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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
(Mark One)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
oTRANSITION 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)
Minnesota41-1939628
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5540 Pioneer Creek Drive
Maple Plain, Minnesota
55359
(Address of principal executive offices)(Zip Code)
(763) 479-3680
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.001 Per SharePRLBNew 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. þYes oNo
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). þYes oNo
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 filerþAccelerated filer o
Non-accelerated filero
Smaller reporting companyoEmerging growth companyo
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes þNo
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 25,785,903 shares of Common Stock, par value $0.001 per share, were outstanding at October 31, 2023.


Proto Labs, Inc.
TABLE OF CONTENTS
1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Proto Labs, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
September 30,
2023
December 31,
2022
(Unaudited)
Assets
Current assets
Cash and cash equivalents$83,496 $56,558 
Short-term marketable securities19,204 23,568 
Accounts receivable, net of allowance for doubtful accounts of $2,665 and $1,706 as of September 30, 2023, and December 31, 2022, respectively
78,395 76,225 
Inventory13,803 13,578 
Income taxes receivable891 4,042 
Prepaid expenses and other current assets8,722 12,597 
Total current assets204,511 186,568 
Property and equipment, net243,022 257,785 
Goodwill273,991 273,991 
Other intangible assets, net26,668 31,250 
Long-term marketable securities12,212 26,419 
Operating lease assets2,737 3,844 
Finance lease assets16,763 17,532 
Other long-term assets4,341 4,779 
Total assets$784,245 $802,168 
Liabilities and shareholders' equity
Current liabilities  
Accounts payable$17,922 $17,356 
Accrued compensation16,337 12,743 
Accrued liabilities and other21,027 22,384 
Current operating lease liabilities1,568 1,561 
Current finance lease liabilities16,630 17,537 
Income taxes payable1,144 - 
Total current liabilities74,628 71,581 
Long-term operating lease liabilities1,545 2,255 
Long-term finance lease liabilities671  
Long-term deferred tax liabilities17,138 26,322 
Other long-term liabilities5,341 4,362 
Total liabilities99,323 104,520 
Shareholders' equity  
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2023, and December 31, 2022
- - 
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 25,785,903 and 26,888,425 shares as of September 30, 2023, and December 31, 2022, respectively
26 27 
Additional paid-in capital463,908 473,740 
Retained earnings251,276 258,236 
Accumulated other comprehensive loss(30,288)(34,355)
Total shareholders' equity684,922 697,648 
Total liabilities and shareholders' equity$784,245 $802,168 
The accompanying notes are an integral part of these consolidated financial statements.
2

Proto Labs, Inc.
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Statements of Operations:
Revenue$130,705 $121,721 $378,829 $372,791 
Cost of revenue71,423 68,089 212,648 205,933 
Gross profit59,282 53,632 166,181 166,858 
Operating expenses  
Marketing and sales21,682 20,594 65,863 62,235 
Research and development10,105 9,309 30,647 29,316 
General and administrative17,058 16,477 49,713 49,770 
Closure of Japan business22 1,194 186 6,388 
Total operating expenses48,867 47,574 146,409 147,709 
Income from operations10,415 6,058 19,772 19,149 
Other income (loss), net320 (24)(1,758)(323)
Income before income taxes10,735 6,034 18,014 18,826 
Provision for income taxes2,781 2,083 7,784 7,223 
Net income$7,954 $3,951 $10,230 $11,603 
Net income per share:
Basic$0.31 $0.14 $0.39 $0.42 
Diluted$0.31 $0.14 $0.39 $0.42 
Shares used to compute net income per share:
Basic26,023,83027,505,09726,296,30427,512,057
Diluted26,028,45627,508,21726,327,60627,522,734
Comprehensive Income (Loss) (net of tax)
Comprehensive income (loss)$6,887 $(6,924)$14,297 $(18,604)
The accompanying notes are an integral part of these consolidated financial statements.
3

