UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
(Mark One)
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☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December |
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☐ | 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: 001-35435001-35435
Proto Labs, Inc.Inc.
(Exact name of Registrant as specified in its charter)
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Minnesota |
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(State or other jurisdiction of |
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incorporation or organization) |
| Identification No.) |
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5540 Pioneer Creek Drive |
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Maple Plain, |
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(Address of principal executive offices) |
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((763) 479-3680763) 479-3680
(Registrant’s telephone number, including area code)
SecuritiesSecurities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Name of Each Exchange on Which Registered |
Common Stock, Par Value |
| New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosuredisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
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Non-accelerated filer ☐ | Smaller reporting company ☐ | |||
(Do not check if a smaller reporting company) |
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| 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 Act). Yes ☐ No ☒
As of June 30, 20162017 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $1.4$1.8 billion.
As of February 16, 2017,14, 2018, there were 26,527,77026,901,193 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 20172018 Annual Meeting of Shareholders are incorporated by reference to Part III of this Annual Report on Form 10-K.
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Item 1B. | 26 | |||
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Item 3. | 27 | |||
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 32 | ||
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 11. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 15. |
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Special Note Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K 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 which may cause our results to be materially different than those expressed or implied in such statements. In particular, some of the risks associated with our business include:
• | the level of competition in our industry and our ability to compete; | |
• | our ability to respond to changes in our industry; | |
• | our ability to effectively grow our business and manage our growth; | |
• | our ability | |
• | our ability to meet product developers’ and engineers’ needs and expectations regarding quick turnaround time, price and specifications for quality; | |
• | the adoption rate of e-commerce and 3D CAD software by product developers and engineers; | |
• | our ability to process a large volume of designs and identify significant opportunities in our | |
• | our ability to maintain and enhance our brand; | |
• | our ability to successfully identify, complete and integrate acquisitions or other strategic transactions; | |
• | the loss of key personnel or failure to attract and retain additional personnel; | |
• | system interruptions at our operating facilities; | |
• | possible unauthorized access to customers’ confidential information stored in our systems; and | |
• | our ability to protect our intellectual property and not infringe on others’ intellectual property. |
Certain of these factors and others are described in the discussion on risk factors that appear in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K and uncertainties are detailed in this and other reports and filings 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
Proto Labs, Inc. was incorporated in Minnesota in 1999. The terms “Proto Labs,” the “Company,” “we,” “us,” and “our” as used herein refer to the business and operations of Proto Labs, Inc. and its subsidiaries. We are an e-commerce driventhe world’s largest and fastest digital manufacturer of quick-turn,custom prototypes and on-demand customproduction parts. Our mission is to help companies accelerate product development, reduce risk, and optimize supply chains by providing quality prototyping and on-demand manufacturing services at unprecedented speeds. Our automated quoting and manufacturing systems allow us to produce commercial-grade plastic, metal, and liquid silicone rubber parts within days. We manufacture prototype and low volume production parts for prototyping and short-run production. We manufacture parts for product developers and engineerscompanies 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, and 3D printing and sheet metal fabrication to manufacture custom parts for our customers. 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. We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where these product developers and engineers are located. Additional information required by this item is incorporated herein by reference to Note 17 – Segment Reporting of the Notes to our consolidated financial statements, which appears in Part II, Item 8. of this Annual Report on Form 10-K. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many product developers and engineerscustomers and is the primary reason we have become a leading supplier of custom parts.
We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our customers typically order short run custom parts for a variety of reasons, including:
● | they need a prototype to confirm the form, fit and function of one or more components of a product under |
● | they need an initial supply of parts to support pilot production for testing of a product; |
● | they need an initial supply of parts to support production while their high-volume production mold is being prepared; |
● | they need |
● | their product will only be released in a limited quantity; or |
● | they need to support end-of-life production |
In each of these instances, we believe our solution provides product developers, engineers, and engineerssupply chains with an exceptional combination of speed, quality, competitive pricing, ease of use and reliability that they typically cannot find among conventional custom parts manufacturers. Our technology enables us to ship parts as soon as the same day after receipt of a customer’s design submission.
Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal. We continually seek to expand the range of size 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 productproduct developers and engineers.
We have experienced significant growth since our inception in 1999. We have grown our total revenue from $126.0$163.1 million in 20122013 to $298.1$344.5 million in 2016.2017. We have grown our income from operations from $34.9$51.3 million in 20122013 to $61.8$72.2 million in 2016.2017.
Our increasesincreases in revenue and income from operations can be attributed to serving more product development engineersexpanding our customer base, broadening our parts envelope, and our expansion of product lines offered.launching new manufacturing technologies. We were founded in 1999 with plastic injection molding, and have expanded our product lines over the years by the introduction of:
● | CNC |
● | liquid silicon rubber (LSR) and lathe manufacturing processes that expanded the breadth and scope of our injection molding and CNC machining product |
● | 3D printing, including stereolithography (SL), selective laser sintering (SLS), and direct metal laser sintering (DMLS), through our acquisition of FineLine Prototyping, Inc. (FineLine) in 2014 and expanded through our acquisition of certain assets |
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● | rapid overmolding technology in 2016 and insert molding technology in 2017, both of which expanded the breadth of our manufacturing capabilities in |
● | PolyJet and Multi Jet Fusion (MJF) in |
● | injection molding commercial offerings tailored to on-demand manufacturing customers in 2017; |
● | sheet metal fabrication capability through our acquisition of RAPID Manufacturing Group, LLC (RAPID) in 2017; and | |
| ● | expanded CNC machining capabilities for larger and more complex parts through our acquisition of RAPID in 2017. |
Industry Overview
Our Industry
We serve product developers and engineers worldwide who bring new ideas to market in the form of products containing one or more custom parts. Many of these product developers and engineers use 3D CAD software to create digital models representing their custom part designs that are then used to create physical parts for concept modeling, prototyping, functional testing, market evaluation or production. Custom prototype parts play a critical role in the product development process, as they provide product developers and engineers with the ability to test and confirm their intended performance requirements and explore design alternatives.
Early in the product development process, 3D printing processes such as stereolithography (SL)SL and PolyJet can be used to quickly produce an approximate physical representation of a part, but these representations may not meet product developers’ and engineers’ requirements for dimensional accuracy, cosmetics or material properties. As an alternative, injection molding, CNC machining, sheet metal, and 3D printing processes such as selective laser sintering (SLS)SLS, DMLS, and direct metal laser sintering (DMLS) or CNC machiningMJF can be used to produce low volumes of high-quality custom parts in either metal or plastic. For follow-on functional testing, market evaluation and production runs, parts are typically manufactured using injection molding.molding, CNC machining and sheet metal fabrication.
Our Solution
We have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required in quoting, production engineering and manufacturing of custom parts. We believe our interactive web-based interface and highly automated processes address the desires of many product developers and engineers for a fast, efficient and cost-effective means to obtain custom parts, and are the primary reasons we have become a leading supplier of custom parts.
Key elements of our solution include:
Sophisticated Technology that Reduces Turnaround Time
Our digital model is centered on ourour web-based interfaceinterface and proprietary software, towhich automate many of the manual and time-consuming processes typically required to obtain custom injection-molded, CNC-machined or 3D-printed parts from conventional suppliers. Our platform automates many aspects of the entire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation, and mold or part manufacture.manufacture and digital inspection. To utilize our platform, a prospective customer uploads a 3D CAD file of their required part through our website. Often within minutes of design submission, our software analyzes the design, assesses the manufacturability of the part, assessesdesign and our ability to make the part, and returns a firm price quotation with any recommendations for design modifications. In the case of CNC machining, this manufacturability analysis identifies features that may be too fragile to be machined and areas that cannot be machined at all. For injection molding, problematic features such as undercuts, thin areas, thick areas and areas requiring geometry adjustments to allow the part to be ejected from the mold are identified. Many of our customers find this analysis particularly helpful, as it diagnoses and prevents potential problems prior to manufacturing. We can also provide a flow analysis to identify partsdesign flaws that may be so thin and large that plastic will solidify beforelimit the mold can be completely filled.ability to manufacture a quality part.
Our quoting system is highly interactive, enabling our prospective customers to change the material, finish, quantity or shipping schedule of orders, and to instantly receive an updated quotation. Once an order is received, our software automates much of the manual engineering and skilled labor that is normally required to manufacture parts. As a result, in many cases we are able to quote orders in minutes and ship parts as soon as the same day ordered.
Scale to Process Large Numbers of Unique Part Designs
Our proprietary, highly scalable quoting technology addresses the manual processes conventionally involved in submitting a design, analyzing its manufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3D CAD part design submissions and provide feedback to our prospective product developer and engineer customers. In 20162017 alone, we generated quotations for over 650,000800,000 design submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large numbers of unique designs and, combined with our manufacturing processes, efficiently and effectively manufacture high volumes of parts to meet the needs of product developers and engineers.
Enhanced Customer Experience
Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysis then quickly analyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides suggested design modifications to enhance manufacturability, which is presented to the product developer or engineer in an interactive quotation containing a color-coded 3D representation of the part. This allows product developers and engineers to quickly determine the manufacturability of their parts, understand the cost and when they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an order’sorder’s various parameters such as material, finish, quantity or shipping schedule. As a result, we provide product developers and engineers with an easy-to-use and consistent means to obtain custom parts.
Attractive Custom Pricing
Based on internal market research, we believe we generally have competitive pricing on custom orders. We believe this, combined with speed, is a direct result of our technology and the efficiency of our operations, both of which were designed specifically for lower volume runs of custom parts production. By limiting these costs, we can typically offer attractive pricing not normally possible in the low volume, high mix custom parts market, and as a result, we can typically offer product developers and engineers competitive prices on custom manufactured parts.
Monitoring and ControlOur Product Lines
We have developed a proprietary, intranet-based monitoring and control system that allows us to monitor key aspects of our entire worldwide operations in real time using an easy-to-understand management dashboard. This system provides us with the ability to quickly react to new information across our organization.
Our Product Lines
Our Injection Molding, CNC Machining, and 3D Printing and Sheet Metal product lines offer many product developers and engineers the ability to quickly and efficiently outsource their quick-turn custom parts manufacturing. See Item 7. “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the historical revenue generated by each of Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal.
Injection Molding
Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic, metal or liquid silicone injection 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 is usedworks best for prototype, on-demand production, bridge tooling, pilot runs and short-run production.functional prototyping. Our affordable aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-run production often come back to Proto Labs’Labs’ Injection Molding product line for additional quantities typically ranging up to 10,000 parts or more.quantities. They do so to support pilot production for product testing, or 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 will only be released in arequires limited annual quantity or because they need end-of-life production support. These additional part ordersIn 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, typically occur on approximately halfin annual volumes of the molds that we make, typically accounting for approximately half of our total Injection Molding revenue.less than 10,000 parts.
CNC Machining
Our CNC Machining product line uses commercially available CNC machines to cut offer milling and turning. CNC milling is a manufacturing process that cuts plastic orand metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 200 parts.
3D Printing
Our 3D Printing product line includes stereolithography (SL), selective laser sintering (SLS)SL, SLS, DMLS, MJF and direct metal laser sintering (DMLS)PolyJet 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. 3D Printing is well suited to produce small quantities, typically in the range of one to 50 parts.
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 product developer or engineer to fabricate quick turn prototype sheet metal or short run production parts. The Sheet Metal product line is well suited to produce quantities in the range of one to 500 parts.
Our Process
Process
The process for Injection Molding CNC Machining and 3D Printing begins when the product developer or engineer uploads one or more 3D CAD models representing the desired part geometry through our website. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and support the creation of an interactive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer or engineer, who can access the quotation, change a variety of order parameters and instantly see the effect on price before finalizing the order. For 3D Printing, the quote is reviewed and then scheduled for production. For CNC Machining, the tool paths are then reviewed and routed to our high-speed CNC machining centers for execution. In the case of Injection Molding, ourOur proprietary software supports the creation of the mold design and the tool paths required to manufacture the mold components, which are then routed to our CNC machining centers for execution. Once the mold is assembled, it is placed in one of our injection molding presses to create the required parts. For our CNC Machining product line, we ship parts as soon as the same day as the order is received. For our Injection Molding and 3D Printing product lines, we ship partsParts are shipped in as little as one business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions. Our other services have similar processes, but differ mainly due to the nature of the manufacturing processes on which each service is based.
Our Growth Strategy
The principal elements of our growth strategy are to:
Expand the Customer Base
We plan to expandexpand our customer base to serve more product developers and engineers within the companies that have already used our product lines. Individual product developers and engineers typically make or influence the choice of vendor when sourcing custom parts. We believe a significant opportunity exists for us to leverage highly satisfied product developers and engineers to encourage others within the same organization to utilize our product lines. We have historically generatedgained a significant number of new customers through word-of-mouth referrals from other product developers and engineers, and combine these referrals with the efforts of our marketing and sales force to identify and market our product lines to the colleagues of our existing customers.
We also plan to use our marketing and sales capabilities to continue to pursue product developers and engineers within companies who have not yet used our products. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies on which to focus our marketing and sales efforts.
We believe there may be opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the United States, Europe and Japan,, where we believe a substantial portion of the world’sworld’s product developers and engineers are located. We entered the European market in 2005 and launched operations in Japan in 2009. For 2016,2017, revenue earned in these markets represents approximately 25%24% of our total revenue. In 2016, we increased marketing efforts in Europe and the surrounding regions. While we currently do not have specific plans to expand into any particular geographic markets, we believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions and we will continue to evaluate such opportunities if and when they arise.
We plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our technology in order to further increase automation and meet the evolving needs of product developers and engineers worldwide. We believe product developers and engineers have come to expect advanced web-based tools and a fully integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers and engineers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive quotations quickly and efficiently.
AddLaunch New Manufacturing ProcessesTechnology
We seek to identify additional manufacturing processes to which we can apply our digital technology and expertise to meet a greater range of product developers’developers’ and engineers’ needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunity to cross-sell our existing product lines to our existing customer base. We regularly evaluate new manufacturing processes to offer product developers and engineers and introduce such new processes when we are confident that a sufficient market demand exists and that we can offer the same advantages our customers have come to expect from us. See Item 6. “Selected Financial Data” for disclosure of our historical research and development expenses.
