0001437749-20-022363.txt : 20201103 0001437749-20-022363.hdr.sgml : 20201103 20201103154015 ACCESSION NUMBER: 0001437749-20-022363 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 62 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201103 DATE AS OF CHANGE: 20201103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Proto Labs Inc CENTRAL INDEX KEY: 0001443669 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED STRUCTURAL METAL PRODUCTS [3440] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35435 FILM NUMBER: 201283344 BUSINESS ADDRESS: STREET 1: 5540 Pioneer Creek CITY: Maple Plain STATE: MN ZIP: 55359 BUSINESS PHONE: 763-479-7474 MAIL ADDRESS: STREET 1: 5540 Pioneer Creek CITY: Maple Plain STATE: MN ZIP: 55359 10-Q 1 prlb20200930_10q.htm FORM 10-Q prlb20190630_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                      

Commission File Number: 001-35435

 

Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

 

Minnesota

41-1939628

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

5540 Pioneer Creek Drive

 

Maple Plain, Minnesota

55359

(Address of principal executive offices)

(Zip Code)

 

(763479-3680

(Registrant’s telephone number, including area code)

 

Not Applicable

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

  

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

PRLB

New York Stock Exchange

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

☐    

 

Smaller reporting company

Emerging growth company

    

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,753,545 shares of Common Stock, par value $0.001 per share, were outstanding at October 29, 2020.

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 


 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(Unaudited)

     

Assets

        

Current assets

        
Cash and cash equivalents $118,254  $125,225 
Short-term marketable securities  30,993   35,437 
Accounts receivable, net of allowance for doubtful accounts of $1,854 and $952 as of September 30, 2020 and December 31, 2019, respectively  61,250   57,450 
Inventory  10,402   10,075 
Income taxes receivable  16   - 
Prepaid expenses and other current assets  10,198   8,232 

Total current assets

  231,113   236,419 
Property and equipment, net  281,895   263,712 
Goodwill  128,752   128,752 
Other intangible assets, net  15,107   17,369 
Long-term marketable securities  51,369   12,960 
Operating lease assets  10,485   11,425 
Finance lease assets  2,087   - 
Other long-term assets  5,318   3,030 

Total assets

 $726,126  $673,667 
         

Liabilities and shareholders' equity

        

Current liabilities

        
Accounts payable $15,452  $16,804 
Accrued compensation  13,539   15,058 
Accrued liabilities and other  19,047   11,057 
Current operating lease liabilities  3,330   3,340 
Current finance lease liabilities  325   - 
Income taxes payable  -   1,322 

Total current liabilities

  51,693   47,581 
Long-term operating lease liabilities  8,003   8,565 
Long-term finance lease liabilities  1,758   - 
Long-term deferred tax liabilities  32,849   26,283 
Other long-term liabilities  6,002   5,448 

Total liabilities

  100,305   87,877 
         

Shareholders' equity

        

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2020 and December 31, 2019

  -   - 
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,753,545 and 26,786,459 shares as of September 30, 2020 and December 31, 2019, respectively  27   27 
Additional paid-in capital  278,996   268,059 
Retained earnings  353,322   324,722 
Accumulated other comprehensive loss  (6,524)  (7,018)

Total shareholders' equity

  625,821   585,790 

Total liabilities and shareholders' equity

 $726,126  $673,667 

 


 

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

 

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Statements of Operations:

                               

Revenue

  $ 107,504     $ 117,455     $ 329,187     $ 346,839  

Cost of revenue

    52,861       57,839       163,988       168,127  

Gross profit

    54,643       59,616       165,199       178,712  

Operating expenses

                               

Marketing and sales

    16,705       17,604       51,821       55,466  

Research and development

    7,915       8,359       25,550       24,541  

General and administrative

    12,354       12,380       38,983       38,411  

Total operating expenses

    36,974       38,343       116,354       118,418  

Income from operations

    17,669       21,273       48,845       60,294  

Other income, net

    728       228       2,549       1,566  

Income before income taxes

    18,397       21,501       51,394       61,860  

Provision for income taxes

    3,700       4,709       10,106       13,391  

Net income

  $ 14,697     $ 16,792     $ 41,288     $ 48,469  
                                 

Net income per share:

                               

Basic

  $ 0.55     $ 0.63     $ 1.54     $ 1.80  

Diluted

  $ 0.55     $ 0.62     $ 1.54     $ 1.79  
                                 

Shares used to compute net income per share:

                               

Basic

    26,736,709       26,846,030       26,724,715       26,894,420  

Diluted

    26,886,433       27,005,341       26,861,647       27,072,873  
                                 

Comprehensive Income (net of tax)

                               

Comprehensive income

  $ 17,807     $ 14,642     $ 41,782     $ 46,317  

 


 

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

 

 

 

Proto Labs, Inc.

