The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 — Nature of Business
Organization and business
Proto Labs, Inc. and its subsidiaries (Proto Labs, the Company, we, us, or our) is an e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded, computer numerical control (CNC) machined, 3D-printed and sheet metal-fabricated custom parts for prototyping and short-run production. The Company’s customers are product developers and engineers throughout the world who require a faster and less expensive way to obtain low volumes of parts. The Company’s proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet. The Company targets its product lines to the millions of product developers and engineers who use three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has established operations in the United States, Europe and Japan, which the Company believes are among the largest geographic markets where these product developers and engineers are located. The Company’s primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. Proto Labs, Inc. is headquartered in Maple Plain, Minnesota. The Company’s subsidiaries are:
|
Name
|
|
Location
|
|
|
|
|
|
PL-US International LLC
|
|
United States
|
|
Rapid Management Group LLC
|
|
United States
|
|
Rapid Sheet Metal LLC (RSM)
|
|
United States
|
|
Rapid Manufacturing LLC (RM)
|
|
United States
|
|
Proto Labs Ltd.
|
|
United Kingdom
|
|
PL International Holdings, UK, Ltd.
|
|
United Kingdom
|
|
PL Euro Services Limited
|
|
United Kingdom
|
|
Proto Labs GmbH
|
|
Germany
|
|
Proto Labs Tooling GmbH
|
|
Germany
|
|
Proto Labs, G.K.
|
|
Japan
|
Note 2 — Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as listed within “Organization and business” above. All intercompany accounts and transactions have been eliminated in consolidation.
Comprehensive income
Components of comprehensive income include net income and foreign currency translation adjustments. Comprehensive income is disclosed in the accompanying consolidated statements of comprehensive income and consolidated statements of shareholders’ equity.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash and other investments, including marketable securities, with maturities of three months or less at the date of purchase. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses on such accounts.
Marketable securities
Marketable securities include held-to-maturity debt securities recorded at amortized cost. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in other income, net. Interest on securities classified as held to maturity is included in other income, net. The classification of marketable securities as current or non-current is dependent upon the security’s maturity date. Securities with maturities of three months or less at the time of purchase are categorized as cash equivalents as described above. The Company reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments – Debt and Equity Securities, when determining the classification of impairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-temporary include assessment of the quality of the security, credit ratings actions and management’s intent to hold the security to maturity as well as other factors.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are reported at the invoiced amount less an allowance for doubtful accounts. As of each balance sheet date, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received.
Inventory
Inventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average 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.
Property, equipment and leasehold improvements
Property, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an asset’s useful life are capitalized. Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including amortization of leasehold improvements and assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturing equipment is depreciated over 3 to 15 years, office furniture and equipment are depreciated over 3 to 7 years, computer hardware and software are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold improvements are depreciated over the estimated lives of the related assets or the life of the lease, whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the asset is put into use.
The Company follows ASC 350-40, Internal-Use Software, in accounting for internally developed software. As of December 31, 2019 and 2018, respectively, $32.7 million and $16.6 million of software development costs were capitalized. Capitalized software development costs for the year ended December 31, 2019 were $16.1 million.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Goodwill
The Company recognizes goodwill in accordance with ASC 350, Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount.
Other Intangible Assets
Other intangible assets include software technology, customer relationships and other intangible assets acquired from other independent parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis, and are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value.
Accounting for long-lived assets
The Company periodically reviews the carrying amount of its property, equipment and leasehold improvements to determine if circumstances exist indicating an impairment or if depreciation periods should be modified. If facts or circumstances indicate that an impairment may exist, the Company will prepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an adjustment will be made to reduce the carrying amount of the specific assets to fair value.
Revenue recognition
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. The Company manufactures custom parts to specific customer orders that have no alternative use to the Company, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the Company will recognize revenue over time. Revenue is recognized over time using the input method based on time in production as a percentage of total estimated production time to measure progress toward satisfying performance obligations.
Prior to 2018, the Company recognized revenue when it was realized or realizable and earned when all of the following criteria were met: persuasive evidence of an arrangement existed, delivery had occurred or services had been rendered, the price to the buyer was fixed or determinable and collectability was reasonably assured. Revenue was recognized upon transfer of title and risk of loss, which was generally upon the shipment of parts in the Company’s Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines.
Leases
On January 1, 2019, the Company adopted ASC 842, Leases, which introduced the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at commencement date.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Income taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. The Company establishes a valuation allowance for any portion of its deferred tax assets that the Company believes may not be recognized.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by requiring that individual tax positions are recorded only when they meet a more-likely-than-not criterion. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes the compensation expense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company accounts for forfeitures as they occur. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the awards vest early in the event of a change in control.
In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the date of grant using the Black-Scholes option-pricing model.
Advertising costs
Advertising is expensed as incurred and was approximately $13.0 million, $11.8 million and $10.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Research and development
Research and development expenses consist primarily of personnel and outside service costs related to the development of new processes and product lines, enhancements 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. Research and development costs were approximately $32.7 million, $28.7 million and $23.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Foreign currency translation/transactions
The Company translated the balance sheets of its foreign subsidiaries at period-end exchange rates and the income statement at the average exchange rates in effect throughout the period. The Company has recorded the translation adjustment as a separate component of consolidated shareholders’ equity. Foreign currency transaction gains and losses are recognized in the consolidated statements of comprehensive income.