EWe were founded with Injection Moxampleslding which represents 56.4% of our total revenue for the year ended December 31, 2017. Examples of new manufacturing processesservices we have added include CNC Machining, 3D Printing through the acquisitions of FineLine and Alphaform and the launch of liquid silicone rubber injection molding, lathe-turned parts and rapid overmolding technology.Sheet Metal. Our CNC Machining product line was first introduced in the United States in 2007, expanded to Japan in 2009 and Europe in 2012, and further expanded in the United States through our acquisition of RAPID in November 2017. CNC Machining represents 27.3%30.1% of our total revenue infor the year ended December 31, 2016. In April 2014, we added 3D-printing2017. 3D printing technologies were introduced through our acquisition of FineLine andin April 2014. We further expanded our 3D printing capabilities in October 2015 through our acquisition of Alphaform. Our 3D Printing product line represents 12.7%12.6% of our total revenue infor the year ended December 31, 2016. During 2014, we2017. Our Sheet Metal product line was introduced through our acquisition of RAPID in November 2017 and represents $1.8 million of total revenue for the year ended December 31, 2017.
We continue to expand our core product lines through product launches including liquid silicone rubber injection molding, lathe-turned parts, rapid overmolding, insert molding, PolyJet and MJF. We introduced liquid silicone rubber injection molding during 2014 and in February 2015, we introduced lathe-turned products to further expand our product offerings. products. In 2016, we expanded the breadth of our manufacturing capabilities by adding rapid overmolding technologytechnology. In 2017, we added insert molding to our Injection Molding product line and PolyJet and MJF to our 3D Printing product line. Our Injection MoldingIn addition, we launched on-demand manufacturing to address the needs of the low-volume, high-mix product line represents 59.0% ofsegment. We also opened our total revenuefirst metrology lab in the year ended December 31, 2016.2017 for enhanced inspection reporting on end-use production parts, including First Article Inspection Reports and digital inspection reports.
Broaden the Parts Envelope
We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a portion of our research and development efforts to expand the range of parts that we can produce. Since we first introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can support. In 2017, we launched two new 3D Printing processes, which strengthened our capability to manufacture complex part geometries quickly and accurately. Through our acquisition of RAPID in November 2017, we added quick-turn and e-commerce-enabled Sheet Metal services to our portfolio and expanded our CNC Machining capabilities to support larger and more complex projects. As we continue to expand the range of our existing process capabilities, we believe we will meet the needs of a broader set of product developers and engineers and consequently convert a higher number of quotation requests into orders.
Marketing
Our internationalglobal marketing effort generates prospects for our sales teams and seeks to strengthen our reputation as an industry leader in digital manufacturing services for custom prototyping and low-volume manufacturing. Since we are an agile, technology-based company, much of our marketing activities occur online. We use marketing automation software to enhance the productivity of our marketing and sales teams and continuously track the results of every campaign to ensure our return on investment.
We maintain top-of-mind brand awareness with product developers and engineers through regular publication of technical information including design guidelines and helpful tips, engineering white papers, educational webinars, quick videos, and a quarterly journal focused on important industry topics. We also provide complimentary physical design aids to designers and engineers — as well as teachers and students — that highlight technical aspects of injection molding to help create efficient, well-designed parts. We believe these educational materials are key aspects of our lead generation efforts.
Marketing represents the face of Proto Labs, so it is our goal to actively and intelligently engage designers and engineers across multiple mediums — whether print, online, social media or in person. By doing this, we gain new customers, drive sales and build brand equity.
Sales and Customer Service
We maintain an internal sales team trained in the basics of part design and the capabilities of our manufacturing product lines, as well as the key advantages of our product linesprocesses over alternate methods of custom parts manufacturing.manufacturing. We organize our sales team into complementary roles: business development, account management and strategic account management, with the former focused on selling to new customer companies and the latter two focused on expanding sales within existing customer companies.
We believe our sales staff is adept at researching customer companies and networking to find additional product developers and engineers who may have a need for our products. We also have a team of customer service engineers who can support highly technical engineering discussions with product developers and engineers as required during the sales process. Our revenue is generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2016.2017.
Competition
The market for custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. Our potential competitors include:
| Captive in-house product manufacturing. |
| Other custom parts manufacturers. |
We believe that the key competitive factors in our industry include:
Quality: dimensional accuracy, surface finish, material properties, color and cleanliness;
● | Quality: dimensional accuracy, surface finish, material properties, color and cleanliness; |
Speed: turnaround time for quotations and parts;
● | Speed: turnaround time for quotations and parts; |
Reliability: greater than 97% on-time delivery;
● | Reliability: greater than 97% on-time delivery; |
Service: overall customer experience, from web interface to post-sales support;
● | Service: overall customer experience, from web interface to post-sales support; |
Capability: range of part sizes and dimensional complexities supported, variety of manufacturing processes offered, materials supported and post-processing provided;
● | Capability: range of part sizes and dimensional complexities supported, variety of manufacturing processes offered, materials supported and post-processing provided; |
Scale: ability to support thousands of part designs in parallel;
● | Scale: ability to support thousands of part designs in parallel; |
Capacity: ability to manage peaks in demand with very short lead times and no minimum order quantities; and
● | Capacity: ability to manage peaks in demand with very short lead times and no minimum order quantities; and |
Price: mold and part pricing.
● | Price: mold and part pricing. |
We believe that we have competitive strengths that positionour digital end-to-end manufacturing capability positions us favorably and havehas enabled us to become a leader in our markets. We also believe that substantially all of our current direct competitors are relatively small in terms of size of operations, revenue, number of customers and volume of parts sold, and generally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and more established companies with developed technological capabilities, may begin to focus on low volume, high mix custom parts manufacturing. These companies could more directly compete with us, along with our existing competitors, and could also launch new products and product lines that we do not offer that may quickly gain market acceptance. Any of the foregoing could adversely affect our ability to attract customers.
Intellectual Property
We regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other intellectual property as valuable to our business and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, vendors and others to protect our proprietary rights. We register our patents, trademarks and service marks in the United States and other jurisdictions as we deem appropriate. As of December 31, 2016,2017, we owned and had applications pending for patents relating to various aspects of our quoting and manufacturing processes as follows:
Jurisdiction | Issued Patents | Applications Pending | ||||||
United States | 16 | 1 | ||||||
United Kindgom | 2 | 0 | ||||||
Germany | 0 | 2 | ||||||
Jurisdiction | Issued Patents | Applications Pending | ||||||
United States | 17 | 6 | ||||||
United Kingdom | 2 | 0 | ||||||
Germany | 0 | 2 | ||||||
OurOur patents have expiration dates ranging from 2022 to 2032. We also owned approximately 1217 registered and 16 pending United States trademarks or service marks as of December 31, 2016,2017, with corresponding registered protection in Europe and Japan for the most important of these marks such as PROTO LABS, PROTOMOLD, FIRSTCUT, PROTOQUOTE, FIRSTQUOTE, PROTOFLOW and FINELINE, corresponding approved protection in Canada for PROTO LABS, FIRSTCUT and FINELINE, and corresponding registered protection in Australia, Canada and Mexico for PROTOMOLD. There can be no assurance that the steps we take to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate such rights. We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in the ordinary course of our business. In particular, we may face claims from third parties that we have infringed their patents, trademarks or other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results.
Employees
As of December 31, 2016, 2017 we had 1,7002,266 full-time employees. We consider our current relationship with our employees to be good. We also regularly use independent contractors and other temporary employees across the organization to augment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
Information About Segment and Geographic Revenue
Information about segment and geographic revenue is set forth in Note 17 – Segment Reporting of the Notes to our consolidated financial statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
Available Information
Our principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359 and our telephone number is (763) 479-3680. Our website address is www.protolabs.com. Information on our website does not constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC. We provide free access to various reports that we file with or furnish to the SEC through our website as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. Our SEC reports can be accessed through the investor relations section of our website.
The public may read and copy any materials that we file with the SEC at the SEC’sSEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s website is www.sec.gov.
Executive Officers of the Registrant
Set forth below are the names of our current executive officers, their ages, titles, the year first appointed as an executive officer, and employment for the past five years:
Victoria M. Holt |
| President, Chief Executive Officer and Director | |
Robert Bodor | 4 | Vice President/General Manager – Americas | |
John A. Way |
| Chief Financial Officer and Executive Vice President of Development | |
Arthur R. Baker III |
| Chief Technology Officer | |
David M. Fein |
| Chief Revenue Officer | |
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| Vice |
Executive officers of the Company are elected at the discretion of the board of directors with no fixed terms. There are no family relationships between or among any of the executive officers or directors of the Company.
Victoria M. Holt. Ms. Holt has been our President and Chief Executive Officer since February 2014. Prior to joining Proto Labs, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in March 2013. Ms. Holt also is a member of the Board of Directors of Waste Management, Inc.
Robert Bodor. Dr. Bodor has served as our Vice President/General Manager - Americas since January 2015. From July 2013 to January 2015, Dr. Bodor served as our Chief Technology Officer. From December 2012 to June 2013, Dr. Bodor served as our Director of Business Development. Prior to joining Proto Labs, from January 2011 to December 2012, Dr. Bodor held several roles at Honeywell, most recently leading SaaS business offerings for Honeywell’s Life Safety Division.
John A. Way. Mr. Way has served as our Chief Financial Officer and Executive Vice President of Development since December 2014. From October 2013 to September 2014, Mr. Way served as Chief Financial Officer of Univita Health Inc., a privately held home healthcare service provider. From September 2012 to July 2013, Mr. Way served as Chief Financial Officer of Virtual Radiologic, a global telemedicine company. From October 2002 to November 2012, Mr. Way worked in senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer of Optum Collaborative Care, SecureHorizons and OptumHealth.
Arthur R. Baker IIIBaker III. Dr. Baker has been our Chief Technology Officer since May 2016. Prior to joining Proto Labs, Dr. Baker served as Chief Technology Officer of PaR Systems, a robotics and specialty machine tool builder. From 2005 to 2014, Dr. Baker held multiple positions at MTS Systems, including General Manager of the Test Division, Chief Technology Officer, and Vice President of Engineering and Operations. MTS Systems was a leader in mechanical testing and simulation systems for automotive, aerospace, medical, civil-seismic and general research.
David M. FeinFein. Mr. Fein has been our Chief Revenue Officer since December 2016. Prior to joining Proto Labs, Mr. Fein spent 16 years at PMC-Sierra, Inc., a semiconductor and software solutions provider for big data storage, optical transport networks and wireless infrastructure markets. Most recently, Mr. Fein served as Executive Vice President, Worldwide Sales from December 2014 until PMC-Sierra, Inc. was acquired by Microsemi Corporation in January 2016.2016. From November 2008 to November 2014, Mr. Fein served as Vice President, Sales for the Americas at PMC-Sierra.
John B. TumeltyBjoern Klaas. Mr. TumeltyKlaas has served as the Vice President/General Manager and Managing Director –led our company’s business in Europe, Middle East and Africa since January 2015. Mr. Tumelty served as the Vice President and Managing Director ofsince December 2017. Prior to joining Proto Labs, LimitedMr. Klaas held key positions with global polymer supplier PolyOne from 2012 to 2017, most recently as its inceptionVice President and General Manager for its ColorMatrix Group headquartered in July 2005the United States. From 2008 to January 2015.2012, Mr. Tumelty leads our company’s operations in Europe.Klaas worked at Colorant-Chromatics, a global leader for high temperature polymer formulations, as the General Manager for the global business.
The following are the significant factors that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the value of an investment in our common stock.
Risks Relating to Our Business
We face significant competition and expect to face increasing competition in many aspects of our business, which could cause our operating results to suffer.
The market for custom parts manufacturing is fragmented and highly competitive. We compete for customers with a wide variety of custom parts manufacturers and methods. Some of our current and potential competitors include captive in-house product lines, other custom parts manufacturers and alternative manufacturing vendors such as those utilizing 3D printing processes including stereolithography (SL), selective laser sintering (SLS) and, direct metal laser sintering (DMLS), PolyJet and Multi Jet Fusion (MJF). Moreover, some of our existing and potential competitors are researching, designing, developing and marketing other types of products and product lines. We also expect that future competition may arise from the development of allied or related techniques for custom parts manufacturing that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products and from improvements to existing technologies. Furthermore, our competitors may attempt to adopt and improve upon key aspects of our business model, such as development of technology that automates much of the manual labor conventionally required to quote and manufacture custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or building scalable operating models specifically designed for efficient custom production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that could more effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminate such relationships and establish alliances and relationships with our competitors, our business could be harmed.
Existing and potential competitors may have substantially greater financial, technical, marketing and sales, manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enable them to compete effectively against us.
Though we plan to continue to expend resources to develop new technologies, processes and product lines, we cannot assure you that we will be able to maintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developing new products is finding product lines for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any new product lines with potential economies of scale similar to our molding and machiningexisting product lines. If we do not keep pace with technological change and introduce new technologies, processes and product lines, the demand for our products and product lines may decline and our operating results may suffer.
Our success depends on our ability to deliver products and product linesthat meet the needs of product developers and engineers and to effectively respond to changes in our industry.
We derive almost all of our revenue from the manufacture and sale to product developers and engineers of quick-turn low volumes of custom parts for prototyping, support of internal manufacturing and limited quantity product release. Our business has been, and, we believe, will continue to be, affected by changes in product developer and engineering requirements and preferences, rapid technological change, new product and product line introductions and the emergence of new standards and practices, any of which could render our technology, products and product lines less attractive, uneconomical or obsolete. To the extent that our customers’customers’ need for quick-turn parts decreases significantly for any reason, it would likely have a material adverse effect on our business and operating results and harm our competitive position. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remain competitive, we must continually expend resources to enhance and improve our technology, product offerings and product lines.
In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to further develop our technology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within the research and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture. We believe successful execution of this part of our business plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able to do so in a timely fashion, or at all. Broadening the range of parts we offer is of particular importance since limitations in manufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted to executing on this aspect of our business plan will improve our business and operating results or result in increased demand for our products and product lines. Failures in this area could adversely impact our operating results and harm our reputation and brand. Even if we are successful in executing in these areas, our industry is subject to rapid and significant technological change, and our competitors may develop new technologies, processes and product lines that are superior to ours. Our research and developmentdevelopment costs were approximately $23.6 million, $22.4 million $18.4 million and $16.6$18.4 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively, and there is no guarantee that these costs will enable us to maintain or grow our revenue profitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for additional discussion related to research and development costs.