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

 


 

   

Common Stock

   

Additional

           

Accumulated Other

         
                   

Paid-In

   

Retained

   

Comprehensive

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Total

 
                                                 

Balance at January 1, 2020

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

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

    23,525       -       (902 )     -       -       (902 )

Stock-based compensation expense

    -       -       3,033       -       -       3,033  

Repurchases of common stock

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

Net income

    -       -       -       13,984       -       13,984  

Other comprehensive income

                                               

Foreign currency translation adjustment

    -       -       -       -       (2,980 )     (2,980 )

Comprehensive income

                                            11,004  

Balance at March 31, 2020

    26,648,524     $ 27     $ 268,574     $ 329,137     $ (9,998 )   $ 587,740  
Common shares issued on exercise of options and other, net of shares withheld for tax obligations     96,186       -       400       -       -       400  
Stock-based compensation expense     -       -       3,639       -       -       3,639  
Repurchases of common stock     (38,154 )     -       (382 )     (3,119 )     -       (3,501 )
Net income     -       -       -       12,607       -       12,607  

Other comprehensive income

                                               
Foreign currency translation adjustment     -             -       -       364       364  

Comprehensive income

                                            12,971  

Balance at June 30, 2020

    26,706,556     $ 27     $ 272,231     $ 338,625     $ (9,634 )   $ 601,249  
Common shares issued on exercise of options and other, net of shares withheld for tax obligations     46,989       -       2,820                   2,820  
Stock-based compensation expense     -       -       3,945       -       -       3,945  
Repurchases of common stock     -       -       -       -       -       -  
Net income     -       -       -       14,697       -       14,697  
Other comprehensive income                                                
Foreign currency translation adjustment     -       -       -       -       3,110       3,110  
Comprehensive income                                             17,807  
Balance at September 30, 2020     26,753,545     $ 27     $ 278,996     $ 353,322     $ (6,524 )   $ 625,821  

 

   

Common Stock

   

Additional

           

Accumulated Other

         
                   

Paid-In

   

Retained

   

Comprehensive

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Total

 
                                                 

Balance at January 1, 2019

    26,984,747       27       258,502       291,460       (8,492 )     541,497  

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

    19,950       -       (420 )     -       -       (420 )

Stock-based compensation expense

    -       -       3,040       -       -       3,040  

Repurchases of common stock

    (157,716 )     -       (1,511 )     (15,798 )     -       (17,309 )

Net income

    -       -       -       15,511       -       15,511  

Other comprehensive income

                                               

Foreign currency translation adjustment

    -       -       -       -       476       476  

Comprehensive income

                                            15,987  

Balance at March 31, 2019

    26,846,981     $ 27     $ 259,611     $ 291,173     $ (8,016 )   $ 542,795  
Common shares issued on exercise of options and other, net of shares withheld for tax obligations     75,785       -       245       -       -       245  
Stock-based compensation expense     -       -       3,486       -       -       3,486  
Repurchases of common stock     (40,669 )     -       (390 )     (3,711 )     -       (4,101 )
Net income     -       -       -       16,166       -       16,166  

Other comprehensive income

                                               
Foreign currency translation adjustment     -             -       -       (478 )     (478 )

Comprehensive income

                                            15,688  

Balance at June 30, 2019

    26,882,097     $ 27     $ 262,952     $ 303,628     $ (8,494 )   $ 558,113  
Common shares issued on exercise of options and other, net of shares withheld for tax obligations     5,089       -       241       -       -       241  
Stock-based compensation expense     -       -       3,212       -       -       3,212  
Repurchases of common stock     (128,077 )     -       (1,227 )     (10,884 )     -       (12,111 )
Net income     -       -       -       16,792       -       16,792  
Other comprehensive income                                                
Foreign currency translation adjustment     -             -       -       (2,150 )     (2,150 )
Comprehensive income                                             14,642  
Balance at September 30, 2019     26,759,109     $ 27     $ 265,178     $ 309,536     $ (10,644 )   $ 564,097  

 


 

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

 

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 


 

   

Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 
                 

Operating activities

               

Net income

  $ 41,288     $ 48,469  

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

               
Depreciation and amortization     23,891       22,658  
Stock-based compensation expense     10,617       9,738  
Deferred taxes     6,578       1,599  
Amortization of held-to-maturity securities     202       (5 )
Other     (865 )     (133 )