Business combinations
The Company accounts for business combinations in accordance with ASC 805, Business Combinations (ASC 805). On November 30, 2017, the Company acquired RAPID Manufacturing Group, LLC (RAPID) for $122.0 million, consisting of $110.6 million in cash and $11.3 million in the Company’s common stock.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Recently adopted accounting pronouncements
During the fourth quarter of 2019, the Company early adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. The adoption of this guidance had no material impact on the Company's consolidated financial statements.
During the first quarter of 2019, the Company adopted the FASB ASU 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $13.1 million.
During the first quarter of 2018, the Company adopted the FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company adopted the new revenue standard using the modified retrospective approach. The Company manufactures custom parts to specific customer orders that have no alternative use to the Company, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the Company will recognize revenue over time. The transition adjustment recorded was an increase of $1.5 million to the Company's retained earnings balance as of January 1, 2018.
During the first quarter of 2018, the Company adopted ASU 2017-09, Compensation – Stock Compensation, which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes, which is intended to simplify the accounting for income taxes. This guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The impact of this guidance will not have a material impact on the Company's consolidated financial statements.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 3 – Revenue
The Company provides quality, quick-turn prototyping and on-demand manufacturing services. As a result, the majority of revenue recognized in a reporting period is based on completed, invoiced contracts. The Company accounts for revenue in accordance with ASC 606, which the Company adopted on January 1, 2018, using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. The Company recorded a net increase of $1.5 million to its retained earnings balance on January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact of adopting ASC 606 was to increase revenue by $0.3 million and increase cost of revenue by $0.2 million for the year ended December 31, 2018, and to increase accounts receivable by $2.9 million and decrease inventory by $1.3 million as of December 31, 2018, which includes the transition adjustment of $1.5 million noted above.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. The majority of the Company’s CNC machining, 3D printing, and sheet metal contracts have a single performance obligation. The majority of the Company’s injection molding contracts have multiple performance obligations including one obligation to produce the mold and a second obligation to produce parts. For injection molding contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on the price charged to customers.
The Company manufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the Company will recognize revenue over time. Revenue is recognized over time using the input method based on time in production as a percentage of total estimated production time to measure progress toward satisfying performance obligations.
Revenue by geographic region for the years ended December 31, 2019, 2018 and 2017 was as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
360,205
|
|
|
$
|
350,535
|
|
|
$
|
263,086
|
|
Europe
|
|
|
82,805
|
|
|
|
80,889
|
|
|
|
70,154
|
|
Japan
|
|
|
15,718
|
|
|
|
14,172
|
|
|
|
11,250
|
|
Total revenue
|
|
$
|
458,728
|
|
|
$
|
445,596
|
|
|
$
|
344,490
|
|
Revenue by product line for the years ended December 31, 2019, 2018 and 2017 was as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection Molding
|
|
$
|
217,415
|
|
|
$
|
210,523
|
|
|
$
|
194,432
|
|
CNC Machining
|
|
|
155,473
|
|
|
|
153,521
|
|
|
|
103,739
|
|
3D Printing
|
|
|
61,352
|
|
|
|
53,342
|
|
|
|
43,329
|
|
Sheet Metal
|
|
|
21,000
|
|
|
|
24,998
|
|
|
|
1,767
|
|
Other Revenue
|
|
|
3,488
|
|
|
|
3,212
|
|
|
|
1,223
|
|
Total revenue
|
|
$
|
458,728
|
|
|
$
|
445,596
|
|
|
$
|
344,490
|
|
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within marketing and sales expenses. The value of unsatisfied performance obligations for contracts with an original expected length of one year or less is not material.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 4 – 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 the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
The following table presents the calculation of net income per basic and diluted share attributable to common shareholders:
|
|
Year Ended December 31,
|
|
(in thousands, except share and per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
63,655
|
|
|
$
|
76,588
|
|
|
$
|
51,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - weighted-average shares outstanding:
|
|
|
26,866,985
|
|
|
|
26,982,614
|
|
|
|
26,647,610
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and other
|
|
|
182,438
|
|
|
|
296,202
|
|
|
|
197,461
|
|
Diluted - weighted-average shares outstanding:
|
|
|
27,049,423
|
|
|
|
27,278,816
|
|
|
|
26,845,071
|
|
Net income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.37
|
|
|
$
|
2.84
|
|
|
$
|
1.94
|
|
Diluted
|
|
$
|
2.35
|
|
|
$
|
2.81
|
|
|
$
|
1.93
|
|
Note 5 – Business Combinations
On November 30, 2017, the Company acquired RAPID for $122.0 million, consisting of $110.6 million in cash (net of cash acquired) and $11.3 million in the Company’s common stock. The operations of RAPID are integrated into the operations of the Company.
RAPID is a New Hampshire-based custom parts supplier specializing in quick-turn sheet metal fabrication and CNC machining. With the acquisition, the Company offers its customers another quick-turn manufacturing service while expanding its CNC machining capabilities.