Any failure to properly meet the needs of product developers and engineers or respond to changes in our industry on a cost-effective and timely basis, or at all, would likely have a material adverse effect on our business and operating results and harm our competitive position.
Our failure to meet our product developers’ and engineers’ expectations regarding quick turnaround time would adversely affect our business and results of operations.
We believe many product developers and engineers are facing increased pressure from global competitors to be first to market with their finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no guarantees we will be able to meet product developers’developers’ and engineers’ increasing expectations regarding quick turnaround time, especially as we increase the scope of our operations. If we fail to meet our customers’ expectations regarding turnaround time in any given period, our business and results of operations will likely suffer.
Our failure to meet our product developers’ and engineers’ price expectations would adversely affect our business and results of operations.
Demand for our product lines is sensitive to price. We believe our competitive pricing has been an important factor in our results to date. Therefore, changes in our pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our production and personnel costs and our competitors’competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectations in any given period, demand for our products and product lines could be negatively impacted and our business and results of operations could suffer.
Our failure to meet our product developers’ and engineers’ quality specifications would adversely affect our business and results of operations.
We believe many product developers and engineers have a need for specific quality of quick-turn, on-demand custom parts. We believe our ability to create parts with the specifications of the product developers and engineers is an important factor in our results to date. If we fail to meet our customers’customers’ specifications in any given period, demand for our products and product lines could be negatively impacted and our business and results of operations could suffer.
The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt our ability to retain and expand our customer base as well as further penetrate existing customers.
Since our products and product lines are sold primarily through our websites, the success of our business depends upon our ability to attract new and repeat customers to our websites in order to increase business and grow our revenue. Customer awareness and the perceived value of our brand will depend largely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the required timeframes and positive customer experiences, which we may not do successfully. A primary component of our business strategy is the continued promotion and strengthening of our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing efforts directed toward enhancing our brand. We have initiated marketing efforts through social media, but this method of marketing may not be successful and subjects us to a greater risk of inconsistent messaging and bad publicity. We may choose to increase our branding expense materially, but we cannot be sure that this investment will be profitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate revenue.
Our business depends in part on our ability to process a large volume of new part designs from a diverse group of product developers and engineers and successfully identify significant opportunities for our business based on those submissions.
We believe the volume of new part designs we process and the size and diversity of our customer base give us valuable insight into the needs of our prospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new part designs we process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product developers and engineers could be negatively impacted. In addition, even if we do continue to process a large number of new part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized to help us identify significant business opportunities or better understand the needs of product developers and engineers.
The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain additional personnel in the future, could harm our business and negatively affect our ability to successfully grow our business.
We are highly dependent upon the continued service and performance of the key members of our management team and other personnel. The loss of any of these individuals, each of whom is “at will” and may terminate his or her employment relationship with us at any time, could disrupt our operations and significantly delay or prevent the achievement of our business objectives. We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel. A possible shortage of qualified individuals in the regions where we operate might require us to pay increased compensation to attract and retain key employees, thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many of whom have substantially greater financial and other resources and name recognition than us. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability to achieve our business objectives.
If we fail to grow our business as anticipated, our net sales,, gross margin and operating margin will be adversely affected.
We are attempting to grow our business substantially. To this end, we have made and expect to continue to make significant investments in our business, including investments in our infrastructure, technology, and marketing and sales efforts. These investments include dedicated facilities expansion and increased staffing, both domestic and international. If our business does not generate the level of revenue required to support our investment, our net sales and profitability will be adversely affected.
If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be damaged, and our business and results of operations may be harmed.
Over the past several years, we have experienced rapid growth. For example, we have grown from 749 full-time employees as of January 1, 20132014 to 1,7002,266 full-time employees as of December 31, 2016.2017. We have expanded internationally, including establishing manufacturing operations in Europe in 2005 and Japan in 2009. In 2014, we expanded our product lines with 3D Printing through our acquisition of FineLine. In 2015, we expanded our manufacturing operations and our 3D Printing product lines in Europe through our acquisition of Alphaform. In 2017, we expanded our product lines to include Sheet Metal through our acquisition of RAPID. We expect this growth to continue and the number of countries and facilities from which we operate to increase in the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among other things, the following:
enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures, in particular as we continue to operate as a global organization;
effectively scale our operations, including accurately predicting the need for floor space, equipment, and additional staffing;
successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees; and
expand our international resources.resources.
These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. Furthermore, our growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on our operational, financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation and brand, including impairing our ability to perform to our customers’customers’ expectations.
We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.
A key element to our continued growth is the ability to quickly and efficiently quote an increasing number of product developer and engineer submissions across geographic regions and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improve their performance, especially during periods of heavy usage and as our solutions become more complex and our user traffic increases across geographic regions. Similarly, our manufacturing automation technology may not enable us to process the large numbers of unique designs and efficiently manufacture the related parts in a timely fashion to meet the needs of product developers and engineers as our business continues to grow. Any failure in our ability to timely and effectively scale and adapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers and attract new customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations.
Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.
Although our revenue has grown over the past five years from $126.0$163.1 million for the year ended December 31, 20122013 to $298.1$344.5 million for the year ended December 31, 2016,2017, we may not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, a number of which are out of our control, including among others, our ability to:
retain and further penetrate existing customer companies, as well as attract new customer companies;
consistently execute on custom part orders in a manner that satisfies product developers’ and engineers’ needs and provides them with a superior experience;
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develop new technologies or manufacturing processes and broaden the range of parts we offer;
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successfully execute on our international strategy and expand into new geographic markets;
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capitalize on product developer and engineer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours per day, 7 days per week;
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increase the strength and awareness of our brand across geographic regions;
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respond to changes in product developer and engineer needs, technology and our industry; and
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react to challenges from existing and new competitors.
We cannot assure you that we will be successful in addressing the factors above and continuing to grow our business and revenue.
Our operating results and financial condition may fluctuate on a quarterly and annual basis.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to continue to vary due to a number of factors, some of which are outside of our control. In addition, our actual or projected operating results may fail to match our past performance. These events could in turn cause the market price of our common stock to fluctuate. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline.
Our operating results and financial condition may fluctuate due to a number of factors, including those listed below and those identified throughout this “Risk Factors” section:
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the development of new competitive systems or processes by others;
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the entry of new competitors into our market, whether by established companies or by new companies;
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changes in the size and complexity of our organization, including our international operations;
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levels of sales of our products and product lines to new and existing customers;
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the geographic distribution of our sales;
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changes in product developer and engineer preferences or needs;
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changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generally increase and may fluctuate in the future;
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delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto;
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our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth;
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limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue;
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changes in our pricing policies or those of our competitors, including our responses to price competition;
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changes in the amount we spend in our marketing and other efforts;
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unexpected increases in expenses as compared to our related accounting accruals or operating plan;
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the volatile global economy;
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general economic and industry conditions that affect customer demand and product development trends;
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interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations;
changes in accounting rules and tax and other laws; and
plant shutdowns due to a health pandemic or weather conditions.
Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely on quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance.
Interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations could damage our reputation and brand and substantially harm our business and results of operations.
The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technology systems, manufacturing processes and other operations are critical to our reputation and brand, and to our ability to effectively service product developers and engineers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costs seeking to remedy the problem and otherwise substantially harm our business and results of operations.
A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults, challenges associated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce-relatedworkforce-related issues, capacity constraints due to an unusually large number of product developers and engineers accessing our websites or ordering parts at the same time, and other similar events. These risks are augmented by the fact that our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to these product developers and engineers. We are dependent upon our facilities through which we satisfy all of our production demands and in which we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fully redundant systems in multiple locations. However, we have back-up computing systems for each of our United States, European and Japanese operations. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extent outside of our control.
Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our product lines as a result of system failures.
We depend on the continued growth of product developers’ and engineers’ e-commerce expectations when working with their custom parts manufacturers and their migration from 2D to 3D CAD software.
The business of selling custom parts over the Internet via an interactive web-based and automated user interface and quoting system is not widespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD software. Concerns about privacy and technological and other problems may discourage some product developers and engineers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers and engineers in industries not well suited to utilize our product lines, such as architecture. In order to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If product developers and engineers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely impacted.
Our business depends on the development and maintenance of the Internet infrastructure.
The success of our We storeproduct lines will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing bandwidth requirements, or problems caused by “viruses,” “worms,” malware and similar programs may harm the performance of the Internet. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage generally as well as the level of usage of our product lines, which could adversely impact our business.
If the security of our customers’ confidential customer information stored in our systems isthat, if breached or otherwise subjected to unauthorized access, may harm our reputation or brand may be harmed, and we may be exposedor expose us to liability.
Our system stores, processes and transmits our customers’ confidential information, including the intellectual property in their part designs credit card information and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure such confidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed the internal and external risks posed to the security of our company’s systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brand and could cause the loss of customers.
Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.
The prospects for economic growth in the United States and other countries remain uncertain and could worsen. Economic concerns and other issues such as reduced access to capital for businesses may cause product developers and engineers to further delay or reduce the product development projects that our business supports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, product developers and engineers and other related risks to our business.
Political and economic uncertainty arising from the outcome of the United Kingdom’s recent Kingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.
On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The outcome of the Brexit vote triggered short-term financial volatility, including a decline in the value of the British Pound in comparison to both the United States dollar and the Euro. The impact of the Brexit referendum and the ongoing uncertainty associated with the outcome thereof may result in various long-term financial consequences for businesses operating in the UK, the EU and beyond. As a result of the referendum, it is expected that the British government will beginis negotiating the terms of the UK’s relationship with the EU going forward, including the terms of trade between the UK and the EU. Although the specific terms and the timeframe in which they will be negotiatedof the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations.
We operate a global business that exposes us to additional risks.
We have established our operations in the United States, Europe and Japan and are seeking to further expand our international operations.operations. As of December 31, 2016,2017, we had sold products into approximately 60 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our international revenue accounted for approximately 25%24%, 27%25% and 26%27% of our total revenue in the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the United States and may again in the future:
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difficulties in staffing and managing foreign operations, particularly in new geographic locations;
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challenges in providing solutions across a significant distance, in different languages and among different cultures;
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rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, and other similar outbreaks or events;
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fluctuations in foreign currency exchange rates;
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differences in product developer and engineer preferences and means of procuring parts;
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compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad, including those associated with export controls, tariffs and embargoes, other trade restrictions and antitrust and data privacy concerns;
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different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain areas;
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differing levels of use of the Internet or 3D CAD software;
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seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe and holiday season;
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higher costs of doing business internationally;
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interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad;
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protectionist laws and business practices that favor local producers and service providers;
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taxation;
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energy costs;
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restrictions imposed by local labor practices and laws on our business and operations;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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transportation delays; and
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increased payment risk and higher levels of payment fraud.
Our business depends on product developers’ and engineers’ demand for our product lines, the general economic health of current and prospective customers, and companies’ desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce demand for our product lines, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.
If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.
We manufacture all of our products in 912 manufacturing facilities, located in Maple Plain, Minnesota; Rosemount, Minnesota; Plymouth, Minnesota; Raleigh,Cary, North Carolina; Nashua, New Hampshire (3 facilities); Telford, United Kingdom; Feldkirchen, Germany; Eschenlohe, Germany; Rusko, Finland and Zama, Kanagawa, Japan. These facilities and the manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, hurricanes, tsunamis and nuclear disasters.
In the event any of our facilities are affected by a disaster, we may:
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be unable to meet the shipping deadlines of our customers;
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experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide marketing and sales support and customer service, and otherwise operate our business, any of which could negatively impact our business;
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be forced to rely on third-party manufacturers;
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need to expend significant capital and other resources to address any damage caused by the disaster; and
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lose customers and be unable to regain those customers.
Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.
We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing operation and future growth of our business from just a few third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and materials for our products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on terms acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or increases in pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited source supplier could adversely affect our relationship with our customers and our results of operations and financial condition.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or gross margin, which would adversely affect our net income.
We may be subject to infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patents in the fields of injection molding, CNC machining, injection molding3D printing, sheet metal or part production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted.
Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws,, treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property.
We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business and reputation and brand.
The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors that are not discovered until after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error.
We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.
The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and product lines. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.
Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.
We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic and abroad. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules, including those set forth in the Tax Cuts and Jobs Act enacted in 2017, and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating results and financial condition.
Our business and our customer base have been built primarily through organic growth. However, from time to time, we may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us to offer our customers 3D printingprinting manufacturing processes andprocesses; in October 2015, we acquired Alphaform to enable us to expand our 3D printing capabilities in Europe.Europe, and in November 2017, we acquired RAPID to enable us to offer our customers Sheet Metal processes. We cannot forecast the number, timing or size of any future acquisitions or other similar strategic transactions, or the effect that any such transactions might have on our operating or financial results. We have limited experience engaging in these types of transactions. Such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including:
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an acquired company, asset or technology not furthering our business strategy as anticipated;
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difficulties entering and competing in new product or geographic markets and increased competition, including price competition;
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integration challenges;
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challenges in working with strategic partners and resolving any related disagreements or disputes;
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high valuation for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition;
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significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses, assets or technologies;
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acquisition of a significant amount of goodwill, which could result in future impairment charges that would reduce our earnings; and
requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensation and other items, as well as other charges or expenses.
Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended resources on them, as well as divert our management’s attention. Any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or stakeholders.
In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.
We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business is dependent in part on the availability of such licenses on commercially reasonable terms.
We currently, and will continue to, license certain technologies from third parties. While these licenses are not material to our financial results, their function in our business is integral to our operations. We cannot be certain that these third-party content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party licenses may expose us to increased risk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer.
Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed.
If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we manufacture, our business, financial condition or operating results could be harmed.
As a manufacturer of CNC-macCNC-machinedhined and injection-molded custom parts, we are required to meet certain regulatory standards, including International Organization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in Minnesota. In North Carolina, we are required to meet ISO 9001:2008 standards for our plastics manufacturing and AS9100 standards for our metals manufacturing. In New Hampshire, we are required to meet ISO 9001:2015 for our CNC-machined and sheet metal fabrication, as well as AS9100C standards. We are also able to meet regulatory standards ISO 9001:2008 at our manufacturing facilities in Feldkirchen, Germany, Eschenlohe, Germany and Rusko, Finland. We also meet regulatory standard ISO 13485 at our manufacturing facility in Eschenlohe, Germany. We are also able to meet regulatory standards ISO 9001 and ISO 14001 in Japan. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert management’s attention.