Changes in operating assets and liabilities:

               
Accounts receivable     (3,812 )     (5,387 )
Inventories     (316 )     551  
Prepaid expenses and other     (1,008 )     (162 )
Income taxes     (1,325 )     9,165  
Accounts payable     (1,257 )     1,479  
Accrued liabilities and other     8,382       (4,193 )

Net cash provided by operating activities

    82,375       83,779  
                 

Investing activities

               
Purchases of property, equipment and other capital assets     (40,489 )     (46,151 )
Purchases of other assets and investments     (3,000 )     (4,000 )
Purchases of marketable securities     (90,596 )     (17,443 )
Proceeds from maturities of marketable securities     56,428       54,352  

Net cash used in investing activities

    (77,657 )     (13,242 )
                 

Financing activities

               
Proceeds from exercises of stock options     5,674       2,486  
Purchases of shares withheld for tax obligations     (3,367 )     (2,420 )
Repurchases of common stock     (14,686 )     (33,521 )

Net cash used in financing activities

    (12,379 )     (33,455 )
Effect of exchange rate changes on cash and cash equivalents     690       (560 )

Net (decrease) increase in cash and cash equivalents

    (6,971 )     36,522  
Cash and cash equivalents, beginning of period     125,225       85,046  

Cash and cash equivalents, end of period

  $ 118,254     $ 121,568  

 


 

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

 

 

 

Note 1 – Basis of Presentation

 

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended  December 31, 2019 as filed with the Securities and Exchange Commission (SEC) on February 26, 2020.

 

The accompanying Consolidated Balance Sheet as of December 31, 2019 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 26, 2020 as referenced above.

  

 

 

Note 2 – Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

During the first quarter of 2020, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (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. The adoption of this guidance had no material impact on our consolidated financial statements. 

 

During the fourth quarter of 2019, the Company early adopted the FASB 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 our consolidated financial statements.

 

 

6

 
 

Note 3 – Net Income per Common Share

 

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

 

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

 


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except share and per share amounts)

 

2020

   

2019

   

2020

   

2019

 

Net income

  $ 14,697     $ 16,792     $ 41,288     $ 48,469  
                                 

Basic - weighted-average shares outstanding:

    26,736,709       26,846,030       26,724,715       26,894,420  

Effect of dilutive securities:

                               

Employee stock options and other

    149,724       159,311       136,932       178,453  

Diluted - weighted-average shares outstanding:

    26,886,433       27,005,341       26,861,647       27,072,873  

Net income per share:

                               

Basic

  $ 0.55     $ 0.63     $ 1.54     $ 1.80  

Diluted

  $ 0.55     $ 0.62     $ 1.54     $ 1.79  

 


 

7

 
 

Note 4 – Goodwill and Other Intangible Assets

 

There were no changes in the carrying amount of Goodwill during the three and nine months ended September 30, 2020.

 

Intangible assets other than goodwill at  September 30, 2020 and December 31, 2019 were as follows:

 


 

  

September 30, 2020

  

December 31, 2019

  

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  $(597) $333  $930  $(527) $403  10.0 3.5

Non-compete agreement

  270   (234)  36   270   (222)  48  2.0 - 5.0 2.3

Software technology

  13,229   (3,302)  9,927   13,229   (2,275)  10,954  10.0 7.3

Customer relationships

  10,070   (5,259)  4,811   10,070   (4,106)  5,964  6.0 - 9.0 3.1

Total intangible assets

 $24,499  $(9,392) $15,107  $24,499  $(7,130) $17,369     

 


 

Amortization expense for intangible assets was $0.8 million and $0.9 million for the three months ended  September 30, 2020 and 2019, respectively, and $2.3 million and $2.6 million for the nine months ended September, 2020 and 2019, respectively.

 

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:

 


 

(in thousands)

 

Estimated Amortization Expense

 
Remaining 2020 $754 
2021  3,016 
2022  3,016 
2023  2,813 
2024  1,400 
Thereafter  4,108 

Total estimated amortization expense

 $15,107 

 


 

8

 
 

Note 5 – Fair Value Measurements

 

Accounting Standards Codification (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 that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs.