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805. The fair value of the consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill of $99.8 million. The goodwill primarily relates to synergies resulting from the acquisition and is deductible for tax purposes over a 15-year period.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The RAPID amortizable intangible assets were valued as of the acquisition date and were deemed to have a weighted-average useful life of 5.5 years. The customer relationships were valued at $7.5 million based on the Multi-Period Excess Earnings Method and are amortized over 6.0 years. The trade names were valued at $1.1 million based on the Relief-from-Royalty Method and are amortized over 2.0 years. The non-competition agreement was valued at $0.1 million based on the Discounted Cash Flow method and will be amortized over 5 years. The allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(in thousands)
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Current assets
|
|
$
|
6,720
|
|
Goodwill
|
|
|
99,836
|
|
Other intangible assets
|
|
|
8,700
|
|
Other long-term assets
|
|
|
8,855
|
|
Total assets acquired
|
|
|
124,111
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Current liabilities
|
|
|
2,067
|
|
Other long-term liabilities
|
|
|
85
|
|
Total liabilities assumed
|
|
|
2,152
|
|
Net assets acquired
|
|
$
|
121,959
|
|
|
|
|
|
|
Cash paid
|
|
$
|
115,378
|
|
Cash acquired
|
|
|
(4,755
|
)
|
Net cash consideration
|
|
|
110,623
|
|
Equity portion of purchase price
|
|
|
11,336
|
|
Total purchase consideration
|
|
$
|
121,959
|
|
The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2017 acquisition of RAPID had occurred at the beginning of fiscal 2016. These performance results may not be indicative of the actual results that would have occurred under the ownership and management of the Company.
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
386,677
|
|
|
$
|
336,634
|
|
Net income
|
|
|
55,070
|
|
|
|
41,805
|
|
The unaudited pro forma net income for the year ended December 31, 2017 excludes transaction costs of approximately $1.9 million and includes the increase in estimated depreciation expense of approximately $0.9 million and the increase in estimated amortization expense of approximately $3.0 million. The unaudited pro forma net income for the year ended December 31, 2016 includes the impact of new stock options and restricted stock units granted to employees of approximately $0.2 million in connection with the acquisition, an increase in estimated depreciation expense of approximately $0.6 million and the increase in estimated amortization expense of approximately $3.1 million. The pro forma net income for the years ended December 31, 2017 and 2016 include the related tax effects of the adjustments. The pro forma information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the RAPID acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the RAPID acquisition occurred on January 1, 2016. The Company’s 2017 Consolidated Statements of Comprehensive Income include $3.6 million of revenue and $0.7 million of net loss related to RAPID. The net loss was primarily driven by $1.1 million of bonus payments to RAPID employees as a result of the acquisition.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 6 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows:
(in thousands)
|
|
Dec. 31, 2017
|
|
|
Goodwill acquired during 2018
|
|
|
Dec. 31, 2018
|
|
|
Goodwill acquired during 2019
|
|
|
Dec. 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
123,635
|
|
|
$
|
248
|
|
|
$
|
123,883
|
|
|
$
|
-
|
|
|
$
|
123,883
|
|
Europe
|
|
|
4,239
|
|
|
|
-
|
|
|
|
4,239
|
|
|
|
-
|
|
|
|
4,239
|
|
Japan
|
|
|
630
|
|
|
|
-
|
|
|
|
630
|
|
|
|
-
|
|
|
|
630
|
|
Total goodwill
|
|
$
|
128,504
|
|
|
$
|
248
|
|
|
$
|
128,752
|
|
|
$
|
-
|
|
|
$
|
128,752
|
|
As described in Note 5 – Business Combinations, the Company acquired RAPID in November 2017. The fair value of the consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill in the United States of $99.6 million for the year ended December 31, 2017 and a related working capital adjustment of $0.2 million for the year ended December 31, 2018.
Intangible assets other than goodwill for the years ended December 31, 2019 and 2018 were as follows:
|
|
Year Ended December 31, 2019
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Weighted Average Useful Life
|
|
(in thousands)
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Useful Life (in years)
|
|
|
Remaining (in years)
|
|
Intangible Assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing assets
|
|
$
|
930
|
|
|
$
|
(527
|
)
|
|
$
|
403
|
|
|
$
|
930
|
|
|
$
|
(434
|
)
|
|
$
|
496
|
|
|
|
10.0
|
|
|
|
4.3
|
|
Non-compete agreement
|
|
|
270
|
|
|
|
(222
|
)
|
|
|
48
|
|
|
|
270
|
|
|
|
(206
|
)
|
|
|
64
|
|
|
|
2.0 - 5.0
|
|
|
|
3.0
|
|
Trade secrets
|
|
|
250
|
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
250
|
|
|
|
(233
|
)
|
|
|
17
|
|
|
|
5.0
|
|
|
|
0.0
|
|
Trade names
|
|
|
1,080
|
|
|
|
(1,080
|
)
|
|
|
-
|
|
|
|
1,080
|
|
|
|
(540
|
)
|
|
|
540
|
|
|
|
2.0
|
|
|
|
0.0
|
|
Software technology
|
|
|
13,229
|
|
|
|
(2,275
|
)
|
|
|
10,954
|
|
|
|
12,229
|
|
|
|
(997
|
)
|
|
|
11,232
|
|
|
|
10.0
|
|
|
|
8.0
|
|
Customer relationships
|
|
|
10,070
|
|
|
|
(4,106
|
)
|
|
|
5,964
|
|
|
|
10,070
|
|
|
|
(2,569
|
)
|
|
|
7,501
|
|
|
|
6.0 - 9.0
|
|
|
|
3.8
|
|
Total intangible assets
|
|
$
|
25,829
|
|
|
$
|
(8,460
|
)
|
|
$
|
17,369
|
|
|
$
|
24,829
|
|
|
$
|
(4,979
|
)
|
|
$
|
19,850
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 was $3.5 million, $3.2 million and $0.5 million, respectively.