We are subject to payment-related risks.
We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
Risks Relating to Ownership of Our Common Stock
Our stock price has been and may continue to be volatile.
In the year ended December 31, 2016,2017, our common stock traded as high as $82.06$109.10 and as low as $43.10.$48.00. The market for our common stock may become less active, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to fluctuate include:
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fluctuations in our financial condition and operating results;
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our ability to retain and attract customers and increase net sales;
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pricing pressures due to competition or otherwise and changes in gross margins;
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changes in general economic and market conditions, economic uncertainty and changes in product development activity levels;
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announcements by us or our competitors of technological innovations or new product or product lines offerings or significant acquisitions;
timing, effectiveness, and costs of expansion and upgrades of our offerings, systems and infrastructure;
changes in key personnel;
success in entry into new markets and expansion efforts;
the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission and announcements relating to litigation;
the projections we may provide to the public, any changes in these projections or our failure to meet these projections;
the issuance of new or updated research or reports by any securities or industry analysts who follow our common stock, changes in analysts’ financial estimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock;
changes in the market valuations of similar companies;
significant lawsuits, including patent or shareholder litigation;
changes in laws or regulations applicable to us;
changes in accounting principles;
the sustainability of an active trading market for our common stock;
future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders;
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share price and volume fluctuations attributable to inconsistent trading levels of our shares; and
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other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events.
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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
Our failure to maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 of the Sarbanes-Oxley Act or prevent or detect misstatements in our financial statements in the future could harm our business and cause a decrease in our stock priceprice..
Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we are not able to comply with the requirements of Section 404 in the future, or if we fail to prevent or detect misstatements in the financial statements we include in our reports filed with the SEC, our business could be harmed and the market price of our common stock could decline.
Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for us that you might consider favorable.
Our Third Amended and Restated Articles of Incorporation, as amended, and Amended and Restated By-Laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:
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permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our board may designate, including the right to approve an acquisition or other change in our control;
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provide that the authorized number of directors may be changed by resolution of the board of directors;
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provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
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provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a shareholder’s notice; and
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do not provide for cumulative voting rights.
We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of the corporation’s voting shares within four years following the date the person became an interested shareholder, unless the business combination is approved by a committee composed solely of one or more disinterested members of the corporation’s board of directors before the date the person became an interested shareholder.
These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
We do not expect to pay any cash dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such cash dividends for the foreseeable future. We anticipate that we will retain all of our future earningsearnings for use in the business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.
Item 1B. Unresolved Staff Comments
None.
We believe that our facilities are well maintained and of sufficient capacity to support our current operations. We have facilities in the following regions:
United States
Our corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of office space. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We lease an additional facility on a property adjacent to our headquarters that encompasses approximately 40,000 square feet of manufacturing space. The lease for this facility expires in 2017. We own a facility in Rosemount, Minnesota that encompasses approximately 130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses approximately 170,000 square feet of manufacturing and office space.
In April 2014, we purchased FineLine Prototyping, Inc. (FineLine) and assumed the leases of two facilities in Raleigh, North Carolina. The two facilities we lease are approximately 10,000 square feet each. We also purchasedown a facility in Cary, North Carolina in 2015 that encompasses approximately 77,000 square feet of manufacturing and office space.
In 2016,November 2017, we moved intopurchased RAPID and assumed the new facilityleases of three facilities in Cary, North CarolinaNashua, New Hampshire. The three facilities we lease total approximately 146,000 square feet of manufacturing and consolidated operations. As a result, we exited the lease for one of the Raleigh facilities and planoffice space. The leases expire at various times from 2018 to exit the lease for the other Raleigh facility in 2017. 2022.
Europe
Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing approximately 126,000 square feet of office and manufacturing space.
We also lease office space in the United Kingdom; Mosbach, Germany,Germany; Le Bourget du Lac, FranceFrance; and Novara, Italy, for sales, customer service and technical support staff. The leases expire at various times from 20172018 to 2023. In October 2015, we purchased certain assets, including shares of select subsidiaries, of Alphaform, AG (Alphaform), headquartered in Feldkirchen (Munich), Germany. As a result of the acquisition, we lease manufacturing and office facilities encompassing approximately 60,000 square feet in Feldkirchen, Germany, approximately 16,00022,000 square feet in Eschenlohe, Germany and approximately 24,000 square feet in Rusko, Finland. The leases expire at various times from 2018 to 2022.2019.
Japan
Our Japan operations are headquartered in Zama, Kanagawa, Japan (southwest of Tokyo). In 2016, we moved into a new leased facility encompassing approximately 96,000 square feet of office and manufacturing space. The lease expires in April 2023.
From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we do not believe we are party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business.
Item 4. Mine Safety Disclosures
NotNot applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has traded on the New York Stock Exchange (NYSE) under the symbol “PRLB” since February 24, 2012. Prior to that date, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock as reported on the NYSE:
Fiscal 2016 | Fiscal 2015 | Fiscal 2017 | Fiscal 2016 | |||||||||||||||||||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
First Quarter | $ | 79.65 | $ | 51.61 | $ | 74.82 | $ | 57.30 | $ | 60.25 | $ | 48.00 | $ | 79.65 | $ | 51.61 | ||||||||||||||||
Second Quarter | $ | 82.06 | $ | 55.07 | $ | 79.00 | $ | 65.84 | $ | 70.10 | $ | 48.70 | $ | 82.06 | $ | 55.07 | ||||||||||||||||
Third Quarter | $ | 61.62 | $ | 50.50 | $ | 79.95 | $ | 65.82 | $ | 80.40 | $ | 66.85 | $ | 61.62 | $ | 50.50 | ||||||||||||||||
Fourth Quarter | $ | 59.65 | $ | 43.10 | $ | 69.48 | $ | 58.84 | $ | 109.10 | $ | 79.06 | $ | 59.65 | $ | 43.10 | ||||||||||||||||
On February 16, 2017,14, 2018, the last reported sale price of our common stock on the NYSE was $55.65$108.80 per share. As of February 16, 2017,14, 2018, we had 1320 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available fundsstock and any future earnings to support our operations and finance the growth and development of our business. Wewe do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
Outstanding Equity Awards
The following table summarizes, as of December 31, 2016,2017, information about shares of our common stock that may be issued under equity compensation plans approved by shareholders and plans not approved by shareholders:
Plan Category | Number of shares to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding shares in first column) | |||||||||
Equity compensation plans approved by shareholders(1) | 784,744 | $32.66 | 6,778,872(2) | |||||||||
Equity compensation plans not approved by shareholders |
| None | N/A |
| None | |||||||
Plan Category | Number of shares to be issued upon exercise of outstanding options and rights | Weighted-average exercise price of outstanding options and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding shares in first column) | |||||||||
Equity compensation plans approved by shareholders(1) | 759,593 | $51.13 | 6,515,301(2) | |||||||||
Equity compensation plans not approved by shareholders |
| None | N/A | None | ||||||||
(1) | Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan. | ||||
(2) | Includes | ||||
Performance Graph
The following graph shows a comparison from February 24, 2012 (the date our common stock commenced trading on the NYSE) through December 31, 20162017 of the cumulative total return for our common stock, the S&P 500 Index and the Russell 2000 Index. We have selected the Russell 2000 Index because the Russell 2000 Index measures the performance of the small market capitalization segment of U.S. equity instruments and we are a member company included in the Russell 2000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P 500 Index and the Russell 2000 Index assume reinvestment of dividends.
Period Ending | Period Ending | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Index | 02/23/12 | 06/30/12 | 12/31/12 | 06/30/13 | 12/31/13 | 06/30/14 | 12/31/14 | 06/30/15 | 12/31/15 | 06/30/16 | 12/31/16 | 02/24/12 | 06/30/12 | 12/31/12 | 06/30/13 | 12/31/13 | 06/30/14 | 12/31/14 | 06/30/15 | 12/31/15 | 06/30/16 | 12/31/16 | 06/30/17 | 12/31/17 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proto Labs, Inc. | 100.00 | 179.75 | 246.38 | 406.06 | 444.88 | 512.00 | 419.75 | 421.75 | 398.06 | 359.75 | 320.94 | 100.00 | 115.04 | 157.68 | 259.88 | 284.72 | 327.68 | 268.64 | 269.92 | 254.76 | 230.24 | 205.40 | 269.00 | 412.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
S&P 500 | 100.00 | 99.90 | 104.60 | 117.81 | 135.56 | 143.77 | 151.01 | 151.31 | 149.91 | 153.94 | 164.20 | 100.00 | 99.90 | 104.60 | 117.81 | 135.56 | 143.77 | 151.01 | 151.31 | 149.91 | 153.94 | 164.20 | 177.74 | 196.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Russell 2000 | 100.00 | 96.29 | 102.43 | 117.88 | 140.33 | 143.86 | 145.28 | 151.22 | 136.98 | 138.91 | 163.66 | 100.00 | 96.29 | 102.43 | 117.88 | 140.33 | 143.86 | 145.28 | 151.22 | 136.98 | 138.91 | 163.66 | 170.68 | 185.17 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unregistered Sales of Equity Securities and Issuer Purchases of Equity Securities
We did not sell any unregistered equity securities or purchase any of our securities during the year ended December 31, 2016. On February 9, 2017, we announced that our board of directors had authorized the repurchase of shares of our common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million. The timing and amount of any share repurchases will be determined by our management based on market conditions and other factors. The term of the program runs through December 31, 2021.
During the three months ended December 31, 2017, we did not repurchase shares of our common stock. During the year ended December 31, 2017, we repurchased 77,806 shares at an average price of $56.66 per share for an aggregate purchase price of $4.4 million. We have $45.6 million remaining under this authorization.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial data for the periods and at the dates indicated. The selected consolidated statements of comprehensive income data for the years ended December 31, 2017, 2016 2015 and 20142015 and selected consolidated balance sheets data as of December 31, 20162017 and 20152016 are derived from our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The selected consolidated statements of comprehensive income data for the years ended December 31, 20132014 and 20122013 and selected consolidated balance sheet data as of December 31, 2015, 2014 2013 and 20122013 are derived from our audited consolidated financial statements not included in this report.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial data in conjunction with Item 7. “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes appearing in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Year Ended December 31, | ||||||||||||||||||||
(in thousands, except share and per share amounts) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Consolidated Statements of Comprehensive Income Data | ||||||||||||||||||||
Revenue | $ | 298,055 | $ | 264,106 | $ | 209,583 | $ | 163,112 | $ | 125,991 | ||||||||||
Cost of revenue | 131,118 | 109,703 | 81,182 | 61,410 | 49,853 | |||||||||||||||
Gross profit | 166,937 | 154,403 | 128,401 | 101,702 | 76,138 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Marketing and sales | 46,131 | 39,188 | 29,144 | 22,386 | 18,098 | |||||||||||||||
Research and development | 22,388 | 18,350 | 16,607 | 11,863 | 9,137 | |||||||||||||||
General and administrative | 36,651 | 29,716 | 22,122 | 16,154 | 13,957 | |||||||||||||||
Total operating expenses | 105,170 | 87,254 | 67,873 | 50,403 | 41,192 | |||||||||||||||
Income from operations | 61,767 | 67,149 | 60,528 | 51,299 | 34,946 | |||||||||||||||
Other income, net | 2,454 | 712 | 3 | 279 | 23 | |||||||||||||||
Income before income taxes | 64,221 | 67,861 | 60,531 | 51,578 | 34,969 | |||||||||||||||
Provision for income taxes | 21,514 | 21,347 | 18,896 | 16,301 | 10,944 | |||||||||||||||
Net income | 42,707 | 46,514 | 41,635 | 35,277 | 24,025 | |||||||||||||||
Net income attributable to common shareholders(1) | $ | 42,707 | $ | 46,514 | $ | 41,635 | $ | 35,277 | $ | 24,025 | ||||||||||
Net income per share(1) | ||||||||||||||||||||
Basic | $ | 1.62 | $ | 1.79 | $ | 1.62 | $ | 1.40 | $ | 1.03 | ||||||||||
Diluted | $ | 1.61 | $ | 1.77 | $ | 1.60 | $ | 1.36 | $ | 0.98 | ||||||||||
Weighted average shares outstanding(1) | ||||||||||||||||||||
Basic | 26,365,173 | 26,005,858 | 25,692,699 | 25,198,556 | 23,373,593 | |||||||||||||||
Diluted | 26,564,639 | 26,320,284 | 26,100,320 | 25,859,741 | 24,443,665 | |||||||||||||||
