Proto Labs(PRLB) - 2023 Q4 - Annual Report

Part I - Business and Risk Factors This section outlines the company's business, competitive landscape, ESG initiatives, intellectual property, and key risks, including cybersecurity and property assets Business Overview Proto Labs is a digital manufacturer of custom parts, leveraging in-house factories and a global partner network to serve product developers and engineers online - The company is a leading digital manufacturer of custom parts, specializing in injection molding, CNC machining, 3D printing, and sheet metal fabrication[26][27] - The 2021 acquisition of Hubs, now Protolabs Network, expanded customer access to a global manufacturing partner network, complementing in-house production[28] - The company's digital model automates manufacturing processes, serving diverse industries including medical, electronics, aerospace, and automotive[39][42] - Japan operations were dissolved in December 2023, following a May 2022 board decision to close the manufacturing facility[30][149] - As of December 31, 2023, the company employed 2,415 full-time employees, with 1,672 in the U.S. and 743 in Europe[57] Industry Overview and Growth Strategy The company addresses manufacturing industry disruptions like SKU proliferation and shorter product lifecycles through its digital model and expanded growth strategy - Key industry trends include SKU proliferation, shorter product life cycles, and the shift to e-commerce sourcing, pressuring traditional supply chains[37] - The growth strategy aims to be the most comprehensive custom parts provider by augmenting internal manufacturing with a network of premium partners[43] Competition The highly fragmented custom parts market sees competition from traditional shops, digital brokers, and in-house operations, with key factors being quality, speed, and price - Competitors include traditional machine shops, injection molders, digital brokers with manufacturing networks, and captive in-house manufacturing operations[44][46] - Key competitive factors encompass quality, speed, reliability, service, manufacturing capabilities, scale, capacity, and price[46] Corporate Responsibility and Sustainability The company's ESG strategy prioritizes environmental compliance, employee well-being, DEI, and ethical governance, leveraging digital manufacturing for sustainability - Top ESG priorities include environmental compliance, energy use reduction, waste management, ethics, employee health and well-being, and diversity, equity, and inclusion (DEI)[48][49][50][51] - Digital manufacturing is a sustainable solution, reducing product waste through virtual iteration and on-demand production, minimizing excess inventory[52] - Attrition rates in 2023 were 20.4% in the U.S. and 23.9% in Europe, influenced by workforce reductions in lower volume areas[59] Intellectual Property The company protects its proprietary rights through patents, trademarks, and trade secrets, holding 46 issued U.S. patents as of December 2023 Patent Portfolio as of Dec 31, 2023 | Jurisdiction | Issued Patents | Applications Pending | | :--- | :--- | :--- | | United States | 46 | 15 | | United Kingdom | 3 | 0 | | Netherlands | 1 | 0 | - The company's patents expire between 2025 and 2043[70] Risk Factors The company faces significant business, operational, and financial risks, including intense competition, technology scaling challenges, cybersecurity threats, and supply chain dependencies - The company faces significant competition from a fragmented market of custom parts manufacturers, brokers, and in-house operations, some with greater resources[80][81] - A key risk is scaling existing technology and infrastructure to handle increasing volume and complexity, as failure could damage the brand and result in lost revenue[83] - Storing confidential customer information, including intellectual property, exposes the company to security breach risks, potentially harming reputation and leading to liability[88] - International operations, accounting for 21% of 2023 revenue, are subject to currency fluctuations, political instability, and complex foreign laws[91] - The business depends on single or limited source suppliers for critical manufacturing equipment and materials, where disruptions could adversely affect operations[112] Cybersecurity Proto Labs maintains an enterprise-wide information security program, overseen by the Audit Committee, to manage cybersecurity risks and incidents - The company maintains an enterprise-wide information security program to identify, protect, detect, and respond to cybersecurity risks[137] - The Audit Committee oversees cybersecurity risks and incidents, reporting findings to the full board[140] - Cybersecurity threats have not materially affected the company's business, results of operations, or financial condition to date[141] Properties The company owns and leases corporate, manufacturing, and office facilities across the U.S. and Europe, with Japan operations dissolved in 2023 - Corporate headquarters are located in a 95,000 sq. ft. owned facility in Maple Plain, Minnesota[142] - Major manufacturing facilities are in Minnesota, North Carolina, New Hampshire, Telford (UK), and Putzbrunn (Germany)[142][143][144][146] - Japan operations were dissolved in December 2023, with the 88,000 sq. ft. facility lease expiring in 2023[149] Part II - Market, Financials, and MD&A This section details the company's common stock market, shareholder matters, financial performance, liquidity, critical accounting estimates, and market risk exposures Common Stock Market and Shareholder Matters Proto Labs' common stock trades on the NYSE, with no cash dividends paid, and an active stock repurchase program with $88.4 million remaining - The company's common stock trades on the New York Stock Exchange (NYSE) under the symbol PRLB[153] - No cash dividends have ever been paid, nor are any anticipated in the foreseeable future[155] - The board authorized a stock repurchase program of up to $250 million, with $88.4 million remaining as of year-end 2023[159] - In 2023, the company repurchased 1,392,921 shares for an aggregate price of $43.9 million[160] Management's Discussion and Analysis (MD&A) In 2023, revenue increased by 3.2% to $503.9 million, returning to profitability with $17.2 million net income, driven by Europe and specific product lines Financial Highlights (2023 vs. 2022) | Metric | 2023 | 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $503.9M | $488.4M | +$15.5M | +3.2% | | Gross Profit | $222.0M | $215.5M | +$6.5M | +3.0% | | Gross Margin | 44.1% | 44.1% | 0 bps | 0.0% | | Income (Loss) from Operations | $28.2M | ($98.0M) | +$126.2M | +128.7% | | Net Income (Loss) | $17.2M | ($103.5M) | +$120.7M | +116.6% | | Diluted EPS | $0.66 | ($3.77) | +$4.43 | N/A | - The number of unique customer contacts served in 2023 was 53,464, a 5.1% decrease from 2022[172][191] Results of Operations (2023 vs. 2022) Revenue increased 3.2% to $503.9 million in 2023, driven by Europe, CNC Machining, and 3D Printing, with a return to operating income Revenue by Segment (2023 vs. 2022) (in thousands) | Segment | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | United States | $396,821 | $387,399 | +2.4% | | Europe | $107,056 | $92,770 | +15.4% | | Japan | $0 | $8,229 | -100.0% | | Total | $503,877 | $488,398 | +3.2% | Revenue by Product Line (2023 vs. 2022) (in thousands) | Product Line | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Injection Molding | $203,941 | $200,578 | +1.7% | | CNC Machining | $198,222 | $188,372 | +5.2% | | 3D Printing | $84,291 | $78,988 | +6.7% | | Sheet Metal | $16,540 | $19,498 | -15.2% | | Total | $503,877 | $488,398 | +3.2% | - The return to operating income was primarily due to the non-recurrence of the $118.0 million goodwill impairment charge recorded in 2022 for the Europe reporting unit[198][200] Liquidity and Capital Resources The company maintains strong liquidity, with cash increasing to $83.8 million and $73.3 million in operating cash flow, sufficient for future requirements Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $73,274 | $62,079 | | Net cash used in investing activities | ($4,552) | ($43,092) | | Net cash used in financing activities | ($41,858) | ($27,922) | | Net (decrease) increase in cash | $27,232 | ($9,371) | - Cash and cash equivalents increased to $83.8 million as of December 31, 2023[205] - Financing activities were primarily driven by $44.0 million in common stock repurchases[211] - Future capital expenditures are expected to be between 4% and 7% of annual revenue[215] Critical Accounting Estimates Critical accounting estimates, involving significant judgment, include revenue recognition, goodwill impairment, stock-based compensation, and income taxes, potentially impacting financial results - Revenue for custom parts is recognized over time using an input method based on time in production as a percentage of total estimated production time[221] - Goodwill is tested annually for impairment; a $118.0 million impairment was recorded in 2022 for Europe, with no impairment in 2023[223] - Stock-based compensation is valued using the Black-Scholes model, requiring subjective inputs for expected term and volatility[226] - A valuation allowance of $17.7 million is maintained against deferred tax assets as of December 31, 2023, primarily for foreign net operating loss carryforwards[370] Market Risk Disclosures The company's primary market risk is unhedged foreign currency exposure from European operations, with a $3.9 million translation loss in 2023 from Japan's closure - The primary market risk is foreign currency exposure from European operations, with revenues and expenses in British Pounds and Euros[239] - The company does not use forward contracts or other derivatives to hedge foreign currency risk[241] - A $3.9 million foreign currency translation loss was recognized in 2023 related to the closure of the Japan business[241][363] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, with an unqualified auditor's opinion from Ernst & Young LLP, highlighting revenue recognition as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting[248][262] - The auditor identified 'Revenue Recognition – Revenue Recognized Over Time' as a Critical Audit Matter due to significant estimates required[255][256] Consolidated Financial Statements As of December 31, 2023, the company reported $772.4 million in total assets, $503.9 million in revenue, and $17.2 million in net income Consolidated Balance Sheet Highlights (as of Dec 31, 2023) (in thousands) | Account | Amount | | :--- | :--- | | Cash and cash equivalents | $83,790 | | Total Current Assets | $200,660 | | Property and equipment, net | $253,655 | | Goodwill | $273,991 | | Total Assets | $772,353 | | Total Current Liabilities | $49,681 | | Total Liabilities | $77,058 | | Total Shareholders' Equity | $695,295 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2023) (in thousands) | Account | Amount | | :--- | :--- | | Revenue | $503,877 | | Gross Profit | $221,993 | | Income from Operations | $28,167 | | Net Income | $17,220 | | Diluted EPS | $0.66 | Selected Notes to Consolidated Financial Statements Notes provide detailed disclosures on revenue, goodwill, stock-based compensation, effective tax rate, and segment performance, including a $118 million goodwill impairment in 2022 - Stock-based compensation expense was $16.0 million in 2023, down from $17.5 million in 2022[345] - The effective tax rate was 38.4% in 2023, compared to (5.7)% in 2022, primarily due to the 2022 goodwill impairment and shift to net income[365][366] Segment Operating Income (Loss) (in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | United States | $94,682 | $93,176 | | Europe | ($12,528) | ($130,386) | | Corporate Unallocated and Japan | ($53,987) | ($60,773) | | Total | $28,167 | ($97,983) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[381] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2023[382] Part III - Corporate Governance and Compensation This section outlines corporate governance, executive compensation, security ownership, and principal accountant fees, with detailed information incorporated by reference from the proxy statement Directors, Compensation, and Governance Matters Information on directors, executive compensation, security ownership, and governance is incorporated by reference from the company's 2024 Proxy Statement - Information regarding directors, executive compensation, security ownership, and related transactions is incorporated by reference from the company's 2024 Proxy Statement[387][390][391][395] - The company has adopted a Code of Ethics and Business Conduct applicable to all directors, officers, and employees, available on its website[389] Part IV - Exhibits and Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents and certifications Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with the 10-K, including corporate governance documents, compensation plans, and required certifications - This section provides an index of all exhibits filed with the 10-K, including corporate governance documents, compensation plans, and required certifications[400][401]