The Company acquired a software company in December 2017, which was accounted for as an asset acquisition and resulted in an $8.2 million software technology intangible asset for the year ended December 31, 2017. The acquisition did not meet the definition of a business under ASC 805. The asset acquisition included an additional $5.0 million in contingent consideration to be recognized and paid upon completion of certain milestones over a 24-month period. The completion of each milestone resulted in additional value to the software technology intangible asset. We recognized $1.0 million of the contingent consideration for the year ended December 31, 2019. We recognized $4.0 million of the contingent consideration for the year ended December 31, 2018.
Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:
(in thousands)
|
|
Estimated Amortization Expense
|
|
2020
|
|
$
|
3,016
|
|
2021
|
|
|
3,016
|
|
2022
|
|
|
3,016
|
|
2023
|
|
|
2,813
|
|
2024
|
|
|
1,400
|
|
Thereafter
|
|
|
4,108
|
|
Total estimated amortization expense
|
|
$
|
17,369
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 7 – Fair Value Measurements
ASC 820, 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 which 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 cash equivalents measured at fair value as of December 31, 2019 and 2018, respectively, consist of money market mutual funds. The Company determines the fair value of these financial assets using Level 1 inputs.
The following tables summarizes financial assets as of December 31, 2019 and 2018 measured at fair value on a recurring basis:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
68,962
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,943
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
68,962
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,943
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 8 – Marketable Securities
The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of December 31, 2019 and 2018 is as follows:
|
|
December 31, 2019
|
|
(in thousands)
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
6,274
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
|
$
|
6,268
|
|
Corporate debt securities
|
|
|
26,944
|
|
|
|
80
|
|
|
|
(12
|
)
|
|
|
27,012
|
|
U.S. municipal securities
|
|
|
10,204
|
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
10,210
|
|
Commercial paper
|
|
|
3,491
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,491
|
|
Certificates of deposit/time deposits
|
|
|
1,484
|
|
|
|
22
|
|
|
|
-
|
|
|
|
1,506
|
|
Total marketable securities
|
|
$
|
48,397
|
|
|
$
|
112
|
|
|
$
|
(22
|
)
|
|
$
|
48,487
|
|
|
|
December 31, 2018
|
|
(in thousands)
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
16,843
|
|
|
$
|
-
|
|
|
$
|
(88
|
)
|
|
$
|
16,755
|
|
Corporate debt securities
|
|
|
31,769
|
|
|
|
-
|
|
|
|
(96
|
)
|
|
|
31,673
|
|
U.S. municipal securities
|
|
|
17,509
|
|
|
|
1
|
|
|
|
(33
|
)
|
|
|
17,477
|
|
Certificates of deposit/time deposits
|
|
|
4,208
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
4,183
|
|
Total marketable securities
|
|
$
|
70,329
|
|
|
$
|
1
|
|
|
$
|
(242
|
)
|
|
$
|
70,088
|
|
Fair values for the U.S. government agency securities and corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, commercial paper and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).
The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The investment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Those unrealized losses displayed above are the result of macroeconomic factors and are indicative of neither the quality of the underlying security nor the issuer’s ability to pay its debt. The Company intends, and has the ability, to hold the investments to maturity and recover the full principal.
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.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The December 31, 2019 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
35,437
|
|
Due after one year through five years
|
|
|
12,960
|
|
Total marketable securities
|
|
$
|
48,397
|
|
Note 9 – Property and Equipment
Property and equipment consists of the following:
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
14,098
|
|
|
$
|
10,566
|
|
Buildings and improvements
|
|
|
75,843
|
|
|
|
72,819
|
|
Machinery and equipment
|
|
|
208,954
|
|
|
|
185,416
|
|
Computer hardware and software
|
|
|
24,953
|
|
|
|
22,323
|
|
Leasehold improvements
|
|
|
7,341
|
|
|
|
7,330
|
|
Construction in progress
|
|
|
54,313
|
|
|
|
25,279
|
|
Total
|
|
|
385,502
|
|
|
|
323,733
|
|
Accumulated depreciation and amortization
|
|
|
(121,790
|
)
|
|
|
(95,732
|
)
|
Property and equipment, net
|
|
$
|
263,712
|
|
|
$
|
228,001
|
|
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $27.4 million, $23.5 million and $18.0 million, respectively.
Note 10 – Inventory
Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-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 consists of the following:
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
9,818
|
|
|
$
|
9,560
|
|
Work in process
|
|
|
501
|
|
|
|
792
|
|
Total inventory
|
|
|
10,319
|
|
|
|
10,352
|
|
Allowance for obsolescence
|
|
|
(244
|
)
|
|
|
(265
|
)
|
Inventory, net of allowance
|
|
$
|
10,075
|
|
|
$
|
10,087
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 11 – Financing Obligations
The Company had no financing obligations as of December 31, 2019 and 2018.