Proto Labs, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
Common StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Loss
Total
SharesAmount
Balance at December 31, 202226,888,42527 473,740 258,236 (34,355)697,648 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations26,798(401)(401)
Stock-based compensation expense-3,695 3,695 
Repurchases of common stock and other(712,500)(1)(11,849)(9,475)(21,325)
Net income-2,659 2,659 
Other comprehensive income
Foreign currency translation adjustment-527 527 
Net unrealized gains (losses) on investments in securities-334 334 
Comprehensive income    3,520 
Balance at March 31, 202326,202,723$26 $465,185 $251,420 $(33,494)$683,137 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations169,229962 962 
Stock-based compensation expense-3,675 3,675 
Repurchases of common stock and other(276,518)(4,872)(4,107)(8,979)
Net loss-(383)(383)
Other comprehensive income
Foreign currency translation adjustment-4,254 4,254 
Net unrealized gains (losses) on investments in securities-19 19 
Comprehensive income3,890 
Balance at June 30, 202326,095,434$26 $464,950 $246,930 $(29,221)$682,685 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations1,037(11)(11)
Stock-based compensation expense-4,441 4,441 
Repurchases of common stock and other(310,568)(5,472)(3,608)(9,080)
Net income-7,954 7,954 
Other comprehensive income
Foreign currency translation adjustment-(1,307)(1,307)
Net unrealized gains (losses) on investments in securities-240 240 
Comprehensive income6,887 
Balance at September 30, 202325,785,903$26 $463,908 $251,276 $(30,288)$684,922 
Common StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Loss
Total
SharesAmount
Balance at December 31, 202127,465,94528 468,548 376,734 (16,817)828,493 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations27,716(462)(462)
Stock-based compensation expense-4,397 4,397 
Repurchases of common stock-
Net income-5,095 5,095 
Other comprehensive loss
Foreign currency translation adjustment-(4,972)(4,972)
Net unrealized gains (losses) on investments in securities-(516)(516)
Comprehensive loss(393)
Balance at March 31, 202227,493,661$28 $472,483 $381,829 $(22,305)$832,035 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations122,7051,158 1,158 
Stock-based compensation expense-4,031 4,031 
Repurchases of common stock(113,266)(1,932)(3,307)(5,239)
Net income-2,557 2,557 
Other comprehensive loss
Foreign currency translation adjustment-(13,515)(13,515)
Net unrealized gains (losses) on investments in securities-(329)(329)
Comprehensive loss(11,287)
Balance at June 30, 202227,503,100$28 $475,740 $381,079 $(36,149)$820,698 
Common shares issued on exercise of options and other, net of shares withheld for tax obligations31,150- - 
Stock-based compensation expense-4,907 4,907 
Repurchases of common stock(207,500)(3,540)(4,295)(7,835)
Net income-3,951 3,951 
Other comprehensive loss
Foreign currency translation adjustment-(10,287)(10,287)
Net unrealized gains (losses) on investments in securities-(588)(588)
Comprehensive loss(6,924)
Balance at September 30, 202227,326,750$28 $477,107 $380,735 $(47,024)$810,846 
The accompanying notes are an integral part of these consolidated financial statements.
4

Proto Labs, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
20232022
Operating activities
Net income$10,230 $11,603 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization28,213 29,981 
Stock-based compensation expense11,811 13,335 
Deferred taxes(9,197)(8,920)
Interest on finance lease obligations859 - 
Loss on foreign currency translation3,906 - 
Impairments related to closure of Japan business- 2,842 
Gain on disposal of property and equipment(498)(1,174)
Other122 11 
Changes in operating assets and liabilities:  
Accounts receivable(3,058)(3,909)
Inventories(150)(1,613)
Prepaid expenses and other4,127 (920)
Income taxes4,693 670 
Accounts payable746 1,292 
Accrued liabilities and other4,242 8,366 
Net cash provided by operating activities56,046 51,564 
Investing activities
Purchases of property, equipment and other capital assets(9,935)(16,414)
Proceeds from sales of property, equipment and other capital assets693 3,227 
Purchases of marketable securities- (45,872)
Proceeds from sales of marketable securities- 1,998 
Proceeds from call redemptions and maturities of marketable securities19,115 13,696 
Net cash provided by (used in) investing activities9,873 (43,365)
Financing activities
Proceeds from exercises of stock options1,986 2,311 
Purchases of shares withheld for tax obligations(1,436)(1,615)
Repurchases of common stock(39,053)(13,074)
Principal repayments of finance lease obligations(234)(417)
Net cash used in financing activities(38,737)(12,795)
Effect of exchange rate changes on cash and cash equivalents(244)(1,972)
Net increase (decrease) in cash and cash equivalents26,938 (6,568)
Cash and cash equivalents, beginning of period56,558 65,929 
Cash and cash equivalents, end of period$83,496 $59,361 
The accompanying notes are an integral part of these consolidated financial statements.
5

Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation
The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (SEC) on February 21, 2023.
The accompanying Consolidated Balance Sheet as of December 31, 2022 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Company's Annual Report on Form 10-K filed on February 21, 2023 as referenced above.
Note 2 – Recent Accounting Pronouncements
The Company did not recently adopt any accounting pronouncements that had a material impact on the Company's Consolidated Financial Statements. There are no pending accounting pronouncements that are expected to have a material impact on the Company's Consolidated Financial Statements.
Note 3 – Net Income per Common Share
Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied. Anti-dilutive options were excluded from the calculation of diluted weighted average shares outstanding and were 393,592 and 210,443 for the three months ended September 30, 2023 and 2022, respectively, and 372,353 and 202,901 for the nine months ended September 30, 2023 and 2022, respectively.
6

The table below sets forth the computation of basic and diluted net (loss) income per share:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except share and per share amounts)2023202220232022
Net income$7,954 $3,951 $10,230 $11,603 
Basic - weighted-average shares outstanding:26,023,83027,505,09726,296,30427,512,057
Effect of dilutive securities:
Employee stock options and other4,6263,12031,30210,677
Diluted - weighted-average shares outstanding:26,028,45627,508,21726,327,60627,522,734
Net (loss) income per share:
Basic$0.31 $0.14 $0.39 $0.42 
Diluted$0.31 $0.14 $0.39 $0.42 
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, 2023.
Intangible assets other than goodwill at September 30, 2023 and December 31, 2022 were as follows:
September 30, 2023December 31, 2022Useful
Life (in years)
Weighted Average
Useful Life Remaining
(in years)
(in thousands)GrossAccumulated
Amortization
NetGrossAccumulated
Amortization
Net
Intangible assets with finite lives:
Marketing assets$930 $(876)$54 $930 $(806)$124 10.00.6
Non-compete agreement825 (569)256 828 (487)341 
2.0 - 5.0
1.6
Software technology13,229 (7,410)5,819 13,229 (6,383)6,846 10.04.3
Software platform25,902 (5,928)19,974 26,054 (4,337)21,717 12.09.3
Tradenames348 (312)36 350 (227)123 3.00.3
Customer relationships12,185 (11,656)529 12,197 (10,098)2,099 
3.0 - 9.0
0.2
Total intangible assets$53,419 $(26,751)$26,668 $53,588 $(22,338)$31,250 
Intangible assets allocated to the acquired Hubs entities consisted of intangible assets of €11.6 million in Europe and $16.6 million in the United States as of the date of the acquisition. The Euro denominated intangible assets are translated at the end of each period using the current exchange rates resulting in a foreign currency translation adjustment that is recorded as a component of Other Comprehensive Income. Foreign currency losses related to intangible assets were $1.9 million and $1.7 million as of September 30, 2023 and December 31, 2022, respectively. Amortization expense for intangible assets was $1.5 million for each of the three months ended September 30, 2023 and 2022 and $4.5 million and $4.6 million for the nine months ended September 30, 2023 and 2022, respectively.
7

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets and current exchange rates is as follows:
(in thousands)Estimated Amortization Expense
Remaining 2023$1,432
20243,713
20253,619
20263,518
20273,509
Thereafter10,877
Total estimated amortization expense$26,668
Note 5 – Fair Value Measurements
Accounting Standards Codification, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Observable 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 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company's assets and liabilities that are required to be measured or disclosed at fair value on a recurring basis include cash and cash equivalents and marketable securities. The Company’s cash consists of bank deposits and cash equivalents consist primarily of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs. The Company's marketable securities consist of short-term and long-term agency, municipal, corporate and other debt securities. Fair value for the corporate debt securities is primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).
The following table summarizes financial assets as of September 30, 2023 and December 31, 2022 measured at fair value on a recurring basis:
September 30, 2023December 31, 2022
(in thousands)Level 1Level 2Level 3Level 1Level 2Level 3
Financial Assets:
Cash$77,307 $- $- $38,862 $- $- 
Money market mutual fund6,189 - - 17,696 - - 
Marketable securities3,965 27,451 - 9,881 40,106 - 
Total$87,461 $27,451 $- $66,439 $40,106 $- 
8