 

The following table summarizes financial assets as of  September 30, 2020 and December 31, 2019 measured at fair value on a recurring basis: 

 


 

   

September 30, 2020

   

December 31, 2019

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                               

Cash and cash equivalents

                                               
Money market mutual fund   $ 66,374     $ -     $ -     $ 68,962     $ -     $ -  

Total

  $ 66,374     $ -     $ -     $ 68,962     $ -     $ -  

 


 

 

Note 6 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost, net of an allowance for credit losses. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of  September 30, 2020 and December 31, 2019:

 


 

   

September 30, 2020

 

(in thousands)

 

Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 
U.S. municipal securities   $ 17,795     $ 68     $ -     $ 17,863  
Corporate debt securities     38,876       283       (25 )     39,134  
U.S. government agency securities     19,003       9       (15 )     18,997  
Certificates of deposit/time deposits     5,189       105       -       5,294  
Commercial paper     1,499       -       -       1,499  

Total marketable securities

  $ 82,362     $ 465     $ (40 )   $ 82,787  

 


 

9

 

 

   

December 31, 2019

 

(in thousands)

 

Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

U.S. municipal securities

  $ 10,204     $ 9     $ (3 )   $ 10,210  

Corporate debt securities

    26,944       80       (12 )     27,012  

U.S. government agency securities

    6,274       1       (7 )     6,268  

Certificates of deposit/time deposits

    1,484       22       -       1,506  
Commercial paper     3,491       -       -       3,491  

Total marketable securities

  $ 48,397     $ 112     $ (22 )   $ 48,487  

 


 

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

 

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

 

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

 

The  September 30, 2020 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost, net of an allowance for credit losses. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 


 

   

September 30,

 

(in thousands)

 

2020

 

Due in one year or less

  $ 30,993  

Due after one year through five years

    51,369  

Total marketable securities

  $ 82,362  

 


 

 

Note 7 – 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 consisted of the following as of the dates indicated:

 


 

   

September 30,

   

December 31,

 

(in thousands)

 

2020

   

2019

 
Raw materials   $ 10,650     $ 9,818  
Work in process     16       501  

Total inventory

    10,666       10,319  
Allowance for obsolescence     (264 )     (244 )

Inventory, net of allowance

  $ 10,402     $ 10,075  

 


 

10

 

 

 

Note 8 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

 

Employee Stock Purchase Plan

 

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

 

Stock-Based Compensation Expense

 

Stock-based compensation expense was $3.9 million and $3.2 million for the three months ended  September 30, 2020 and 2019, respectively, and $10.6 million and $9.7 million for the nine months ended September 30, 2020 and 2019, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2020:

 


 

      

Weighted-

 
      

Average

 
  

Stock Options

  

Exercise Price

 

Options outstanding at December 31, 2019

  276,266  $72.38 
Granted  60,065   105.79 
Exercised  (64,932)  57.24 
Forfeited  (37,842)  67.92 
Options outstanding at September 30, 2020  233,557  $85.89 
         
Exercisable at September 30, 2020  135,837  $98.38 

 


 

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period from four to five years, 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 weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2020 was $45.32.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2020 and 2019:

 


 

  

Nine Months Ended September 30,

  

2020

 

2019

Risk-free interest rate

 

0.50 - 1.47%

 

2.35 - 2.58%

Expected life (years)

 6.25 6.25

Expected volatility

 

42.40 - 43.83%

 

42.52 - 42.74%

Expected dividend yield

 

0%

 

0%

 


 

As of September 30, 2020, there was $4.8 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.

 

11

 

Restricted Stock

 

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from four to five years, 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 during the nine months ended September 30, 2020:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Restricted

  

Fair Value

 
  

Stock

  

Per Share

 

Restricted stock at December 31, 2019

  314,973  $89.55 
Granted  108,179   117.76 
Restrictions lapsed  (100,596)  84.57 
Forfeited  (12,221)  92.61 
Restricted stock at September 30, 2020  310,335  $98.84 

 


 

As of September 30, 2020, there was $24.3 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.6 years. 

 

12

 
 

Performance Stock

 

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. The Company’s PSUs granted from 2017 to 2019 are based on performance conditions and the related compensation cost is based on the probability that the performance conditions will be achieved. The Company’s PSUs granted in 2020 are based on market conditions and the related compensation cost is based on the fair value at grant date calculated using a Monte Carlo pricing model.