Note 12 – Employee Benefit Plans
The Company maintains a 401(k) retirement plan that covers employees in the United States. Under the plan, a full-time or regular part-time (over 20 hours/week) employee becomes a participant after completing three months of employment. Employees may elect to contribute up to 50 percent of regular gross pay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions and may make a discretionary contribution to the plan. Total employer contributions were approximately $3.1 million, $2.7 million and $1.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company also sponsors a defined contribution retirement plan that covers the employees in the United Kingdom. Total employer contributions were approximately $0.3 million in each of the years ended December 31, 2019, 2018 and 2017.
Note 13 – Stock-Based Compensation
The Company has two equity incentive plans: the 2000 Stock Option Plan (2000 Plan) and the 2012 Long-Term Incentive Plan (2012 Plan). Upon the adoption of the 2012 Plan on February 21, 2012, all shares that were reserved but not issued under the 2000 Plan were assumed by the 2012 Plan. No additional awards will be issued under the 2000 Plan. Under the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, performance stock, 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 of the board of directors 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. Restricted stock is valued at fair market value on the date of grant.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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 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, and 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. The Company determines the fair value stock-based compensation related to its ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.
Employees purchased 41,615 and 33,562 shares of common stock under the ESPP at an average exercise price of $86.70 and $85.61 during 2019 and 2018, respectively. As of December 31, 2019, 1,168,830 shares remained available for future issuance under the ESPP.
The Company determines its stock-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on fair value.
Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expected term and stock price volatility.
The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that the Company's stock options are expected to be outstanding. The Company estimates the volatility of its stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. The Company accounts for forfeitures as they occur. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period.
The following table summarizes stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
$
|
9,591
|
|
|
$
|
10,113
|
|
|
$
|
7,954
|
|
Employee stock purchase plan
|
|
|
1,190
|
|
|
|
815
|
|
|
|
604
|
|
Total stock-based compensation expense
|
|
$
|
10,781
|
|
|
$
|
10,928
|
|
|
$
|
8,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
2,056
|
|
|
$
|
1,543
|
|
|
$
|
970
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
2,632
|
|
|
|
1,942
|
|
|
|
1,429
|
|
Research and development
|
|
|
1,851
|
|
|
|
1,517
|
|
|
|
1,091
|
|
General and administrative
|
|
|
4,242
|
|
|
|
5,926
|
|
|
|
5,068
|
|
Total stock-based compensation expense
|
|
$
|
10,781
|
|
|
$
|
10,928
|
|
|
$
|
8,558
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Stock Options
The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended December 31, 2019, 2018 and 2017:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.35 - 2.58%
|
|
|
|
2.52 - 3.07%
|
|
|
|
2.24 - 2.36%
|
|
Expected life (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.5
|
|
Expected volatility
|
|
|
42.52 - 42.74%
|
|
|
|
41.68 - 42.22%
|
|
|
|
42.68 - 44.68%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant date fair value
|
|
|
$47.84
|
|
|
|
$50.08
|
|
|
|
$32.26
|
|
The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2017
|
|
|
569,639
|
|
|
$
|
45.00
|
|
Granted
|
|
|
60,100
|
|
|
|
69.06
|
|
Exercised
|
|
|
(187,313
|
)
|
|
|
35.93
|
|
Cancelled
|
|
|
(43,371
|
)
|
|
|
61.02
|
|
Options outstanding at December 31, 2017
|
|
|
399,055
|
|
|
|
51.13
|
|
Granted
|
|
|
36,600
|
|
|
|
110.59
|
|
Exercised
|
|
|
(155,765
|
)
|
|
|
38.92
|
|
Cancelled
|
|
|
(27,274
|
)
|
|
|
74.35
|
|
Options outstanding at December 31, 2018
|
|
|
252,616
|
|
|
|
64.71
|
|
Granted
|
|
|
53,708
|
|
|
|
105.81
|
|
Exercised
|
|
|
(16,079
|
)
|
|
|
48.67
|
|
Cancelled
|
|
|
(13,979
|
)
|
|
|
89.50
|
|
Options outstanding at December 31, 2019
|
|
|
276,266
|
|
|
$
|
72.38
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
152,423
|
|
|
$
|
59.26
|
|
The outstanding options have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vesting period, which is generally a four- or five-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was $0.9 million, $13.0 million and $7.0 million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices.
For options outstanding at December 31, 2019, the weighted-average remaining contractual term was 5.5 years and the aggregate intrinsic value was $8.6 million. For options exercisable at December 31, 2019, the weighted-average remaining contractual term was 3.6 years and the aggregate intrinsic value was $6.5 million. Refer to the table below for additional information.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at December 31, 2019:
|
|
Options Outstanding, Vested and Expected to Vest
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price ($)
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.76 to 31.43
|
|
23,883
|
|
|
1.98
|
|
|
|
25.04
|
|
|
23,883
|
|
|
|
25.04
|
|
31.44 to 66.87
|
|
125,022
|
|
|
4.42
|
|
|
|
58.67
|
|
|
85,656
|
|
|
|
58.81
|
|
66.88 to 96.20
|
|
45,255
|
|
|
4.49
|
|
|
|
70.98
|
|
|
33,445
|
|
|
|
70.41
|
|
96.21 to 123.10
|
|
82,106
|
|
|
8.68
|
|
|
|
107.79
|
|
|
9,439
|
|
|
|
110.36
|
|
The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive income. As of December 31, 2019, there was $3.6 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years. The total fair value of options vested was $1.5 million, $1.5 million and $2.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Restricted Stock
The 2012 Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share settled and restrictions lapse ratably over the vesting period, which is generally a four- or five-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date.