Note 6 – Marketable Securities
The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as available-for-sale and are recorded at fair value. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of September 30, 2023 and December 31, 2022:
September 30, 2023
(in thousands)CostUnrealized GainsUnrealized LossesFair Value
U.S. municipal securities$8,629 $- $(209)$8,420 
Corporate debt securities2,530 - (54)2,476 
U.S. government agency securities20,793 - (520)20,273 
Certificates of deposit/time deposits249 - (2)247 
Total marketable securities$32,201 $- $(785)$31,416 
December 31, 2022
(in thousands)CostUnrealized GainsUnrealized LossesFair Value
U.S. municipal securities$15,574 $- $(417)$15,157 
Corporate debt securities9,578 - (205)9,373 
U.S. government agency securities25,275 - (750)24,525 
Certificates of deposit/time deposits939 - (7)932 
Total marketable securities$51,366 $- $(1,379)$49,987 
Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).
Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.
The September 30, 2023 balance of available-for-sale debt securities by contractual maturity is shown in the following table at fair value. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(in thousands)September 30,
2023
Due in one year or less$19,204 
Due after one year through five years12,212 
Total marketable securities$31,416 
Note 7 – Inventory
Inventory consists primarily of raw materials, which are recorded at the lower of cost and net realizable value using the standard cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.
9

The Company’s inventory consisted of the following as of the dates indicated:
(in thousands)September 30,
2023
December 31,
2022
Total inventory$14,435 $13,965 
Allowance for obsolescence(632)(387)
Inventory, net of allowance$13,803 $13,578 
Note 8 – Stock-Based Compensation
Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company had the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards through February 23, 2022. On July 8, 2022, the board of directors approved the Proto Labs, Inc. 2022 Long-Term Incentive Plan (the 2022 Plan), which was approved by the Company's shareholders at a Special Meeting of Shareholders on August 29, 2022. No awards were granted from February 23, 2022 to August 29, 2022. Awards outstanding under the 2012 Plan as of August 29, 2022 will continue to be subject to the terms of the 2012 Plan, but if those awards subsequently expire, are forfeited or cancelled or are settled in cash, the shares subject to those awards will become available for awards under the 2022 Plan. Under the 2022 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2022 Plan have a maximum term of 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 2022 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.
Employee Stock Purchase Plan
The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 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 $4.4 million and $4.9 million for the three months ended September 30, 2023 and 2022, respectively, and $11.8 million and $13.3 million for the nine months ended September 30, 2023 and 2022.
10

Stock Options
The following table summarizes stock option activity during the nine months ended September 30, 2023:
Stock OptionsWeighted-
Average
Exercise Price
Options outstanding at December 31, 2022263,992$79.07 
Granted186,80433.36 
Exercised--
Forfeited(46,619)63.57 
Expired(15,848)55.67 
Options outstanding at September 30, 2023388,329$59.90 
Exercisable at September 30, 2023121,083$90.88 
The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period of four years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company.
The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2023 was $16.36.
The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
20232022
Risk-free interest rate
3.55% - 4.55%
1.94% - 3.40%
Expected life (years)
2.00 - 6.25
6.25
Expected volatility
49.23% - 55.92%
45.95% - 46.03%
Expected dividend yield0%0%
As of September 30, 2023, there was $4.5 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.6 years.
Restricted Stock
Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from three to four years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For the board of directors, restrictions generally lapse in full on the first anniversary of the grant date.
11

