquisition of Hubs. Excluding the impact of Hubs, unique product developers served increased 10.7% during the nine months ended September 30, 2021 when compared to the same period in 2020. Our growth in product developers and engineers served increased at a greater rate than our revenue growth, resulting in a decrease in the average spend per product developer and engineer. The decrease in average spend per product developer and engineer was driven by a change in the mix of products with a lower average order size purchased during the quarter by product developers and engineers we serve.

 

Revenue by product line and the related changes for the nine months ended September 30, 2021 and 2020 were as follows:

 


 

   

Nine Months Ended September 30,

                 
   

2021

   

2020

   

Change

 

(dollars in thousands)

 

$

   

% of Total Revenue

   

$

   

% of Total Revenue

   

$

   

%

 

Revenue

                                               

Injection Molding

  $ 172,212       47.2 %   $ 165,927       50.4 %   $ 6,285       3.8 %

CNC Machining

    121,953       33.5       99,760       30.3       22,193       22.2  

3D Printing

    53,994       14.8       46,478       14.1       7,516       16.2  

Sheet Metal

    14,790       4.1       14,306       4.4       484       3.4  

Other Revenue

    1,567       0.4       2,716       0.8       (1,149 )     (42.3 )

Total revenue

  $ 364,516       100.0 %   $ 329,187       100.0 %   $ 35,329       10.7 %

 


 

By product line, our revenue increase was driven by a 22.2% increase in CNC Machining revenue, a 16.2% increase in 3D Printing revenue, a 3.8% increase in Injection Molding revenue, and a 3.4% increase in Sheet Metal revenue, which was partially offset by a 42.3% decrease in Other Revenue, in each case for the nine months ended September 30, 2021 compared to the same period in 2020.

 

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $33.2 million, or 20.3%, for the nine months ended September 30, 2021 compared to the same period in 2020, which was greater than the rate of revenue increase of 10.7% for the nine months ended September 30, 2021 compared to the same period in 2020. The increase in cost of revenue was driven by a $20.1 million increase resulting from our acquisition of Hubs.  The $13.1 million increase in cost of revenue in our legacy business was driven by increased volumes and a labor shortage resulting in wage inflation, increased overtime and increased recruiting costs resulting in personnel and related cost increases of $8.7 million and an increase in raw material and product costs of $4.5 million, which were partially offset by a decrease in equipment and facility related costs of $0.1 million.

 

Gross Profit and Gross Margin. Gross profit increased from $165.2 million in the nine months ended September 30, 2020 to $167.3 million in the nine months ended September 30, 2021. Gross margin decreased from 50.2% in the nine months ended September 30, 2020 to 45.9% in the nine months ended September 30, 2021, primarily due to labor and materials cost inflation and the mix of revenue.

 

Operating Expenses, Other (Loss) Income, net and Provision for Income Taxes

 

Marketing and Sales. Marketing and sales expenses increased $10.1 million, or 19.5%, during the nine months ended September 30, 2021 compared to the same period in 2020. In our legacy business, personnel and related cost increases of $2.7 million, information technology allocation cost increases, including amortization of Protolabs 2.0 software assets, of $3.3 million and marketing program cost increases of $0.2 million. In addition, our acquisition of Hubs provided $3.9 million in marketing and sales expense during the nine months ended September 30, 2021.

 

Research and Development. Our research and development expenses increased $8.3 million, or 32.5%, during the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to personnel and related cost increases of $6.2 million driven by personnel and contractor resources dedicated to the launch of our Protolabs 2.0 system. During the development of Protolabs 2.0, certain research and development personnel costs were capitalizable as a software development asset. Since the system was placed in service in November 2020, the personnel costs have been expensed as incurred. In addition, increases of $2.2 million resulted from our acquisition of Hubs, which were partially offset by decreases of $0.1 in professional service costs.

 

General and Administrative. Our general and administrative expenses increased $13.7 million, or 35.2%, during the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to an increase of $7.6 million resulting from our acquisition of Hubs, other professional service cost increases of $3.7 million, stock-based compensation cost increases of $1.7 million, administrative cost increases of $0.3 million and personnel and related cost increases of $0.4 million.

 

Changes in fair value of contingent consideration. The fair value of contingent consideration associated with the acquisition of Hubs decreased $8.5 million during the nine months ended September 30, 2021. We had no contingent consideration liabilities recorded during the nine months ended September 30, 2020.

  

Other Loss, net. We recognized immaterial other loss, net for the nine months ended September 30, 2021, a decrease of $2.6 million compared to other income, net of $2.6 million for the nine months ended September 30, 2020. Other loss, net for the nine months ended September 30, 2021 primarily consisted of a $0.6 million loss on foreign currency, which was offset by $0.6 million in interest income on investments and other income. Other income, net for the nine months ended September 30, 2020 primarily consisted of $1.2 million in interest income on investments and a $1.2 million gain on foreign currency.

 

Provision for Income Taxes. Our effective tax rate of 21.2% for the nine months ended September 30, 2021 increased 1.5% compared to 19.7% for the same period in 2020. The increase in the effective tax rate is primarily due to an increase in losses in jurisdictions that are not eligible for tax benefits due to valuation allowances. Our income tax provision of $5.8 million for the nine months ended September 30, 2021 decreased $4.3 million compared to our income tax provision of $10.1 million for the nine months ended September 30, 2020, due to a lower pre-tax income.

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes our cash flows during the nine months ended September 30, 2021 and 2020:

 


 

   

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

   

2020

 

Net cash provided by operating activities

  $ 32,225     $ 82,375  

Net cash used in investing activities

    (98,325 )     (77,657 )

Net cash used in financing activities

    (13,820 )     (12,379 )

Effect of exchange rates on cash and cash equivalents

    119       690  

Net decrease in cash and cash equivalents

  $ (79,801 )   $ (6,971 )

 


 

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 $47.8 million as of September 30, 2021, a decrease of $79.8 million from December 31, 2020. The decrease in our cash was primarily due to cash used in investing activity for our acquisition of Hubs of $127.4 million, purchases of property, equipment and other capital assets of $28.0 million, and cash used in financing activities for repurchases of common stock of $13.0 million, which were partially offset by net proceeds from investments in marketable securities of $57.0 million and cash generated through operations of $32.2 million.

 

Cash Flows from Operating Activities

 

Cash flows from operating activities were $32.2 million during the nine months ended September 30, 2021 and primarily consisted of net income of $21.5 million, adjusted for certain non-cash items, including depreciation and amortization of $30.2 million and stock-based compensation expense of $15.5 million, which were partially offset by a decrease in the fair value of contingent consideration of $8.5 million and changes in operating assets and liabilities and other items totaling $26.5 million. Cash flows from operating activities were $82.4 million during the nine months ended September 30, 2020 and primarily consisted of net income of $41.3 million, adjusted for certain non-cash items, including depreciation and amortization of $23.9 million, stock-based compensation expense of $10.6 million and deferred taxes of $6.6 million.

 

Cash flows from operating activities decreased $50.2 million during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to decreases in net income of $19.8 million, decreases in accounts receivable of $21.8 million driven by timing of cash receipts, a decrease in the fair value of contingent consideration of $8.5 million, decreases in deferred taxes of $6.7 million, and decreases of $4.6 million in other items, which were partially offset by increases in depreciation and amortization of $6.3 million and increases in stock-based compensation of $4.9 million.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $98.3 million during the nine months ended September 30, 2021, consisting of $127.4 million in cash used for acquisitions, net of cash acquired and $27.9 million for the purchases of property, equipment and other capital assets, which were partially offset by $57.0 million for net proceeds from investments in marketable securities.

 

Cash used in investing activities was $77.7 million during the nine months ended September 30, 2020, consisting of $34.2 million in net investments in marketable securities, $40.5 million for the purchases of property, equipment and other capital assets, and $3.0 million for purchases of other assets and investments.

 

 

Cash Flows from Financing Activities

 

Cash used in financing activities was $13.8 million during the nine months ended September 30, 2021, consisting of $13.0 million in repurchases of common stock, $4.2 million in shares withheld for tax obligations associated with equity transactions, and $0.4 million for repayments of finance lease obligations, which were partially offset by $3.8 million in proceeds from the exercise of stock options.

 

Cash used in financing activities was $12.4 million during the nine months ended September 30, 2020, consisting of $14.7 million in repurchases of common stock and $3.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which were partially offset by $5.7 million in proceeds from the exercise of stock options.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Use of Estimates

 

We have adopted various accounting policies to prepare the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

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 losses of $0.2 million and $0.6 million during the three and nine months ended September 30, 2021, respectively. We recognized foreign currency gains of $0.3 million and $1.2 million during the three and nine months ended September 30, 2020, respectively. The changes in foreign exchange rates had a positive impact on consolidated revenue of $0.4 million for the three months ended September 30, 2021 and $3.9 million for the nine months ended September 30, 2021 as compared to the same periods in 2020.

 

 

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

 

During the first quarter of 2021, the Company completed the implementation of Protolabs 2.0, an internal business systems project impacting both external customer-facing and internal back-end systems. Emphasis has been on the maintenance of effective internal controls throughout development and deployment of all phases. The Company evaluated and concluded the implementation of Protolabs 2.0 has not materially affected the Company's internal control over financial reporting. Based on this evaluation, 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.

 

Management has excluded certain elements of Hubs from its assessment of internal control over financial reporting as of September 30, 2021. Those elements of the acquired business’s internal control over financial reporting that were not fully integrated into the Company’s existing internal control over financial reporting during 2021 have been excluded from management’s assessment of the effectiveness of internal control over financial reporting. Hubs is a wholly-owned subsidiary of the Company; its combined total assets (excluding goodwill) and total revenues excluded from our assessment represent approximately 4% and 6%, respectively, of the related consolidated financial statements amounts as of the nine months ended September 30, 2021.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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. 

 

Item 1A. Risk Factors

 

Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 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, we announced that our board of directors had 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 its authorized stock repurchase program and extended the term of the program through December 31, 2023. This authorization increases the stock repurchase program to $100 million. 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 September 30, 2021, we repurchased 157,414 shares of our common stock at a total purchase price of $11.8 million under this program. Common stock repurchase activity for the three months ended September 30, 2021 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)

 

July 1, 2021 through July 31, 2021

  39,425     $82.94     39,425     $30,694  

August 1, 2021 through August 31, 2021

  73,168     $73.08     73,168     $25,347  

September 1, 2021 through September 30, 2021

  44,821     $71.48     44,821     $22,143  
    157,414     $75.09     157,414     $22,143  

1 Effective May 15, 2019 the Board of Directors authorized the repurchase of shares of the Company’s common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $100 million. The term of the program runs through December 31, 2023.

 

Item 3. Defaults Upon Senior Securities

 

No matters to disclose.

 

Item 4. Mine Safety Disclosures

 

No matters to disclose.

 

Item 5. Other Information

 

No matters to disclose.

 

 

Item 6. Exhibits

 

The following documents are filed as part of this report:

 

Exhibit Number

 

Description of Exhibit

3.1(1)

 

Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.

3.2(2)

  Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015

3.3(3)

 

Second Amended and Restated By-Laws of Proto Labs, Inc., as amended through November 8, 2016

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

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

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

(1)

Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012, and incorporated by reference herein.

(2)

Previously filed as Exhibit 3.1 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on May 21, 2015 and incorporated by reference herein.

(3)

Previously filed as Exhibit 3.1 to the Company's Form 8-K (File No. 001-35435), filed with the Commission on November 8, 2016 and incorporated by reference herein.

 

 

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.

 

 

 

Proto Labs, Inc.

 

 

 

 

 

Date: November 2, 2021

 

/s/ Robert Bodor

 

 

 

Robert Bodor

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

Date: November 2, 2021

 

/s/ John A. Way

 

 

 

John A. Way

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

 

 

30