The following table summarizes restricted stock activity for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock Awards
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at January 1, 2017
|
|
|
215,105
|
|
|
$
|
62.78
|
|
Granted
|
|
|
210,744
|
|
|
|
63.70
|
|
Restrictions lapsed
|
|
|
(60,102
|
)
|
|
|
63.60
|
|
Forfeited
|
|
|
(30,916
|
)
|
|
|
61.99
|
|
Restricted stock at December 31, 2017
|
|
|
334,831
|
|
|
|
63.29
|
|
Granted
|
|
|
106,855
|
|
|
|
115.41
|
|
Restrictions lapsed
|
|
|
(86,191
|
)
|
|
|
63.64
|
|
Forfeited
|
|
|
(31,574
|
)
|
|
|
68.67
|
|
Restricted stock at December 31, 2018
|
|
|
323,921
|
|
|
|
79.85
|
|
Granted
|
|
|
115,471
|
|
|
|
106.35
|
|
Restrictions lapsed
|
|
|
(92,597
|
)
|
|
|
77.25
|
|
Forfeited
|
|
|
(31,822
|
)
|
|
|
87.58
|
|
Restricted stock at December 31, 2019
|
|
|
314,973
|
|
|
$
|
89.55
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2019, there was $21.1 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.
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 following table summarizes performance stock activity for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Performance
|
|
|
Fair Value
|
|
|
|
Stock Awards
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
Performance stock at January 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
25,707
|
|
|
|
58.35
|
|
Restrictions lapsed
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Performance stock at December 31, 2017
|
|
|
25,707
|
|
|
|
58.35
|
|
Granted
|
|
|
20,006
|
|
|
|
105.75
|
|
Restrictions lapsed
|
|
|
-
|
|
|
|
-
|
|
Performance change
|
|
|
6,427
|
|
|
|
58.35
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Performance stock at December 31, 2018
|
|
|
52,140
|
|
|
|
76.54
|
|
Granted
|
|
|
21,434
|
|
|
|
104.99
|
|
Restrictions lapsed
|
|
|
-
|
|
|
|
-
|
|
Performance change
|
|
|
(61,816
|
)
|
|
|
88.06
|
|
Forfeited
|
|
|
(2,375
|
)
|
|
|
105.37
|
|
Performance stock at December 31, 2019
|
|
|
9,383
|
|
|
$
|
58.35
|
|
As of December 31, 2019, there was $0.1 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 0.1 years. The decrease in unrecognized stock-based compensation costs related to non-vested performance stock in 2019 when compared to 2018 is driven by a decrease in the number of shares expected to vest at the end of future performance periods.
Employee Stock Purchase Plan
The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended December 31, 2019, 2018 and 2017:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.59 - 2.35%
|
|
|
2.06 - 2.33%
|
|
|
0.97 - 1.48%
|
|
Expected life (months)
|
|
6.00
|
|
|
6.00
|
|
|
6.00
|
|
Expected volatility
|
|
42.63 - 53.57%
|
|
|
31.50 - 37.36%
|
|
|
24.49 - 34.51%
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Note 14 – Leases
The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2019. Significant changes to the Company’s accounting policies as a result of adopting ASC 842 are discussed below.
The Company accounts for leases in accordance with ASC 842. The Company adopted the standard as of January 1, 2019, using the alternative transition method provided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date (the "effective date method"). Under the effective date method, comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments to reflect the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. The Company did not elect the hindsight practical expedient. The Company recorded a net increase of $13.1 million to its operating lease assets and liabilities on January 1, 2019. The adoption did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 did not have a material impact on the Company's consolidated statements of comprehensive income, shareholders' equity or cash flows as of the adoption date.
The Company has operating leases for office space, manufacturing facilities and certain company vehicles and equipment. The leases have remaining lease terms of one year to 10 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of December 31, 2019, the operating lease liability does not include any options to extend or terminate leases. The Company currently has no finance leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate of return, therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease agreements that contain non-lease components, with the exception of certain real estate leases, are accounted for as a single lease component.
Supplemental balance sheet information related to leases was as follows:
(in thousands)
|
|
December 31, 2019
|
|
Operating lease assets
|
|
$
|
11,425
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
3,340
|
|
Long-term operating lease liabilities
|
|
|
8,565
|
|
Total operating lease liabilities
|
|
$
|
11,905
|
|
Lease expense is recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred. The components of lease expense for the periods reported were as follows:
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
(in thousands)
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
Operating lease cost
|
|
$
|
976
|
|
|
$
|
3,960
|
|
Variable lease cost
|
|
|
228
|
|
|
|
1,039
|
|
Total lease cost
|
|
$
|
1,204
|
|
|
$
|
4,999
|
|
Maturities of operating lease liabilities as of December 31, 2019 (in accordance with ASC 842) were as follows:
(in thousands)
|
|
Operating Leases
|
|
Year Ending December 31,
|
|
|
|
|
2020
|
|
$
|
4,034
|
|
2021
|
|
|
2,835
|
|
2022
|
|
|
2,634
|
|
2023
|
|
|
1,064
|
|
2024
|
|
|
498
|
|
After 2024
|
|
|
1,613
|
|
Total future minimum lease payments
|
|
|
12,678
|
|
Less interest
|
|
|
(773
|
)
|
Present value of lease liabilities
|
|
$
|
11,905
|
|
As of December 31, 2019, we have no operating leases that have not yet commenced.