The following table summarizes restricted stock activity during the nine months ended September 30, 2023:
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
Per Share
Restricted stock at December 31, 2022478,596$70.36 
Granted410,68232.46 
Restrictions lapsed(137,053)79.61 
Forfeited(78,769)65.65 
Restricted stock at September 30, 2023673,456$45.83 
As of September 30, 2023, there was $22.0 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.7 years.
Performance Stock
Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 200 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. Certain PSUs granted by the Company in 2021 are based on performance conditions and the related compensation cost is based on the probability that the performance conditions will be achieved. The Company’s PSUs granted in 2020, 2022, 2023 and certain PSUs granted in 2021 are based on market conditions and the related compensation cost is based on the fair value at grant date calculated using a Monte Carlo pricing model.
The following table summarizes performance stock activity during the nine months ended September 30, 2023:
Performance
Stock
Weighted-
Average
Grant Date
Fair Value
Per Share
Performance stock at December 31, 202235,802$77.91 
Granted71,29557.79 
Restrictions lapsed-- 
Performance change-- 
Forfeited-- 
Performance stock at September 30, 2023107,097$74.08 
12

The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the nine months ended September 30, 2023 and 2022:
Nine Months Ended
September 30,
20232022
Risk-free interest rate4.35%
1.76% - 3.40%
Expected life (years)2.88
2.34 - 2.87
Expected volatility58.00%
53.50% - 53.60%
Expected dividend yield0%0%
As of September 30, 2023, there was $4.8 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.0 years.
Employee Stock Purchase Plan
The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2023 and 2022:
Nine Months Ended
September 30,
20232022
Risk-free interest rate
4.60 - 4.82%
0.17 - 2.06%
Expected life (months)6.006.00
Expected volatility
47.38 - 67.84%
47.05 - 53.44%
Expected dividend yield0%0%
13

Note 9 – Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) is comprised of foreign currency translation adjustments and net unrealized gains (losses) on investments in securities. During the nine months ended September 30, 2023 we recognized a $3.9 million foreign currency translation loss from the substantial completion on the closure of our Japan business.
The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and nine months ended September 30, 2023 and 2022:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2023202220232022
Balance at beginning of period$(29,221)$(36,149)$(34,355)$(16,817)
Foreign currency translation adjustments
Other comprehensive income (loss) before reclassifications(1,307)(10,287)(432)(28,774)
Amounts reclassified from accumulated other comprehensive loss- - 3,906 - 
Net current-period other comprehensive income (loss)(1,307)(10,287)3,474 (28,774)
Net unrealized gains (losses) on investments in securities
Other comprehensive income (loss) before reclassifications240 (588)593 (1,433)
Amounts reclassified from accumulated other comprehensive loss- - - - 
Net current-period other comprehensive income (loss)240 (588)593 (1,433)
Balance at end of period$(30,288)$(47,024)$(30,288)$(47,024)
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, 2023 and 2022, the Company recorded an income tax provision of $2.8 million and $2.1 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $7.8 million and $7.2 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, 2023 was 25.9 percent compared to 34.5 percent in the same period of the prior year. The effective tax rate decreased by 8.6 percent for the three months ended September 30, 2023 when compared to the same period in 2022, primarily due to a decrease in losses in jurisdictions that are not eligible for tax benefits due to valuation allowances. The effective income tax rate for the nine months ended September 30, 2023 was 43.2 percent compared to 38.4 percent in the same period of the prior year. The effective tax rate increased by 4.8 percent for the nine months ended September 30, 2023 when compared to the same period in 2022, primarily due to the tax impact of the foreign currency translation loss from the substantial completion on the closure of our Japan business.
The effective income tax rate for the three and nine months ended September 30, 2023 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 $3.9 million as of September 30, 2023 and $3.2 million as of December 31, 2022, 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.
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, 2023 and 2022 were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(dollars in thousands)2023202220232022
Revenue:
United States$103,940 $98,970 $298,007 $295,121 
Europe26,765 21,464 80,822 69,441 
Japan- 1,287 - 8,229 
Total revenue$130,705 $121,721 $378,829 $372,791 
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2023202220232022
Income (Loss) from Operations:
United States$27,178 $25,293 $69,713 $73,984 
Europe(3,006)(3,581)(8,870)(7,509)
Corporate Unallocated and Japan(13,757)(15,654)(41,071)(47,326)
Total Income from Operations$10,415 $6,058 $19,772 $19,149 
Total long-lived assets at September 30, 2023 and December 31, 2022 were as follows:
(in thousands)September 30,
2023
December 31,
2022
Total long-lived assets:
United States$190,927 $203,816 
Europe52,095 53,835 
Japan- 134 
Total Long-lived Assets$243,022 $257,785 
15