Other comprehensive income (loss) (net of tax) | ||||||||||||||||||||
Foreign currency translation adjustments | $ | (5,541 | ) | $ | (2,283 | ) | $ | (1,838 | ) | $ | (163 | ) | $ | (190 | ) | |||||
Comprehensive income | $ | 37,166 | $ | 44,231 | $ | 39,797 | $ | 35,114 | $ | 23,835 | ||||||||||
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | ||||||||||||||||||||
(in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Stock options and grants | $ | 6,177 | $ | 5,580 | $ | 4,386 | $ | 3,084 | $ | 2,539 | ||||||||||
Employee stock purchase plan | 598 | 502 | 423 | 377 | 500 | |||||||||||||||
Total stock-based compensation expense | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 3,461 | $ | 3,039 | ||||||||||
Cost of revenue | $ | 691 | $ | 513 | $ | 386 | $ | 316 | $ | 335 | ||||||||||
Operating expenses: | ||||||||||||||||||||
Marketing and sales | 977 | 1,074 | 927 | 610 | 418 | |||||||||||||||
Research and development | 1,396 | 1,285 | 1,048 | 754 | 486 | |||||||||||||||
General and administrative | 3,711 | 3,210 | 2,448 | 1,781 | 1,800 | |||||||||||||||
Total stock-based compensation expense | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 3,461 | $ | 3,039 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
(in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Consolidated Balance Sheets Data | ||||||||||||||||||||
Cash and cash equivalents | $ | 68,795 | $ | 47,653 | $ | 43,329 | $ | 43,039 | $ | 36,759 | ||||||||||
Working capital | 134,357 | 111,740 | 89,102 | 96,132 | 78,617 | |||||||||||||||
Total assets | 414,241 | 361,036 | 287,031 | 230,175 | 172,722 | |||||||||||||||
Total liabilities | 34,408 | 33,391 | 21,492 | 18,532 | 16,023 | |||||||||||||||
Total shareholders' equity | $ | 379,833 | $ | 327,645 | $ | 265,539 | $ | 211,643 | $ | 156,699 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
(in thousands, except share and per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Consolidated Statements of Comprehensive Income Data | ||||||||||||||||||||
Revenue | $ | 344,490 | $ | 298,055 | $ | 264,106 | $ | 209,583 | $ | 163,112 | ||||||||||
Cost of revenue | 150,648 | 131,118 | 109,703 | 81,182 | 61,410 | |||||||||||||||
Gross profit | 193,842 | 166,937 | 154,403 | 128,401 | 101,702 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Marketing and sales | 56,856 | 46,131 | 39,188 | 29,144 | 22,386 | |||||||||||||||
Research and development | 23,560 | 22,388 | 18,350 | 16,607 | 11,863 | |||||||||||||||
General and administrative | 41,200 | 36,651 | 29,716 | 22,122 | 16,154 | |||||||||||||||
Total operating expenses | 121,616 | 105,170 | 87,254 | 67,873 | 50,403 | |||||||||||||||
Income from operations | 72,226 | 61,767 | 67,149 | 60,528 | 51,299 | |||||||||||||||
Other income, net | 2,209 | 2,454 | 712 | 3 | 279 | |||||||||||||||
Income before income taxes | 74,435 | 64,221 | 67,861 | 60,531 | 51,578 | |||||||||||||||
Provision for income taxes | 22,657 | 21,514 | 21,347 | 18,896 | 16,301 | |||||||||||||||
Net income | $ | 51,778 | $ | 42,707 | $ | 46,514 | $ | 41,635 | $ | 35,277 | ||||||||||
Net income per share(1) | ||||||||||||||||||||
Basic | $ | 1.94 | $ | 1.62 | $ | 1.79 | $ | 1.62 | $ | 1.40 | ||||||||||
Diluted | $ | 1.93 | $ | 1.61 | $ | 1.77 | $ | 1.60 | $ | 1.36 | ||||||||||
Weighted average shares outstanding(1) | ||||||||||||||||||||
Basic | 26,647,610 | 26,365,173 | 26,005,858 | 25,692,699 | 25,198,556 | |||||||||||||||
Diluted | 26,845,071 | 26,564,639 | 26,320,284 | 26,100,320 | 25,859,741 | |||||||||||||||
Other comprehensive income (loss) (net of tax) | ||||||||||||||||||||
Foreign currency translation adjustments | $ | 5,519 | $ | (5,541 | ) | $ | (2,283 | ) | $ | (1,838 | ) | $ | (163 | ) | ||||||
Comprehensive income | $ | 57,297 | $ | 37,166 | $ | 44,231 | $ | 39,797 | $ | 35,114 | ||||||||||
(1) | See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share |
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | ||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Stock options and grants | $ | 7,954 | $ | 6,177 | $ | 5,580 | $ | 4,386 | $ | 3,084 | ||||||||||
Employee stock purchase plan | 604 | 598 | 502 | 423 | 377 | |||||||||||||||
Total stock-based compensation expense | $ | 8,558 | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 3,461 | ||||||||||
Cost of revenue | $ | 970 | $ | 691 | $ | 513 | $ | 386 | $ | 316 | ||||||||||
Operating expenses: | ||||||||||||||||||||
Marketing and sales | 1,429 | 977 | 1,074 | 927 | 610 | |||||||||||||||
Research and development | 1,091 | 1,396 | 1,285 | 1,048 | 754 | |||||||||||||||
General and administrative | 5,068 | 3,711 | 3,210 | 2,448 | 1,781 | |||||||||||||||
Total stock-based compensation expense | $ | 8,558 | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 3,461 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Consolidated Balance Sheets Data | ||||||||||||||||||||
Cash and cash equivalents | $ | 36,707 | $ | 68,795 | $ | 47,653 | $ | 43,329 | $ | 43,039 | ||||||||||
Working capital | 121,249 | 134,357 | 111,740 | 89,102 | 96,132 | |||||||||||||||
Total assets | 518,738 | 414,241 | 361,036 | 287,031 | 230,175 | |||||||||||||||
Total liabilities | 57,523 | 34,408 | 33,391 | 21,492 | 18,532 | |||||||||||||||
Total shareholders' equity | $ | 461,215 | $ | 379,833 | $ | 327,645 | $ | 265,539 | $ | 211,643 | ||||||||||
Item 7. 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 the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are anan e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded,injection-molded, CNC-machined, 3D-printed and 3D printedsheet metal-fabricated custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast”custom parts to product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our product lines to the millions of product developers and engineers who use 3D CAD software to design products across a diverse range of end-markets.end markets. Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal.
We have experienced significant growth since our inception. Since we first introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can support. In 2014, we acquired FineLine Prototyping, Inc. (FineLine) to expand the number of process types we offer to include stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS). In 2017, we acquired RAPID to expand the number of process types we offer to include sheet metal fabrication and expand our CNC machining capability. We also continually seek to enhance other aspects of our technology and manufacturing processes, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly to enhance our technology and manufacturing processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set of product developers and engineers.customers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 67%89%, 85%86% and 87%88% of our revenue in 2017, 2016 2015 and 2014,2015, respectively, derived from existing customers.
We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers and engineers are located. We entered the European market in 2005, launched operations in Japan in late 2009 and further expanded into Europe through our acquisition of Alphaform in 2015.2015 and the United States through our acquisition of RAPID in November 2017. As of December 31, 2016,2017, we had sold products into approximately 60 countries. Our revenue outside of the United States accounted for approximately 25%24%, 27%25% and 26%27% of our consolidated revenue in the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions.
We have grown our total revenue from $126.0$163.1 million in 20122013 to $298.1$344.5 million in 2016.2017. During this period, our operating expenses increased from $41.2$50.4 million in 20122013 to $105.2$121.6 million in 2016.2017. We have grown our income from operations from $34.9$51.3 million in 20122013 to $61.8$72.2 million in 2016.2017. Our recent growth in revenue and income from operations has been accompanied by increased cost of revenues and operating expenses. We expect to increasingly investincrease investment in our operations to support anticipated future growth as discussed more fully below.
In addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target product developer and engineer customers have increasing e-commerce expectations, are facing increased pressure to accelerate the time to market for their products and continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom parts, starting with our elegant web interface through which a product developer or engineer submits a 3D CAD part design. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts in low volumes, including, among others, changes in product developer and engineer preferences or needs, developments in our industry and among our competitors, and factors impacting new product development volume such as economic conditions. For a more complete discussion of the risks facing our business, see Part 1I, Item 1A. “Risk Factors.”Factors” of this Annual Report on Form 10-K.
Key Financial Measures and Trends
Revenue
Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, and 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 revenue is generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2016.2017. 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, offering additional product lines such as the introduction of our CNC Machining product line in 2007 and 3D Printing through our acquisition of FineLine in 2014, expanding internationally such as the opening of our Japanese office in 2009 and through our acquisition of Alphaform in October 2015, improving the usability of our product lines such as our web-centric applications, and expanding the breadth and scope of our products by adding more sizes and materials to our offerings.including:
| • | the introduction of our 3D Printing product line through our acquisition of FineLine in 2014; | |
| • | expanding internationally through our acquisition of Alphaform in October 2015; | |
| • | the introduction of our Sheet Metal product line through our acquisition of RAPID in 2017; | |
| • | continuously improving the usability of our product lines such as our web-centric applications; and | |
| • | expanding the breadth and scope of our products by adding more sizes and materials to our offerings. |
D
During 201uring 2016,7, we served 31,45737,267 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.5% over the same period in 2016. The information does not include 3D Printing, Injection Molding and Sheet Metal customers, principally related to our recent acquisitions, who do not utilize our web-based interface.
During 2016, we served 31,457 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 15.5% over the same period in 2015. Of those product developersThe information does not include 3D Printing and engineers served in 2016, 16,149 were existing product developers and engineersInjection Molding customers resulting from the Alphaform acquisition who had ordered from us in the past, an increase of 20% over the comparable period in 2015, and 15,308 were new product developers and engineers who ordered from us for the first time in 2016, an increase of 12% over the comparable period in 2015.do not utilize our web-based interface.
DuringDuring 2015, we served 27,235 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 26%26.0% over the same period in 2014. Of those product developersThe information does not include 3D Printing and engineers served in 2015, 13,504 were existing product developers and engineersInjection Molding customers resulting from the Alphaform acquisition who had ordered from us in the past, an increase of 37% over the comparable period in 2014, and 13,731 were new product developers and engineers who ordered from us for the first time in 2015, an increase of 17% over the comparable period in 2014.do not utilize our web-based interface.
During 2014, we served 21,552 unique product developers and engineers, an increase of 34% over the same period in 2013. Of those product developers and engineers served in 2014, 9,839 were existing product developers and engineers who had ordered from us in the past, an increase of 26% over the comparable period in 2013, and 11,713 were new product developers and engineers who ordered from us for the first time in 2014, an increase of 41% over the comparable period in 2013. We experienced strong growth in the number of unique product developers and engineers served in 2014, partially as a result of our acquisition of FineLine in April 2014.
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 custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.
Our business model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the expectations for quick delivery of our products to our customers.customers. Therefore, during each of 2017, 2016 2015 and 20142015 we made significant investments in additional factory space, equipment, and infrastructure in the United States. We also made significant investments in infrastructure in Europe in 2017 and significant investments in additional factory space in Japan in 2016. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that these additional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins to remain relatively consistent over time.
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 and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.
Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories, available capacity and our operating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent through all our markets.
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 recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn,, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and 3D printedsheet 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.
Marketing and ssales.ales. 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. 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.base and grow revenue.
Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation, depreciation on equipment personnel and otheroutside service costs related overhead.to the development of new processes and product lines, enhancement of existing product lines, software developed for internal use, maintenance of internally developed software, quality assurance and testing. All of our internal research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings.offerings and supporting business systems.
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. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.
Other Income, NetIncome, Net
Other income,, 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 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 TaxesIncome Taxes
Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law inWe expect income taxes the United States. As a result, many provisions will affect our tax rate in future years. Some provisions, such as the reduction to increase as our taxable income increases and we expectthe U.S. corporate tax rate from 35% to 21%, beginning in 2018, will likely reduce our effective tax rate in future years. Other provisions taken in isolation, such as the elimination of the Domestic Production Activities Deduction, will likely result in an increase to remain relatively constant.our tax rate. Overall, we anticipate our effective tax rate will be lower in 2018 and beyond than in recent periods based on the current tax laws.
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.