Weighted average remaining lease term and discount rate was as follows:
|
|
December 31, 2019
|
|
Weighted Average Remaining Lease Term (Years)
|
|
4.8
|
|
Weighted Average Discount Rate
|
|
2.6%
|
|
Supplemental cash flow information related to leases was as follows:
|
|
Twelve Months Ended
|
|
(in thousands)
|
|
December 31, 2019
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
5,020
|
|
Lease assets obtained in exchange for new operating lease liabilities
|
|
|
1,921
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 15 – Accumulated Other Comprehensive Loss
Other comprehensive loss is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive loss balances for the years ending December 31, 2019, 2018 and 2017, respectively:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(8,492
|
)
|
|
$
|
(5,234
|
)
|
|
$
|
(10,753
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
1,474
|
|
|
|
(3,258
|
)
|
|
|
5,519
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net current-period other comprehensive (loss) income
|
|
|
1,474
|
|
|
|
(3,258
|
)
|
|
|
5,519
|
|
Balance at end of period
|
|
$
|
(7,018
|
)
|
|
$
|
(8,492
|
)
|
|
$
|
(5,234
|
)
|
Note 16 – 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 years ended December 31, 2019, 2018 and 2017, the Company recorded an income tax provision of $17.5 million, $15.1 million and $22.7 million, respectively. The effective income tax rate for the years ended December 31, 2019, 2018 and 2017 was 21.6 percent, 16.4 percent and 30.4 percent, respectively.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The effective tax rate increased by 5.2% for the year ended December 31, 2019 when compared to 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and exercise of stock options, an increase in the state tax provision, and an increase to valuation allowances for unrealizable deferred tax assets.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income before income taxes are as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
74,841
|
|
|
$
|
81,893
|
|
|
$
|
69,929
|
|
Foreign
|
|
|
6,352
|
|
|
|
9,762
|
|
|
|
4,506
|
|
Total
|
|
$
|
81,193
|
|
|
$
|
91,655
|
|
|
$
|
74,435
|
|
Significant components of the provision for income taxes for the following periods are as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,991
|
|
|
$
|
(782
|
)
|
|
$
|
17,808
|
|
State
|
|
|
2,882
|
|
|
|
2,078
|
|
|
|
1,367
|
|
Foreign
|
|
|
1,544
|
|
|
|
1,810
|
|
|
|
2,215
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,121
|
|
|
|
11,325
|
|
|
|
865
|
|
State
|
|
|
269
|
|
|
|
538
|
|
|
|
193
|
|
Foreign
|
|
|
(809
|
)
|
|
|
(430
|
)
|
|
|
(1,918
|
)
|
Valuation Allowance
|
|
|
1,540
|
|
|
|
528
|
|
|
|
2,127
|
|
Total
|
|
$
|
17,538
|
|
|
$
|
15,067
|
|
|
$
|
22,657
|
|
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State tax (net of federal benefit)
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
1.7
|
|
Share based compensation
|
|
|
(0.5
|
)
|
|
|
(2.8
|
)
|
|
|
(0.8
|
)
|
Valuation allowance against deferred tax assets
|
|
|
1.4
|
|
|
|
0.7
|
|
|
|
2.9
|
|
Research and development credit
|
|
|
(2.8
|
)
|
|
|
(2.5
|
)
|
|
|
(2.2
|
)
|
Foreign rate differential
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(1.9
|
)
|
Tax reserves
|
|
|
1.1
|
|
|
|
(0.1
|
)
|
|
|
0.9
|
|
Domestic manufacturing deduction
|
|
|
-
|
|
|
|
-
|
|
|
|
(2.5
|
)
|
Miscellaneous
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
Transition tax
|
|
|
-
|
|
|
|
(0.8
|
)
|
|
|
3.2
|
|
Revaluation of deferred tax liability
|
|
|
-
|
|
|
|
(0.5
|
)
|
|
|
(5.7
|
)
|
Total
|
|
|
21.6
|
%
|
|
|
16.4
|
%
|
|
|
30.4
|
%
|
Significant components of deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,362
|
|
|
$
|
931
|
|
Leases
|
|
|
3,337
|
|
|
|
-
|
|
Warrants and stock options
|
|
|
3,325
|
|
|
|
2,908
|
|
Intangible assets
|
|
|
1,171
|
|
|
|
748
|
|
Inventories
|
|
|
169
|
|
|
|
154
|
|
Other assets
|
|
|
1,765
|
|
|
|
666
|
|
Net operating loss
|
|
|
6,513
|
|
|
|
6,605
|
|
Less valuation allowance
|
|
|
(8,248
|
)
|
|
|
(6,900
|
)
|
Total deferred tax assets
|
|
|
9,394
|
|
|
|
5,112
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(26,750
|
)
|
|
|
(21,788
|
)
|
Goodwill
|
|
|
(5,590
|
)
|
|
|
(3,486
|
)
|
Leases
|
|
|
(3,337
|
)
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
(35,677
|
)
|
|
|
(25,274
|
)
|
Net deferred tax liability
|
|
$
|
(26,283
|
)
|
|
$
|
(20,162
|
)
|
The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2019. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2019, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $9.3 million.