Revenue by product line for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(dollars in thousands)2023202220232022
Revenue:
Injection Molding$51,688 $48,940 $152,455 $155,693 
CNC Machining52,916 47,489 149,317 141,809 
3D Printing21,622 19,823 63,952 59,458 
Sheet Metal4,291 5,219 12,478 15,066 
Other Revenue188 250 627 765 
Total Revenue$130,705 $121,721 $378,829 $372,791 
16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022.
Forward-Looking Statements
Statements contained in this report regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. “Risk Factors” of this Form 10-Q, as well as our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC). Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.
Overview
We are one of the world’s largest and fastest digital manufacturers of custom prototypes and on-demand production parts. Our mission is to empower companies to bring new ideas to market by offering the fastest and most comprehensive digital manufacturing service in the world. Our automated quoting and manufacturing systems allow us to produce commercial-grade plastic, metal, and liquid silicone rubber parts in as fast as one day. We manufacture prototype and low volume production parts for companies worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. For most of our offerings, our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over the Internet. We target our products to the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets. In addition, we serve procurement and supply chain professionals seeking to manufacture custom parts on-demand. Through the acquisition of Hubs (formerly 3D Hubs, Inc.) (Hubs) in 2021, we are able to provide our customers access to a global network of premium manufacturing partners who reside across North America, Europe and Asia, complementing our in-house manufacturing. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many customers and is the primary reason we have become a leading supplier of custom parts.
On May 27, 2022, our board of directors approved a plan for the closure of our manufacturing facility in Japan and announced an intention to cease operations in the region. Affected employees in Japan received severance and other transition assistance that meet or exceed local requirements. We expect to complete the closure plan within the year.
Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support, and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers. In 2021, we augmented our internal manufacturing operations through our acquisition of Hubs to expand the envelope of custom parts we can provide to our customers through a network of premium manufacturing partners in each of our product lines.
Injection Molding
Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Because we retain possession of the molds, customers who need short-run production often come back to Proto
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Labs’ Injection Molding product line for additional quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-demand manufacturing injection molding service. This service utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs.
CNC Machining
Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD model uploaded by the customer. CNC turning is a subtractive manufacturing process that rotates a metal rod while a cutting tool is used to remove material and create final parts. Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications.
Industrial 3D Printing
Our Industrial 3D Printing product line includes SL, SLS, DMLS, MJF, PolyJet, Carbon DLS and fused deposition modeling (FDM) processes, which offers customers a wide-variety of high-quality, precision rapid prototyping and low volume production. These processes create parts with a high level of accuracy, detail, strength and durability. Industrial 3D Printing is best suited for functional prototypes, complex designs and end-use applications.
Sheet Metal
Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, providing customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the customer to fabricate rapid prototyping sheet metal or end-use production parts and assemblies.
Key Financial Measures and Trends
Revenue
Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. On May 27, 2022, our board of directors approved a plan for the closure of our manufacturing facility in Japan and announced an intention to cease operations in the region. Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including:
expanding the breadth and scope of our products by adding more sizes and materials to our offerings;
the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;
expanding 3D Printing to Europe through our acquisition of Alphaform in 2015;
the introduction of our Sheet Metal product line through our acquisition of Rapid Manufacturing Group, LLC in 2017;
continuously improving the usability of our product lines such as our web-centric applications; and
providing customers with on-demand access to a global network of premium manufacturing partners through our acquisition of Hubs in 2021.
During the three months ended September 30, 2023, we served 23,080 unique product developers and engineers who purchased our products through our web-based customer interface, a decrease of 3.1% over the same period in 2022. During the nine months ended September 30, 2023, we served 45,668 unique product developers and engineers who purchased our products through our web-based customer interface, a decrease of 4.4% over the same period in 2022.