 

The following table summarizes performance stock activity during the nine months ended September 30, 2020:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Performance

  

Fair Value

 
  

Stock

  

Per Share

 

Performance stock at December 31, 2019

  9,383  $58.35 

Granted

  19,956   118.66 

Restrictions lapsed

  (7,113)  58.35 

Performance change

  -   - 

Forfeited

  (2,270)  58.35 

Performance stock at September 30, 2020

  19,956  $118.66 

 


 

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

 


 

  

Nine Months Ended September 30,

  

2020

 

Risk-free interest rate

 1.41% 

Expected life (years)

 2.88 

Expected volatility

 38.70% 

Expected dividend yield

 0% 

 


 

As of September 30, 2020, there was $1.9 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.4 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2020 and 2019

 


 

  

Nine Months Ended September 30,

  

2020

 

2019

Risk-free interest rate

 

0.17 - 1.59%

 

2.33 - 2.35%

Expected life (months)

 6.00 6.00

Expected volatility

 

42.63 - 59.99%

 

37.36 - 53.57%

Expected dividend yield

 

0%

 

0%

 


 

13

 
 
 

 Note 9 – Accumulated Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and nine months ended September 30, 2020 and 2019:

 


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Foreign currency translation adjustments

                               

Balance at beginning of period

  $ (9,634 )   $ (8,494 )   $ (7,018 )   $ (8,492 )

Other comprehensive income (loss) before reclassifications

    3,110       (2,150 )     494       (2,152 )

Amounts reclassified from accumulated other comprehensive loss

    -       -       -       -  

Net current-period other comprehensive income (loss)

    3,110       (2,150 )     494       (2,152 )

Balance at end of period

  $ (6,524 )   $ (10,644 )   $ (6,524 )   $ (10,644 )

 


 

 

Note 10 – Income Taxes

 

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended  September 30, 2020 and 2019, the Company recorded an income tax provision of $3.7 million and $4.7 million, respectively. For the nine months ended  September 30, 2020 and 2019, the Company recorded an income tax provision of $10.1 million and $13.4 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended  September 30, 2020 was 20.1 percent compared to 21.9 percent in the same period of the prior year. The effective tax rate decreased by 1.8 percent for the three months ended  September 30, 2020 when compared to the same period in 2019 primarily due to an increase in tax benefits from the vesting of restricted stock and the exercise of stock options. The effective income tax rate for the nine months ended  September 30, 2020 was 19.7 percent compared to 21.6 percent in the same period of the prior year. The effective tax rate decreased by 1.9 percent for the nine months ended  September 30, 2020 when compared to the same period in 2019 primarily due to an increase in tax benefits from the vesting of restricted stock and the exercise of stock options.

 

The effective income tax rate for the nine months ended September 30, 2020 differs from the U.S. federal statutory rate of 21.0 percent due to various factors, including operating in multiple state and foreign jurisdictions and tax credits for which the Company qualifies.

 

The Company had unrecognized tax benefits totaling $4.9 million as of September 30, 2020 and $4.6 million as of  December 31, 2019, respectively, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The CARES Act is meant to infuse companies with various income and payroll tax cash benefits to ease the impact of the pandemic. A technical correction to the Tax Cuts and Jobs Act of 2017 was included in the CARES Act allowing qualified improvement property to claim bonus depreciation for respective assets placed in service in 2018 and 2019.  The impact of the CARES Act to the Company was a $2.6 million reduction in our income taxes payable and a corresponding increase to our deferred tax liability. In addition, the Company has elected to defer deposits of the employer portion of the Social Security tax for the quarter ended September 30, 2020 through the quarter ended December 31, 2020.  The Social Security taxes are being accrued for and will be paid beginning in 2021.

 

14

 
 
 

Note 11 – Segment Reporting

 

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

 

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

 

Revenue and income from operations by reportable segment for the three and nine months ended September 30, 2020 and 2019 were as follows:

 


 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

United States

  $ 85,608     $ 92,916     $ 262,507     $ 271,877  

Europe

    18,897       20,721       56,413       62,915  

Japan

    2,999       3,818       10,267       12,047  

Total revenue

  $ 107,504     $ 117,455     $ 329,187     $ 346,839  

 


 


 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Income from Operations:

                               

United States

  $ 25,164     $ 28,109     $ 74,602     $ 82,367  

Europe

    3,764       4,045       10,389       12,022  

Corporate Unallocated and Japan

    (11,259 )     (10,881 )     (36,146 )     (34,095 )

Total Income from Operations

  $ 17,669     $ 21,273     $ 48,845     $ 60,294  

 


 

Total long-lived assets at  September 30, 2020 and December 31, 2019 were as follows:

 


 

   

September 30,

   

December 31,

 

(in thousands)

 

2020

   

2019

 

Total long-lived assets:

               
United States   $ 219,425     $ 210,171  
Europe     54,628       45,019  
Japan     7,842       8,522  

Total Assets

  $ 281,895     $ 263,712  

 


 

Revenue by product line for the three and nine months ended September 30, 2020 and 2019 were as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

Injection Molding

  $ 53,257