As of December 31, 2019, the Company had estimated net operating loss carry forwards of $6.5 million for tax purposes. The net operating losses relate to operations in Japan and Germany. Japan losses can be carried forward for up to ten years. The remaining Japan net operating losses begin to expire at various dates between 2020 and 2026. The Company’s Japan operations are taxed both by local authorities and in the U.S. Germany net operating losses may be carried forward without any time limitations but are limited to €1 million, plus 60 percent of taxable income exceeding €1 million.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The Company establishes valuation allowances for deferred tax assets when, after consideration of all positive and negative evidence, it is considered more-likely-than-not that a portion of the deferred tax assets will not be realized. The Company's valuation allowances of $8.2 million and $6.9 million at December 31, 2019 and 2018, respectively, reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient positive evidence for recognition. The increase in the valuation allowance is primarily attributable to fluctuations in foreign currency and the net operating losses incurred in Germany in 2019.
The Company files a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2016.
The Company has liabilities related to unrecognized tax benefits totaling $4.6 million and $4.1 million at December 31, 2019 and 2018, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2019, 2018 and 2017.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4,096
|
|
|
$
|
4,233
|
|
Additions for tax positions of current year
|
|
|
592
|
|
|
|
593
|
|
Additions for tax positions of prior years
|
|
|
-
|
|
|
|
309
|
|
Decrease related to expiration of statutes of limitations
|
|
|
(90
|
)
|
|
|
(1,039
|
)
|
Balance at period end
|
|
$
|
4,598
|
|
|
$
|
4,096
|
|
Note 17 – Litigation
From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to any litigation the outcome of which, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business.
Note 18 – Segment Reporting
The Company’s reportable segments are based on the internal reporting used by the Company’s CEO, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Company’s reportable segments are based upon geographic region, consisting of the United States and Europe. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that are global in nature and that the Company does not allocate directly to its operating segments.
Revenue in the United States is derived from Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Revenue in Europe is derived from Injection Molding, CNC Machining, and 3D Printing product lines. Revenue in Japan is derived from Injection Molding and CNC Machining 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 and lathe-turned customer parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal parts.
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The accounting policies of the reportable segments are the same as those described in Note 2 – Summary of Significant Accounting Policies. 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.
Beginning in 2019, the Company's CODM made a decision to view certain research and development costs by geographic region. As a result, costs previously included in the Corporate Unallocated and Japan category have been included in the respective geographic regions. All periods presented have been restated to reflect this change.
Revenue and income from operations by reportable segment are as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
360,205
|
|
|
$
|
350,535
|
|
|
$
|
263,086
|
|
Europe
|
|
|
82,805
|
|
|
|
80,889
|
|
|
|
70,154
|
|
Japan
|
|
|
15,718
|
|
|
|
14,172
|
|
|
|
11,250
|
|
Total revenue
|
|
$
|
458,728
|
|
|
$
|
445,596
|
|
|
$
|
344,490
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
108,594
|
|
|
$
|
115,710
|
|
|
$
|
99,561
|
|
Europe
|
|
|
15,077
|
|
|
|
16,747
|
|
|
|
12,796
|
|
Corporate Unallocated and Japan
|
|
|
(43,815
|
)
|
|
|
(43,557
|
)
|
|
|
(40,131
|
)
|
Total income from operations
|
|
$
|
79,856
|
|
|
$
|
88,898
|
|
|
$
|
72,226
|
|
Total long-lived assets, expenditures for additions to long-lived assets and depreciation and amortization expense are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
210,171
|
|
|
$
|
185,979
|
|
|
$
|
125,308
|
|
Europe
|
|
|
45,019
|
|
|
|
34,577
|
|
|
|
33,691
|
|
Japan
|
|
|
8,522
|
|
|
|
7,445
|
|
|
|
7,441
|
|
Total long-lived assets
|
|
$
|
263,712
|
|
|
$
|
228,001
|
|
|
$
|
166,440
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Expenditures for additions to long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
45,123
|
|
|
$
|
78,762
|
|
|
$
|
20,370
|
|
Europe
|
|
|
14,743
|
|
|
|
7,576
|
|
|
|
11,704
|
|
Japan
|
|
|
2,364
|
|
|
|
766
|
|
|
|
561
|
|
Total expenditures for additions to long-lived assets
|
|
$
|
62,230
|
|
|
$
|
87,104
|
|
|
$
|
32,635
|
|
Proto Labs, Inc.
Notes to Consolidated Financial Statements
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
24,767
|
|
|
$
|
21,117
|
|
|
$
|
13,267
|
|
Europe
|
|
|
4,746
|
|
|
|
4,679
|
|
|
|
4,174
|
|
Japan
|
|
|
1,351
|
|
|
|
958
|
|
|
|
1,033
|
|
Total depreciation and amortization
|
|
$
|
30,864
|
|
|
$
|
26,754
|
|
|
$
|
18,474
|
|
Note 19 – Subsequent Events
None.