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Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and customer parts. We expect our personnel-related costs to increase in order to retain and attract top talent and remain competitive in the market. Overall, we expect cost of revenue to increase in absolute dollars.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our mix of revenue by product line, pricing, sales volume, manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources, the mix between revenue produced in our internal manufacturing operations and outsourced to our external manufacturing partners, the mix between premium expedited manufacturing and longer lead times, and foreign currency exchange rates.
Operating Expenses
Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs are the most significant component in each of these categories.
Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand injection-molded, CNC-machined, 3D-printed and sheet metal custom parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses in the future.
Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade shows and other related overhead, which includes an allocation of information technology expense including amortization of Protolabs 2.0 software assets. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base and grow revenue.
Research and development. Research and development expense consists primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. Costs for internal use software are evaluated by project and capitalized where appropriate under ASC 350-40, Intangibles — Goodwill and Other, Internal-Use Software. We expect research and development expense to increase in the future as we seek to enhance our e-commerce interface technology, internal software and supporting business systems, and continue to expand our product lines.
General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal, and other related overhead, which includes an allocation of information technology expense including amortization of Protolabs 2.0 software assets. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.
Closure of Japan business. Closure of Japan business expense is driven by our decision to close the Japan manufacturing facility and exit the Japan market. The expenses consist primarily of operating expense, including employee severance, write-down of fixed assets, facility-related charges and goodwill impairment charges.
Other Income (Loss), net
Other income (loss), net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying foreign currency exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates.
Provision for Income Taxes
Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. Overall, our effective tax rate for 2023 and beyond may differ from historical effective tax rates due to increases in losses in foreign
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operations that are not eligible for tax benefits on account of valuation allowances, as well as any future tax law changes that may impact our effective tax rate.
Results of Operations
The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.
Three Months Ended September 30,ChangeNine Months Ended September 30,Change
(dollars in thousands)20232022$%20232022$%
Revenue$130,705 100.0 $121,721 100.0 $8,984 7.4 $378,829 100.0 $372,791 100.0 $6,038 1.6 
Cost of revenue71,423 54.6 68,089 55.9 3,334 4.9 212,648 56.1 205,933 55.2 6,715 3.3 
Gross profit59,282 45.4 53,632 44.1 5,650 10.5 166,181 43.9 166,858 44.8 (677)(0.4)
Operating expenses
Marketing and sales21,682 16.6 20,594 16.9 1,088 5.3 65,863 17.4 62,235 16.7 3,628 5.8 
Research and development10,105 7.7 9,309 7.7 796 8.6 30,647 8.1 29,316 7.9 1,331 4.5 
General and administrative17,058 13.1 16,477 13.5 581 3.5 49,713 13.1 49,770 13.4 (57)(0.1)
Closure of Japan business22 — 1,194 1.0 (1,172)(98.2)186 — 6,388 1.7 (6,202)(97.1)
Total operating expenses48,867 37.4 47,574 39.1 1,293 2.7 146,409 38.6 147,709 39.6 (1,300)(0.9)
Income from operations10,415 8.0 6,058 5.0 4,357 71.9 19,772 5.2 19,149 5.1 623 3.3 
Other income (loss), net320 0.2 (24)(0.0)344 (1,433.3)(1,758)(0.5)(323)(0.1)(1,435)444.3 
Income before income taxes10,735 8.2 6,034 5.0 4,701 77.9 18,014 4.8 18,826 5.1 (812)(4.3)
Provision for income taxes2,781 2.1 2,083 1.7 698 33.5 7,784 2.1 7,223 1.9 561 7.8 
Net income$7,954 6.1 %$3,951 3.3 %$4,003 101.3 %$10,230 2.7 %$11,603 3.1 %$(1,373)(11.8)%
Stock-based compensation expense included in the statements of operations data above for the three and nine months September 30, 2023 and 2022 were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2023202220232022
Stock options, restricted stock and performance stock$4,118 $4,573 $10,706 $12,247 
Employee stock purchase plan323 334 1,105 1,088 
Total stock-based compensation expense$4,441 $4,907 $11,811 $13,335 
Cost of revenue$462 $560 $1,388 $1,674 
Operating expenses:
Marketing and sales962 929 2,510 2,479 
Research and development674 602 1,887 1,702 
General and administrative2,343 2,816 6,026 7,480 
Total stock-based compensation expense$4,441 $4,907 $11,811 $13,335 
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Comparison of Three Months Ended September 30, 2023 and 2022
Revenue
Revenue by reportable segment and the related changes for the three months ended September 30, 2023 and 2022 were as follows:
Three Months Ended September 30,
20232022Change
(dollars in thousands)$% of Total Revenue$% of Total Revenue$%
Revenue: