prlb20190630

prlb20190630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2021

☐	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: 27,689,746 shares of Common Stock, par value $0.001 per share, were outstanding at May 5, 2021.

Table of Contents

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	24
4.	Controls and Procedures	25
PART II
1.	Legal Proceedings	26
1A.	Risk Factors	26
2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
3.	Defaults Upon Senior Securities	26
4.	Mine Safety Disclosures	26
5.	Other Information	26
6.	Exhibits	27

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	*March 31,*			*December 31,*
	*2021*			*2020*
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	43,774		$	127,603
Short-term marketable securities		19,592			34,088
Accounts receivable, net of allowance for doubtful accounts of $2,011 and $1,781 as of March 31, 2021 and December 31, 2020, respectively		74,666			57,877
Inventory		9,918			10,862
Income taxes receivable		1,763			540
Prepaid expenses and other current assets		8,803			11,032
Total current assets		158,516			242,002
Property and equipment, net		279,901			282,666
Goodwill		399,426			128,752
Other intangible assets, net		46,883			14,350
Long-term marketable securities		29,760			59,357
Operating lease assets		12,819			9,855
Finance lease assets		2,271			2,396
Other long-term assets		4,872			4,826
Total assets	$	934,448		$	744,204

Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	21,846		$	18,248
Accrued compensation		11,745			11,989
Accrued liabilities and other		16,705			16,193
Current contingent consideration		5,221			-
Current operating lease liabilities		2,732			3,272
Current finance lease liabilities		553			552
Income taxes payable		1,047			-
Total current liabilities		59,849			50,254
Long-term contingent consideration		4,789			-
Long-term operating lease liabilities		11,534			7,586
Long-term finance lease liabilities		1,779			1,919
Long-term deferred tax liabilities		36,899			33,854
Other long-term liabilities		6,167			6,235
Total liabilities		121,017			99,848

Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of March 31, 2021 and December 31, 2020		-			-
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,689,746 and 26,776,796 shares as of March 31, 2021 and December 31, 2020, respectively		28			27
Additional paid-in capital		456,886			284,848
Retained earnings		366,613			362,901
Accumulated other comprehensive loss		(10,096	)		(3,420	)
Total shareholders' equity		813,431			644,356
Total liabilities and shareholders' equity	$	934,448		$	744,204

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

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Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*

Statements of Operations:
Revenue	$	116,126		$	115,108
Cost of revenue		60,796			57,008
Gross profit		55,330			58,100
Operating expenses
Marketing and sales		19,480			18,180
Research and development		12,181			8,987
General and administrative		19,408			14,108
Total operating expenses		51,069			41,275
Income from operations		4,261			16,825
Other (loss) income, net		(313	)		1,054
Income before income taxes		3,948			17,879
Provision for income taxes		236			3,895
Net income	$	3,712		$	13,984

Net income per share:
Basic	$	0.14		$	0.52
Diluted	$	0.13		$	0.52

Shares used to compute net income per share:
Basic		27,464,136			26,776,806
Diluted		27,698,195			26,929,640

Comprehensive (Loss) Income (net of tax)
Comprehensive (loss) income	$	(2,964	)	$	11,004

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

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Proto Labs, Inc.

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

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

Balance at 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 3D 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 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

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

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Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*

Operating activities
Net income	$	3,712		$	13,984
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,059			7,958
Stock-based compensation expense		5,620			3,033
Deferred taxes		(69	)		3,392
Amortization of marketable securities		137			55
Realized gain on available-sale-securities		(166	)		-
Other		155			(644	)
Changes in operating assets and liabilities:
Accounts receivable		(14,558	)		(5,084	)
Inventories		917			(537	)
Prepaid expenses and other		2,696			(1,240	)
Income taxes		(183	)		(841	)
Accounts payable		669			1,739
Accrued liabilities and other		(2,564	)		595
Net cash provided by operating activities		6,425			22,410

Investing activities
Purchases of property, equipment and other capital assets		(6,546	)		(13,421	)
Cash used for acquisitions, net of cash acquired		(127,709	)		-
Purchases of other assets and investments		-			(3,000	)
Purchases of marketable securities		(8,227	)		(37,629	)
Proceeds from sales of marketable securities		45,194			-
Proceeds from maturities of marketable securities		7,155			10,700
Net cash used in investing activities		(90,133	)		(43,350	)

Financing activities
Proceeds from exercises of stock options		1,704			135
Purchases of shares withheld for tax obligations		(1,994	)		(1,048	)
Repurchases of common stock		-			(11,185	)
Principal repayments of finance lease obligations		(137	)		-
Net cash used in financing activities		(427	)		(12,098	)
Effect of exchange rate changes on cash and cash equivalents		306			(282	)
Net decrease in cash and cash equivalents		(83,829	)		(33,320	)
Cash and cash equivalents, beginning of period		127,603			125,225
Cash and cash equivalents, end of period	$	43,774		$	91,905

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

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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.

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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*
	*March 31,*
(in thousands, except share and per share amounts)	*2021*		*2020*
Net income	$	3,712	$	13,984

Basic - weighted-average shares outstanding:		27,464,136		26,776,806
Effect of dilutive securities:
Employee stock options and other		234,059		152,834
Diluted - weighted-average shares outstanding:		27,698,195		26,929,640
Net income per share:
Basic	$	0.14	$	0.52
Diluted	$	0.13	$	0.52

Note 4 – Business Combinations

On January 22, 2021, the Company acquired all outstanding shares of 3D Hubs, Inc. (“3D Hubs”), for $294.4 million, consisting of $127.7 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.

3D 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 approximately 240 premium manufacturing partners. The acquisition enhances the Company’s customer value proposition by enabling the Company to more holistically serve 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 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.

On a preliminary basis, the Company recorded a contingent consideration liability of $10.3 million as of the acquisition date 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. Once final, subsequent changes in the fair value of the contingent consideration liabilities will be recorded in the Consolidated Statements of Comprehensive Income. Fluctuations due to foreign currency translation will be recorded in the Consolidated Statements of Shareholders’ Equity.

The results of 3D 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 3D Hubs, as if the acquisition had occurred on January 1, 2020, 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. As of March 31, 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)	3D Hubs Acquisition
Assets acquired:
Current assets	$	2,497
Intangible assets		34,670
Goodwill		275,438
Other long-term assets		1,139
Total assets acquired		313,744

Liabilities assumed:
Current contingent consideration		5,372
Current liabilities		5,666
Long-term contingent consideration		4,928
Other long-term liabilities		3,360
Total liabilities assumed		19,326
Net assets acquired		294,418

Cash paid		134,143
Cash acquired		(6,434	)
Net cash consideration		127,709
Equity portion of purchase price		166,709
Total purchase consideration	$	294,418

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Note 5 – Goodwill and Other Intangible Assets

Goodwill at March 31, 2021 and December 31, 2020 was as follows:

(in thousands)	*Three Months Ended March 31, 2021*
Balance as of the beginning of the period	$	128,752
Goodwill acquired during the period		275,438
Foreign currency translation adjustments		(4,764	)
Balance as of the end of the period	$	399,426

Goodwill increased $275.4 million during the three months ended March 31, 2021 as a result of our acquisition of 3D Hubs. Goodwill has been allocated to the acquired 3D Hubs entities consisting of goodwill of €104.0 million in Europe and $148.8 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. The goodwill related to the acquisition is not deductible for tax purposes.

Intangible assets other than goodwill at March 31, 2021 and December 31, 2020 were as follows:

	*March 31, 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	$	(643	)	$	287	$	930	$	(620	)	$	310	10.0	3.0
Non-compete agreement		850		(264	)		586		270		(238	)		32	2.0 - 5.0	3.5
Software technology		13,229		(3,987	)		9,242		13,229		(3,645	)		9,584	10.0	7.3
Software platform		30,916		(598	)		30,318		-		-			-	10.0	9.8
Tradenames		364		(23	)		341		-		-			-	3.0	2.8
Customer relationships		12,281		(6,172	)		6,109		10,070		(5,646	)

SEC Form 10-Q filed by Proto Labs, Inc.