Year Ended December 31, | Change | Year Ended December 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2016 | 2015 | $ | % | 2015 | 2014 | $ | % | ||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 298,055 | 100.0 | % | $ | 264,106 | 100.0 | % | $ | 33,949 | 12.9 | $ | 264,106 | 100.0 | % | $ | 209,583 | 100.0 | % | $ | 54,523 | 26.0 | % | |||||||||||||||||||||||||
Cost of revenue | 131,118 | 44.0 | 109,703 | 41.5 | 21,415 | 19.5 | 109,703 | 41.5 | 81,182 | 38.7 | 28,521 | 35.1 | ||||||||||||||||||||||||||||||||||||
Gross profit | 166,937 | 56.0 | 154,403 | 58.5 | 12,534 | 8.1 | 154,403 | 58.5 | 128,401 | 61.3 | 26,002 | 20.3 | ||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Marketing and sales | 46,131 | 15.5 | 39,188 | 14.8 | 6,943 | 17.7 | 39,188 | 14.8 | 29,144 | 13.9 | 10,044 | 34.5 | ||||||||||||||||||||||||||||||||||||
Research and development | 22,388 | 7.5 | 18,350 | 6.9 | 4,038 | 22.0 | 18,350 | 6.9 | 16,607 | 7.9 | 1,743 | 10.5 | ||||||||||||||||||||||||||||||||||||
General and administrative | 36,651 | 12.3 | 29,716 | 11.3 | 6,935 | 23.3 | 29,716 | 11.3 | 22,122 | 10.6 | 7,594 | 34.3 | ||||||||||||||||||||||||||||||||||||
Total operating expenses | 105,170 | 35.3 | 87,254 | 33.0 | 17,916 | 20.5 | 87,254 | 33.0 | 67,873 | 32.4 | 19,381 | 28.6 | ||||||||||||||||||||||||||||||||||||
Income from operations | 61,767 | 20.7 | 67,149 | 25.5 | (5,382 | ) | (8.0 | ) | 67,149 | 25.5 | 60,528 | 28.9 | 6,621 | 10.9 | ||||||||||||||||||||||||||||||||||
Other income, net | 2,454 | 0.8 | 712 | 0.2 | 1,742 | * | 712 | 0.2 | 3 | 0.0 | 709 | * | ||||||||||||||||||||||||||||||||||||
Income before income taxes | 64,221 | 21.5 | 67,861 | 25.7 | (3,640 | ) | (5.4 | ) | 67,861 | 25.7 | 60,531 | 28.9 | 7,330 | 12.1 | ||||||||||||||||||||||||||||||||||
Provision for income taxes | 21,514 | 7.2 | 21,347 | 8.1 | 167 | 0.8 | 21,347 | 8.1 | 18,896 | 9.0 | 2,451 | 13.0 | ||||||||||||||||||||||||||||||||||||
Net income | $ | 42,707 | 14.3 | % | $ | 46,514 | 17.6 | % | $ | (3,807 | ) | -8.2 | % | $ | 46,514 | 17.6 | % | $ | 41,635 | 19.9 | % | $ | 4,879 | 11.7 | % | |||||||||||||||||||||||
Year Ended | Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||
December 31, | Change | December 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2017 | 2016 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 344,490 | 100.0 | % | $ | 298,055 | 100.0 | % | $ | 46,435 | 15.6 | % | $ | 298,055 | 100.0 | % | $ | 264,106 | 100.0 | % | $ | 33,949 | 12.9 | % | ||||||||||||||||||||||||
Cost of revenue | 150,648 | 43.7 | 131,118 | 44.0 | 19,530 | 14.9 | 131,118 | 44.0 | 109,703 | 41.5 | 21,415 | 19.5 | ||||||||||||||||||||||||||||||||||||
Gross profit | 193,842 | 56.3 | 166,937 | 56.0 | 26,905 | 16.1 | 166,937 | 56.0 | 154,403 | 58.5 | 12,534 | 8.1 | ||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Marketing and sales | 56,856 | 16.5 | 46,131 | 15.5 | 10,725 | 23.2 | 46,131 | 15.5 | 39,188 | 14.8 | 6,943 | 17.7 | ||||||||||||||||||||||||||||||||||||
Research and development | 23,560 | 6.8 | 22,388 | 7.5 | 1,172 | 5.2 | 22,388 | 7.5 | 18,350 | 6.9 | 4,038 | 22.0 | ||||||||||||||||||||||||||||||||||||
General and administrative | 41,200 | 12.0 | 36,651 | 12.3 | 4,549 | 12.4 | 36,651 | 12.3 | 29,716 | 11.3 | 6,935 | 23.3 | ||||||||||||||||||||||||||||||||||||
Total operating expenses | 121,616 | 35.3 | 105,170 | 35.3 | 16,446 | 15.6 | 105,170 | 35.3 | 87,254 | 33.0 | 17,916 | 20.5 | ||||||||||||||||||||||||||||||||||||
Income from operations | 72,226 | 21.0 | 61,767 | 20.7 | 10,459 | 16.9 | 61,767 | 20.7 | 67,149 | 25.5 | (5,382 | ) | (8.0 | ) | ||||||||||||||||||||||||||||||||||
Other income, net | 2,209 | 0.6 | 2,454 | 0.8 | (245 | ) | (10.0 | ) | 2,454 | 0.8 | 712 | 0.2 | 1,742 | * | ||||||||||||||||||||||||||||||||||
Income before income taxes | 74,435 | 21.6 | 64,221 | 21.5 | 10,214 | 15.9 | 64,221 | 21.5 | 67,861 | 25.7 | (3,640 | ) | (5.4 | ) | ||||||||||||||||||||||||||||||||||
Provision for income taxes | 22,657 | 6.6 | 21,514 | 7.2 | 1,143 | 5.3 | 21,514 | 7.2 | 21,347 | 8.1 | 167 | 0.8 | ||||||||||||||||||||||||||||||||||||
Net income | $ | 51,778 | 15.0 | % | $ | 42,707 | 14.3 | % | $ | 9,071 | 21.2 | % | $ | 42,707 | 14.3 | % | $ | 46,514 | 17.6 | % | $ | (3,807 | ) | (8.2 | )% | |||||||||||||||||||||||
* | Percentage change not meaningful |
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
(dollars in thousands) | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 | ||||||||||||||||||
Stock options and grants | $ | 6,177 | $ | 5,580 | $ | 4,386 | $ | 7,954 | $ | 6,177 | $ | 5,580 | ||||||||||||
Employee stock purchase plan | 598 | 502 | 423 | 604 | 598 | 502 | ||||||||||||||||||
Total stock-based compensation expense | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 8,558 | $ | 6,775 | $ | 6,082 | ||||||||||||
Cost of revenue | $ | 691 | $ | 513 | $ | 386 | $ | 970 | $ | 691 | $ | 513 | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Marketing and sales | 977 | 1,074 | 927 | 1,429 | 977 | 1,074 | ||||||||||||||||||
Research and development | 1,396 | 1,285 | 1,048 | 1,091 | 1,396 | 1,285 | ||||||||||||||||||
General and administrative | 3,711 | 3,210 | 2,448 | 5,068 | 3,711 | 3,210 | ||||||||||||||||||
Total stock-based compensation expense | $ | 6,775 | $ | 6,082 | $ | 4,809 | $ | 8,558 | $ | 6,775 | $ | 6,082 | ||||||||||||
Comparison of Years Ended December 31, 20172016and 20162015
Revenue
Revenue by reportable segment and the related changes for 2017 and 2016 is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | Change | ||||||||||||||||||||||
(dollars in thousands) | $ | % of Total Revenue | $ | % of Total Revenue | $ | % | ||||||||||||||||||
Revenue | ||||||||||||||||||||||||
United States | $ | 263,086 | 76.4 | % | $ | 223,930 | 75.1 | % | $ | 39,156 | 17.5 | % | ||||||||||||
Europe | 70,154 | 20.4 | 63,365 | 21.3 | 6,789 | 10.7 | ||||||||||||||||||
Japan | 11,250 | 3.2 | 10,760 | 3.6 | 490 | 4.6 | ||||||||||||||||||
Total revenue | $ | 344,490 | 100.0 | % | $ | 298,055 | 100.0 | % | $ | 46,435 | 15.6 | % | ||||||||||||
Our revenue increased $46.4 million, or 15.6%, for 2017 compared with 2016. By reportable segment, revenue in the United States increased $39.2 million, or 17.5%, for 2017 compared with 2016. Revenue growth in the United States was partially attributable to the acquisition of RAPID in November 2017, which contributed $3.6 million in revenue. Excluding RAPID, revenue in the United States increased $35.6 million, or 15.9%, for 2017 compared with 2016.
Revenue in Europe increased $6.8 million, or 10.7%, for 2017 compared with 2016. Revenue in Japan increased $0.5 million, or 4.6%, for 2017 compared with 2016.
Our revenue growth in 2017 was the result of increased volume of the product developers and engineers we served. During 2017, we served 37,267 unique product developers and engineers, an increase of 18.5% over 2016. Average revenue per product developer or engineer remained relatively consistent during 2017 as compared to 2016.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. The impact on international revenue in 2017 compared to 2016 as a result of foreign currency movements was not material.
Revenue by product line and the related changes for 2017 and 2016 is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | Change | ||||||||||||||||||||||
(dollars in thousands) | $ | % of Total Revenue | $ | % of Total Revenue | $ | % | ||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Injection Molding | $ | 194,432 | 56.4 | % | $ | 175,974 | 59.0 | % | $ | 18,458 | 10.5 | % | ||||||||||||
CNC Machining | 103,739 | 30.1 | 81,407 | 27.3 | 22,332 | 27.4 | ||||||||||||||||||
3D Printing | 43,329 | 12.6 | 37,847 | 12.7 | 5,482 | 14.5 | ||||||||||||||||||
Sheet Metal | 1,767 | 0.5 | - | - | 1,767 | 100.0 | ||||||||||||||||||
Other Product | 1,223 | 0.4 | 2,827 | 1.0 | (1,604 | ) | (56.7 | ) | ||||||||||||||||
Total revenue | $ | 344,490 | 100.0 | % | $ | 298,055 | 100.0 | % | $ | 46,435 | 15.6 | % | ||||||||||||
By product line, our revenue growth was driven by a 10.5% increase in Injection Molding revenue, a 27.4% increase in CNC Machining revenue and a 14.5% increase in 3D Printing revenue, in each case for 2017 compared with 2016, which was partially offset by a $1.6 million decrease in Other Product revenue. As a result of our acquisition of RAPID in November 2017, we experienced a $1.8 million increase in Sheet Metal revenue, a $1.7 million increase in CNC Machining revenue and a $0.2 million increase in Other Product revenue.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $19.5 million, or 14.9%, for 2017 compared to 2016, which was slower than the rate of revenue increase of 15.6% for 2017 compared to 2016 reflecting the realization of productivity improvements. The increase in cost of revenue resulted from the growth of the business, including via the RAPID acquisition, and was due to raw material and production cost increases of $5.6 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $12.7 million and equipment and facility-related cost increases of $1.2 million.
Gross Profit and Gross Margin. Gross profit increased from $166.9 million in 2016 to $193.8 million in 2017 primarily due to an increase in revenue growth. Gross margin increased from 56.0% of revenue in 2016 to 56.3% of revenue in 2017 primarily due to increases in revenue and realization of manufacturing productivity improvements.
Income from Operations
Income from operations increased $10.5 million, or 16.9%, for 2017 compared with 2016. By reportable segment, income from operations for the United States and Europe increased 15.5% and 10.2%, respectively, as a percentage of revenue for 2017 compared with 2016. Income from operations for Corporate Unallocated and Japan decreased 11.6% as a percentage of revenue for 2017 compared with 2016.
Operating Expenses
Marketing and Sales. Marketing and sales expense increased $10.7 million, or 23.2%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $10.3 million and marketing program cost increases of $0.4 million. The increase in marketing program costs is the result of our focus on funding those programs that have proven to be the most effective in growing our business.
Research and Development. Our research and development expense increased $1.2 million, or 5.2%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $0.9 million and other operating cost increases of $0.3 million.
General and Administrative. Our general and administrative expense increased $4.5 million, or 12.4%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $4.0 million, professional service cost increases of $0.4 million primarily related to outside legal and accounting services, and stock-based compensation cost increases of $1.3 million, partially offset by a decrease in facility and administrative costs of $1.2 million resulting from $0.8 million of non-recurring costs related to facility moves and vacating leases in 2016.
Other Income, Net and Provision for Income Taxes
Other Income, Net. We recognized other income, net of $2.2 million in 2017, a decrease of $0.3 million compared to other income, net of $2.5 million for 2016. Other income, net decreased primarily due to a decrease of $1.1 million in foreign currency exchange gains, which were partially offset by a $0.4 million favorable legal settlement in the second quarter of 2017 and an increase of $0.5 million in interest income on investments.
Provision for Income Taxes. Our income tax provision increased by $1.1 million for 2017 compared to 2016. This was the result of a significant increase to taxable income along with a tax provision for the transition tax that was part of the Tax Cuts and Jobs Act. Partially offsetting these tax increases was a tax benefit recorded to reflect the decrease to the valuation of our deferred tax liabilities caused by the U.S. corporate income tax rate reduction. As a result of this decrease to the valuation of deferred tax liability, our effective tax rate decreased to 30.4% in 2017 from 33.4% in 2016.
Comparison of Years Ended December 31, 2016 and 2015
Revenue
Revenue by reportable segment and the related changes for 2016 and 2015 is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | Change | ||||||||||||||||||||||
(dollars in thousands) | $ | % of Total Revenue | $ | % of Total Revenue | $ | % | ||||||||||||||||||
Revenue | ||||||||||||||||||||||||
United States | $ | 223,930 | 75.1 | % | $ | 208,018 | 78.7 | % | $ | 15,912 | 7.6 | % | ||||||||||||
Europe | 63,365 | 21.3 | 47,433 | 18.0 | 15,932 | 33.6 | ||||||||||||||||||
Japan | 10,760 | 3.6 | 8,655 | 3.3 | 2,105 | 24.3 | ||||||||||||||||||
Total revenue | $ | 298,055 | 100.0 | % | $ | 264,106 | 100.0 | % | $ | 33,949 | 12.9 | % | ||||||||||||
Our revenue increased $34.0$34.0 million, or 12.9%12.9%, for 2016 compared with 2015. By reportable segment, revenue in the United States increased $15.9 million, or 7.6%, for 2016 compared with 2015. Revenue in Europe increased $15.9 million, or 33.6%, for 2016 compared with 2015, partially driven by the acquisition of Alphaform in the fourth quarter of 2015. Revenue in Japan increased $2.1 million, or 24.3%, for 2016 compared with 2015.
Our revenue growth in 2016 was the result of increased volume of the product developers and engineers we served. During 2016, we served 31,457 unique product developers and engineers, an increase of 15.5% over 2015. Average revenue per product developer or engineer decreased 6% during 2016 as compared to 2015.2015 due to changes in the mix of products purchased by our customers.
OurOur revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. InternationalInternational revenue decreased by $1.3 million in 2016 compared to 2015 as a result of foreign currency movements, primarily the strengthening of the United States dollar relative to the British pound.
Revenue by product line and the related changes for 2016 and 2015 is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | Change | ||||||||||||||||||||||
(dollars in thousands) | $ | % of Total Revenue | $ | % of Total Revenue | $ | % | ||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Injection Molding | $ | 175,974 | 59.0 | % | $ | 163,387 | 61.8 | % | $ | 12,587 | 7.7 | % | ||||||||||||
CNC Machining | 81,407 | 27.3 | 74,368 | 28.2 | 7,039 | 9.5 | ||||||||||||||||||
3D Printing | 37,847 | 12.7 | 25,132 | 9.5 | 12,715 | 50.6 | ||||||||||||||||||
Other Product | 2,827 | 1.0 | 1,219 | 0.5 | 1,608 | 131.9 | ||||||||||||||||||
Total revenue | $ | 298,055 | 100.0 | % | $ | 264,106 | 100.0 | % | $ | 33,949 | 12.9 | % | ||||||||||||
By product line, our revenuerevenue growth was driven by a 7.7% increase in Injection Molding revenue, a 9.5% increase in CNC Machining revenue and a 50.6% increase in 3D Printing revenue, in each case for 2016 compared with 2015, as well as a $1.6 million increase in Other Product revenue throughdriven by our acquisition of Alphaform.
During the second quarter of 2016, we made the decision to discontinue offering two manufacturing processes within our Injection Molding product lines,line, Metal Injection Molding (MIM) and Magnesium Thixomolding (Thixo). In addition, in the second quarter of 2016, we decided to exit our non-core resin resale business, which was acquired from Alphaform in October 2015. Revenue from resin resale was included in Other Product revenue in 2015 and 2016. MIM, Thixo and resin resale inthe aggregate represented approximately 1.6% of revenue during 2016.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $21.4 million, or 19.5%, for 2016 compared to 2015, which was greater than the rate of revenue increase of 12.9% for 2016 compared to 2015. The increase in cost of revenue resulted from the growth of the business, including via the Alphaform acquisition. Additional increase in the cost of revenue was due to raw material and production cost increases of $5.9 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $10.4 million and equipment and facility-related cost increases of $5.1 million. Equipment and facility-related cost increases included $0.6 million of accelerated depreciation of leasehold assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016.
Gross Profit and Gross Margin. Gross profit increased from $154.4 million in 2015 to $166.9 million in 2016 primarily due to increasing revenue growth as noted above. Gross margin decreased from 58.5% of revenue in 2015 to 56.0% of revenue in 2016 primarily as a result of our lower margins from the acquired Alphaform business, as well as increases in investments of additional manufacturing capacity, accelerated depreciation of leasehold assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016 and the impact of fluctuations in foreign currency exchange rates.
Income from Operations
Income from operations decreased $5.4 million, or 8.0%, for 2016 compared with 2015. By reportable segment, income from operations for the United States and Corporate Unallocated and Japan increased 3.3% and 20.2%, respectively, as a percentage of revenue for 2016 compared with 2015. Income from operations for Europe decreased 12.4% as a percentage of revenue for 2016 compared with 2015.
Operating Expenses Other Income (Expense), Net and Provision for Income Taxes
Marketing and Sales.Sales. Marketing and sales expense increased $6.9 million, or 17.7%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $6.2 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs thatwhich have proven to be the most effective in growing our business.
Research and Development. Our research and development expense increased $4.0 million, or 22.0%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $3.1 million, other operating cost increases of $0.8 million and professional services cost increases of $0.1 million.
General and Administrative. Our general and administrative expense increased $6.9 million, or 23.3%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.2 million, facility and administrative cost increases of $3.6 million, professional service cost increases of $0.6 million for outside legal and accounting services and stock-based compensation cost increases of $0.5 million. The increase in administrative costs for 2016 includes accelerated depreciation and facilities-related charges of $0.8 million resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016.
Other Income, Net and Provision for Income Taxes
Other IncomeIncome, Net.Net. We recognized other income, net of $2.5 million in 2016, an increase of $1.8 million compared to other income, net of $0.7 million for 2015. Other income, net included $1.4 million in foreign currency exchange gains for 2016 compared to $0.5 million in foreign currency exchange losses in 2015. The increase was primarily due to the amount of foreign-currency denominated cash balances abroad and movements in the underlying exchange rates at the end of the period.
Provision for Income Taxes. Our income tax provision increased $0.2 million for 2016 compared to 2015 due toresulting in an increase of taxable income. Our effective tax rate increasedincrease to 33.4% in 2016 from 31.5% in 2015 due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current year.
Year Ended December 31, 2015 2014 Change (dollars in thousands) % of Total Revenue % of Total Revenue % Revenue United States Europe Japan Total revenue Year Ended December 31, 2015 2014 Change (dollars in thousands) $ % of Total Revenue $ % of Total Revenue $ % Revenue Injection Molding CNC Machining 3D Printing Other Product Total revenue Selected Quarterly Results of Operations Data The following tables set forth selected unaudited quarterly results of operations datafor Three Months Ended Three Months Ended (in thousands, except share and per share amounts) Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31, 2016 Dec. 31, 2015 Sep. 30, 2015 Jun. 30, 2015 Mar. 31, 2015 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31, 2016 (unaudited) (unaudited) Consolidated Statements of Comprehensive Income Data: Revenue Cost of revenue Gross profit Operating expenses: Marketing and sales Research and development General and administrative Total operating expenses Income from operations Other income (expense), net Other income, net Income before income taxes Provision for income taxes Net income Net income per share: Basic Diluted Shares used to compute net income per share: Basic Diluted Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the Year Ended December 31, Year Ended December 31, (dollars in thousands) 2016 2015 2014 2017 2016 2015 Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Effect of exchange rates on cash and cash equivalents Net increase in cash and cash equivalents Net increase (decrease) in cash and cash equivalents Sources of Liquidity We finance our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $36.7 million as of December 31, 2017, a decrease of $32.1 million from December 31, 2016. The decrease in our cash was due primarily to the acquisition of RAPID in November 2017. We had cash and cash equivalents of $68.8 million as of December 31, 2016, an increase of $21.1 million from December 31, 2015. The increase in our cash was due primarily As of December 31, 2017 Cash Flows from Operating Activities Cash flow from operating activities of $81.8 million during 2017 primarily consisted of net income of $51.8 million, adjusted for certain non-cash items, including depreciation and amortization of $18.5 million, stock-based compensation expense of $8.6 million and changes in operating assets and liabilities and other items totaling $2.9 million. The cash flow from operating activities during 2017 compared to 2016 increased $4.2 million due to increases in net income of $9.0 million, increases in stock-based compensation expense of $1.8 million driven by an increased level of equity grants to employees and increases in depreciation and amortization of $1.0 million driven by an increase in capital investments. These increases were partially offset by decreases to deferred taxes of $1.6 million, amortization of held-to-maturity securities of $0.1 million and changes in operating assets and liabilities of $5.9 million. Cash flow from operating activities of $77.5 million during 2016 primarily consisted of net income of $42.7 million, adjusted for certain non-cash items, including depreciation and amortization of $17.5 million, stock-based compensation expense of $6.8 million, deferred taxes of $2.8 million, loss on impairment of assets of $0.5 million and amortization of Cash flow from operating activities of $64.1 million during 2015 primarily consisted of net income of $46.5 million, adjusted for certain non-cash items, including depreciation and amortization of $14.1 million and stock-based Cash Flows from Investing Activities Cash used in investing activities was $123.9 million for the year ended December 31, 2017, consisting of $110.5 million for the purchase of RAPID, $32.6 million for the purchase of property and equipment primarily to expand our production capacity, $20.0 million for the purchase of marketable securities and $8.8 million for the purchases of other assets and investments, which were partially offset by $48.0 million in proceeds from maturities and call redemption of marketable securities. Cash used in investing Cash used in investing activities was $63.6 million for the year ended December 31, 2015, consisting of $44.4 million for the purchase of property and equipment primarily to expand our production capacity, $5.0 million for the payments on business acquisitions and $66.4 million for the purchase of marketable securities, which were partially offset by $52.2 million in proceeds from maturities and call redemption of marketable securities. Cash Flows from Financing Activities Cash provided by financing activities was $9.2 million for the year ended December 31, 2017, consisting of $5.0 million in short-term debt obligations and $8.6 million in proceeds from exercises of stock options, partially offset by $4.4 million for repurchases of common stock. Cash provided by financing activities was $ Cash provided by financing activities was Operating and Capital Expenditure Requirements We believe, based on our current operating plan, that our cash balances and cash generated through operations and interest income will be sufficient to meet our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell equity or convertible debt securities or enter into credit facilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all. Our future capital requirements will depend on many factors, including the following: the revenue growth in Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines; costs of operations, including costs relating to expansion and growth; the emergence of competing or complementary technological developments; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in litigation-related activities; and the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We Contractual Obligations As of December 31, Payment Due by Period Payment Due by Period (in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Operating leases Total The table above reflects only payment obligations that are fixed and determinable. Our commitments Financing Arrangements December 31, (in thousands) 2017 2016 Revolving Credit Facility, with interest rates from 2.50% to 2.56%, due at maturity in November 2019 Total Financing Obligations Inflation We believe that inflation and changing prices have not had a material effect on our financial condition during the three most recent fiscal years. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. Critical Accounting Policies and Use of Estimates The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill, other intangible assets, stock-based compensation, and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. See the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about these critical accounting policies, as well as a description of our other accounting policies. Revenue Recognition We recognize revenue in accordance with ASC 605, Revenue Recognition, which states that revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured. Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our Injection Molding, CNC Machining, 3D Printing, Sheet Metal and Other product lines. As of January 1, 2018, the Company has adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. The Company manufactures parts that have no alternative use to the Company (since the parts are custom made to specific customer orders), and the Company believes for certain customers there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the Company will recognize revenue over time. Goodwill We recognize goodwill in accordance with ASC 350, Other Intangible Assets We recognize other intangibles assets in accordance with ASC 350, Stock-Based Compensation We determine our stock-based compensation in accordance with ASC 718, Compensation—Stock Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include our expected term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related stock-based compensation expense may be materially impacted. The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base the risk-free interest rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that our stock options are expected to be outstanding. The fair value of each new employee and non-employee director option awarded was estimated on the date of grant for the periods below using the Black-Scholes option pricing model with the following assumptions: Year Ended December 31, Year Ended December 31, 2016 2015 2014 2017 2016 2015 Risk-free interest rate Expected life (years) Expected volatility Expected dividend yield Weighted average grant date fair value Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of our common stock during each offering period at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the last trading day of the offering period. We determine the fair value stock-based compensation related to our ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model. The fair value of each offering period was estimated using the Black-Scholes option pricing model with the following assumptions: Year ended December 31, Year ended December 31, 2016 2015 2014 2017 2016 2015 Risk-free interest rate Expected life (months) Expected volatility Expected dividend yield There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods, or if we decide to use a different valuation model, such as a lattice model, the stock-based compensation expense that we record in the future under ASC 718 may differ significantly from what we have recorded using the Black-Scholes option pricing model and could materially affect our operating results. We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded In future periods, our stock-based compensation expense is expected to increase due to our existing unrecognized stock-based compensation and the issuance of additional stock-based awards to continue to attract and retain employees and non-employee directors. Income Taxes We account for income taxes in accordance with ASC 740, Income ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Including interest and penalties, we have established a liability for uncertain tax positions of During the first quarter of 2017, the Company adopted the Financial Accounting Standards Board (FASB) In January 2017, the FASB issued ASU 2017-01, Business Combinations, which is intended to clarify the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance effective October 1, 2017. The impact on its consolidated financial statements is not material. Recently issued accounting pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application methods. On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its consolidated financial statements, In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which is intended to reduce diversity in how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance on its consolidated financial statements, In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material. Quantitative and Qualitative Disclosure of Market Risks Our exposure to market risk is confined to our cash and cash equivalent balances and investments. The primary goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of debt securities with various maturities ranging from one to three years. Due to the nature of our investment portfolio, we are subject to interest rate risks, which we mitigate by holding our investments to maturity. In future periods, we will continue to evaluate our investment policy in order to continue our overall goals. Foreign Currency Risk As a result of our foreign operations, we have revenue, Our operating results and cash flows are adversely impacted when the United States dollar appreciates relative to other foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign exchange rates. We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be assessed by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized Item 8. Financial Statements and Supplementary Data Proto Labs, Inc. Index to Consolidated Financial Statements Page Consolidated Balance Sheets at December 31, Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 Report of Independent Registered Public Accounting Firm of Proto Labs, Inc. We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. (the Company) as of December 31, 2017 and 2016, In our opinion, the consolidated financial statements We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young We have served as the Company Minneapolis, Minnesota February Report of Independent Registered Public Accounting Firm of Proto Labs, Inc. Opinion on Internal Control over Financial Reporting We have audited Proto Labs, Inc.’s internal control over financial reporting as of December 31, As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Rapid Manufacturing Group, LLC, which is included in the 2017 consolidated financial statements of the Company and constituted 3% of total assets as of December 31, 2017 and 1% of revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Rapid Manufacturing Group, LLC. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Proto Labs, Inc. as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notesand our report dated February 23, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the We conducted our audit in accordance with the standards of the Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any /s/ Ernst & Young LLP Minneapolis, February Proto Labs, Inc. (In thousands, except share and per share amounts) December 31, December 31, 2016 2015 2017 2016 Assets Current assets Cash and cash equivalents Short-term marketable securities Accounts receivable, net of allowance for doubtful accounts of $442 and $330 as of December 31, 2016 and December 31, 2015, respectively Accounts receivable, net of allowance for doubtful accounts of $757 and $442 as of December 31, 2017 and December 31, 2016, respectively Inventory Prepaid expenses and other current assets Income taxes receivable Total current assets Property and equipment, net Goodwill Other intangible assets, net Long-term marketable securities Other long-term assets Total assets Liabilities and shareholders' equity Current liabilities Accounts payable Accrued compensation Accrued liabilities and other Short-term debt obligations Income taxes payable Total current liabilities Long-term income taxes payable Long-term deferred tax liabilities Other long-term liabilities Total liabilities Shareholders' equity Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of December 31, 2016 and December 31, 2015, respectively Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,504,868 and 26,200,718 shares as of December 31, 2016 and December 31, 2015, respectively Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of December 31, 2017 and December 31, 2016, respectively Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,828,651 and 26,504,868 shares as of December 31, 2017 and December 31, 2016, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity The accompanying notes are an integral part of these consolidated financial statements. Proto Labs, Inc. (In thousands, except share and per share amounts) Year Ended December 31, Year Ended December 31, 2016 2015 2014 2017 2016 2015 Statements of Operations: Revenue Cost of revenue Gross profit Operating expenses Marketing and sales Research and development General and administrative Total operating expenses Income from operations Other income, net Income before income taxes Provision for income taxes Net income Net income per share: Basic Diluted Shares used to compute net income per share: Basic Diluted Other Comprehensive Loss, net of tax Other Comprehensive Income (Loss), net of tax Foreign currency translation adjustments Comprehensive income The accompanying notes are an integral part of these consolidated financial statements. Proto Labs, Inc. (In thousands, except share and per share amounts) Common Stock Accumulated Common Stock Additional Accumulated Other Shares Amount Paid-In Capital Retained Earnings Total Comprehensive Shares Amount Earnings Total Balance at January 1, 2014 Common shares issued on exercise of options and other Excess tax benefit from stock option exercises Stock-based compensation expense Net income Other comprehensive income Foreign currency translation adjustment Comprehensive income Balance at December 31, 2014 Balance at January 1, 2015 Common shares issued on exercise of options and other Excess tax benefit from stock option exercises Stock-based compensation expense Net income Other comprehensive income Foreign currency translation adjustment Comprehensive income Balance at December 31, 2015 Common shares issued on exercise of options and other Excess tax benefit from stock option exercises Stock-based compensation expense Net income Other comprehensive income Foreign currency translation adjustment Comprehensive income Balance at December 31, 2016 Common shares issued on exercise of options and other Stock-based compensation expense Repurchases of Common Stock Net income Other comprehensive income Foreign currency translation adjustment Comprehensive income Balance at December 31, 2017 The accompanying notes are an integral part of these consolidated financial statements. Proto Labs, Inc. (In thousands) Year Ended December 31, Year Ended December 31, 2016 2015 2014 2017 2016 2015 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Deferred taxes Excess tax benefit from stock-based compensation Loss on impairment of assets Gain on acquisition Amortization of held-to-maturity securities Other Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Prepaid expenses and other Income taxes Accounts payable Accrued liabilities and other Net cash provided by operating activities Investing activities Purchases of property and equipment Cash used for acquisitions, net of cash acquired Purchases of other assets and investments Purchases of marketable securities Proceeds from maturities of marketable securities Net cash used in investing activities Financing activities Payments on debt Proceeds from issuance of debt Acquisition-related contingent consideration Repurchases of common stock Proceeds from exercises of stock options and other Excess tax benefit from stock-based compensation Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental cash flow disclosure Cash paid for interest Cash paid for taxes The accompanying notes are an integral part of these consolidated financial statements. Proto Labs, Inc. Notes to Consolidated Financial Statements Note 1 — Nature of Business Organization and business Proto Labs, Inc. and its subsidiaries (Proto Labs, the Company, we, us, or our) is an e-commerce driven digital manufacturer of quick-turn, on-demand Name Location PL-US International LLC United States Rapid Manufacturing Group LLC United States Rapid Sheet Metal LLC United States NH Rapid Machining LLC United States Rapid Wire and Cable LLC United States Proto Labs Ltd. United Kingdom PL Euro Services Ltd. United Kingdom PL International UK LLP United Kingdom PL International United Kingdom Proto Labs Distribution, Ltd. United Kingdom PL DE Holding GmbH Germany Proto Labs GmbH Germany Proto Labs Eschenlohe GmbH Germany PL Finland Oy Finland Proto Labs AB Sweden Proto Labs, G.K. Japan Note 2 — Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Comprehensive income Components of comprehensive income include net income and foreign currency translation adjustments. Comprehensive income is disclosed in the accompanying consolidated statements of comprehensive income and consolidated statements of shareholders’ equity. Proto Labs, Inc. Notes to Consolidated Financial Statements Accounting estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include cash and other investments, Marketable securities Marketable securities include held-to-maturity debt securities recorded at amortized cost. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in other income, net. Interest on securities classified as held to maturity is included in other income, net. The classification of marketable securities as current or non-current is dependent upon the Accounts receivable and allowance for doubtful accounts Accounts receivable are reported at the invoiced amount less an allowance for doubtful accounts. As of each balance sheet date, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received. Inventory Inventory consists primarily of raw materials, which are recorded at the lower of Property, equipment and leasehold improvements Property, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an asset’s useful life are capitalized. Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including amortization of leasehold improvements and assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturing equipment is depreciated over 3 to 15 years, office furniture and equipment are depreciated over 3 to 7 years, computer hardware and software are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold improvements are depreciated over the estimated lives of the related assets or the life of the lease, whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the asset is put into use. The Company follows ASC350-40, Internal-Use Software, in accounting for internally developed software. As of December 31, 2017, $4.9 million of external software development costs were capitalized. As of December 31,2016 and 2015, all internal use software projects were in the post-implementation/operation stage and therefore, no software development costs were capitalized. Proto Labs, Inc. Notes to Consolidated Financial Statements Goodwill The Company recognizes goodwill in accordance with ASC 350, During the fourth quarter of2016, the Company changed the date of the annual impairment test from December 31 to October 1. The change was made to more closely align the impairment testing date with Other Intangible Assets Other intangible assets include internally developed software, customer relationships and other intangible assets acquired from Accounting for long-lived assets The Company periodically reviews the carrying amount of its property, equipment and leasehold improvements to determine if circumstances exist indicating an impairment or if depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an adjustment will be made to reduce the carrying amount of the specific assets to fair value. Revenue recognition The Company recognizes revenue when it is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our Injection Molding, CNC Machining, 3D Printing and Proto Labs, Inc. Notes to Consolidated Financial Statements Income taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by requiring that individual tax positions are recorded only when they meet a Stock-based compensation The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the date of grant using the Black-Scholes option-pricing model. Advertising costs Advertising is expensed as incurred and was Research and development Research and development expenses consist primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, quality assurance and testing. Foreign currency translation/transactions The Company translated the balance sheets of its foreign subsidiaries at period-end exchange rates and the income statement at the average exchange rates in effect throughout the period. The Company has recorded the translation adjustment as a separate component of Business combinations The Company accounts for business combinations in accordance with ASC 805, Business Combinations (ASC 805). On November 30, 2017, the Company acquired RAPID for $121.8 million, consisting of $110.5 million in cash and $11.3 million in the Company’s common stock. Proto Labs, Inc. Notes to Consolidated Financial Statements Recently In January 2017, the FASB issued ASU 2017-01,Business Combinations, which is intended to clarify the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance effective October 1, 2017. The impact on its consolidated financial statements is not material. Recently issued accounting pronouncements In May 2014, the FASB issued ASU No. On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU In February 2016, the FASB issued ASU In August 2016, the FASB issued ASU In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material. Proto Labs, Inc. Notes to 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 the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. The following table presents the calculation of net income per basic and diluted share attributable to common shareholders: Year Ended December 31, Year Ended December 31, (in thousands, except share and per share amounts) 2016 2015 2014 2017 2016 2015 Net Income Basic - weighted-average shares outstanding: Effect of dilutive securities: Employee stock options and other Employee stock options, restricted stock and other Diluted - weighted-average shares outstanding: Net income per share attributable to common shareholders: Basic Diluted Note 4 On November 30, 2017, the Company acquired Rapid Manufacturing Group, LLC (“RAPID”) for $121.8 million, consisting of $110.5 million in cash (net of cash acquired) and $11.3 million in the Company’s common stock. The operations of RAPID will be integrated into the operations of the Company. RAPID is a New Hampshire-based custom parts supplier specializing in quick-turn sheet metal fabrication and CNC machining. With the acquisition, the Company will be able to offer its customers another quick-turn manufacturing service while expanding its CNC machining capabilities. The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805. The fair value of the consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill of $99.6 million. The goodwill primarily relates to synergies resulting from the acquisition and is deductible for tax purposes over a 15-year period. The RAPID amortizable intangible assets were valued as of the acquisition date and were deemed to have a weighted-average useful life of 5.5 years. The customer relationships were valued at $7.5 million based on the Multi-Period Excess Earnings Method and are amortized over 6.0 years. The trade names were valued at $1.1 million based on the Relief-from-Royalty Method and are amortized over 2.0 years. The non-competition agreement was valued at $0.1 million based on the Discounted Cash Flow method and will be amortized over 5 years. The allocation of the purchase price to assets acquired and liabilities assumed is as follows: (in thousands) Assets acquired: Current assets Other long-term assets Total assets acquired Liabilities assumed: Current liabilities Other long-term liabilities Total liabilities assumed Net assets acquired Cash paid Cash acquired Net cash consideration Equity portion of purchase price Total purchase consideration The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2017 acquisition of RAPID had occurred at the beginning of fiscal 2016. These performance results may not be indicative of the actual results that would have occurred under the ownership and management of the Company. Year Ended December 31, 2017 2016 Revenue Net income The unaudited pro forma net income for the year ended December 31, 2017 excludes transaction costs of approximately $1.9 million and includes the increase in estimated depreciation expense of approximately $0.9 million and the increase in estimated amortization expense of approximately $3.0 million. The unaudited pro forma net income for the year ended December 31,2016 includes the impact of new stock options and restricted stock units granted to employees of approximately $0.2 million in connection with the acquisition, an increase in estimated depreciation expense of approximately $0.6 million and the increase in estimated amortization expense of approximately $3.1 million. The pro forma net income for the years ended December 31, 2017 and 2016 include the related tax effects of the adjustments. The pro forma information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the RAPID acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the RAPID acquisition occurred on January 1, 2016. The Company’s 2017 Consolidated Statements of Comprehensive Income include $3.6 million of revenue and $0.7 million of net loss related to RAPID. The net loss was primarily driven by $1.1 million of bonus payments to RAPID employees as a result of the acquisition. On October 1, 2015, Alphaform The results of Alphaform since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. Because Alphaform was insolvent, the fair value of the assets purchased and liabilities assumed exceeded the fair value of consideration paid, which resulted in a bargain purchase gain of (in thousands) Assets acquired: Current assets Other long-term assets Total assets acquired Liabilities assumed: Current liabilities Total liabilities assumed Net assets acquired Cash paid Cash acquired Total purchase consideration Gain recognized on bargain purchase (in thousands) Assets acquired: Current assets Intangible assets Goodwill Other long-term assets Total assets acquired Liabilities assumed: Current liabilities Total liabilities assumed Net assets acquired Cash paid Cash acquired Net cash consideration Contingent consideration Total purchase consideration Note 5 – Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the years ended December 31, (in thousands) Dec. 31, 2014 Goodwill acquired during 2015 2015 Other Dec. 31, 2015 Goodwill acquired during 2016 2016 Other Dec. 31, 2016 Dec. 31, 2015 Goodwill acquired during 2016 2016 Other Dec. 31, 2016 Goodwill acquired during 2017 2017 Other Dec. 31, 2017 United States Europe Other Total goodwill Proto Labs, Inc. Notes to Consolidated Financial Statements Intangible assets other than goodwill for the years ended December 31, Year Ended December 31, 2016 Year Ended December 31, 2015 Weighted Year Ended December 31, 2017 Year Ended December 31, 2016 Weighted Average Useful Life (in thousands) Gross Accumulated Amortization Net Gross Accumulated Amortization Net Useful Life Average Gross Accumulated Amortization Net Gross Accumulated Amortization Net Useful Life (in years) Remaining (in years) Intangible Assets with finite lives: Marketing assets Non-compete agreement Trade secrets Internally developed software Customer relationships Total intangible assets Amortization expense for intangible assets was The Company acquired a software company in December 2017, which was accounted for as an asset acquisition and resulted in an $8.2 million software technology intangible asset for the year ended December 31, Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows: (in thousands) Estimated Amortization Expense Estimated Amortization Expense 2017 2018 2019 2020 2021 2022 Thereafter Total estimated amortization expense Proto Labs, Inc. Notes to Consolidated Financial Statements Note 6 ASC 820, Fair Value Measurement (ASC Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s cash equivalents measured at fair value as of December 31, The following tables summarizes financial assets as of December 31, December 31, 2016 December 31, 2015 December 31, 2017 December 31, 2016 (in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial Assets: Cash and cash equivalents Money market mutual funds Total Proto Labs, Inc. Notes to Consolidated Financial Statements Note 7 The Company invests in short-term and long-term agency, municipal, corporate December 31, 2016 December 31, 2017 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. government agency securities Corporate debt securities U.S. municipal securities Certificates of deposit/time deposits Total marketable securities December 31, 2015 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. government agency securities Corporate debt securities Commercial paper U.S. municipal securities Certificates of deposit/time deposits Total marketable securities December 31, 2016 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. government agency securities Corporate debt securities U.S. municipal securities Certificates of deposit/time deposits Total marketable securities Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The investment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Those unrealized losses displayed above are the result of macroeconomic factors and are indicative of neither the quality of the underlying security nor the Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements. Proto Labs, Inc. Notes to Consolidated Financial Statements The December 31, 201 December 31, December 31, 2016 (in thousands) 2017 Note 8 Property and equipment consists of the following: December 31, December 31, (in thousands) 2016 2015 2017 2016 Land Buildings and improvements Machinery and equipment Computer hardware and software Leasehold improvements Construction in progress Total Accumulated depreciation and amortization Property and equipment, net Depreciation expense for the years ended December31,2017,2016 Note 9– Inventory Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates The Company’s inventory consists of the following: December 31, December 31, (in thousands) 2016 2015 2017 2016 Raw materials Work in process Work in progress Total inventory Allowance for obsolescence Inventory, net of allowance Proto Labs, Inc. Notes to Consolidated Financial Statements Note 10 The December 31, (in thousands) 2017 2016 Revolving Credit Facility, with interest rates from 2.50% to 2.56%, due at maturity in November 2019 Total Financing Obligations The Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as lender on November 27, 2017. The Credit Agreement provides the Company with a committed $30 million unsecured revolving credit facility (the “Facility”), which includes a $5 million letter of credit sub-facility. The commitments under the Facility will expire on November 30, 2019, and any loans outstanding on such date will mature and be payable on such date. The Company’s obligations under the Credit Agreement are guaranteed by the Company’s domestic subsidiaries. Loans under the Facility bear interest at a rate per annum equal to, at the election of the Company, either (i) a fluctuating rate per annum equal to daily one month LIBOR plus 1%, or (ii) a fixed rate per annum equal to LIBOR for an interest period of one, two or six months (as designated by the Company) plus 1%. In addition, the Company will pay a commitment fee on the average daily unused amount of the Facility at a rate per annum equal to 0.15%. Note 11 The Company maintains a The Company also sponsors a defined contribution retirement plan that covers the employees in the United Kingdom. Total employer Note 12 The Company has two equity incentive plans: the 2000 Stock Option Plan Proto Labs, Inc. Notes to Consolidated Financial Statements The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for The Company determines its stock-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on fair value. Determining the appropriate fair value model and calculating the fair value of stock option The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that the Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Stock options and other Stock options, restricted stock and other Employee stock purchase plan Total stock-based compensation expense Cost of revenue Operating expenses: Marketing and sales Research and development General and administrative Total stock-based compensation expense Income tax benefits Total stock-based compensation expense, net of tax Proto Labs, Inc. Notes to Consolidated Financial Statements Stock Options The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended December 31,2017,2016 Year Ended December 31, Year Ended December 31, 2016 2015 2014 2017 2016 2015 Risk-free interest rate Expected life (years) Expected volatility Expected dividend yield Weighted average grant date fair value The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31,2017,2016 Weighted- Weighted- Average Average Stock Options Exercise Price Stock Options Exercise Price Options outstanding at January 1, 2014 Granted Exercised Cancelled Options outstanding at December 31, 2014 Options outstanding at January 1, 2015 Granted Exercised Cancelled Options outstanding at December 31, 2015 Granted Exercised Cancelled Options outstanding at December 31, 2016 Granted Exercised Cancelled Options outstanding at December 31, 2017 Exercisable at December 31, 2016 Exercisable at December 31, 2017 The outstanding options The total intrinsic value of options exercised during the years ended December 31,2017,2016 For options outstanding at December 31, 201 Proto Labs, Inc. Notes to Consolidated Financial Statements The following table summarizes information about stock options outstanding at December 31, Options Outstanding, Vested and Expected to Vest Options Exercisable Options Outstanding, Vested and Expected to Vest Options Exercisable Range of Exercise Prices Range of Exercise Prices Number Outstanding Weighted Contractual Life Weighted Average Exercise Price ($) Number Exercisable Weighted Average Exercise Price ($) Range of Exercise Prices Number Outstanding Weighted Contractual Life Weighted Average Exercise Price ($) Number Exercisable Weighted Average Exercise Price ($) $3.67 to $7.86 $7.87 to $31.44 to $47.16 to $66.88 to The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive income. As of December31, Restricted Stock The 2012 Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share settled and restrictions lapse ratably over the vesting period, which is generally a The following table summarizes restricted stock activity for the years ended December 31, 2017,2016 and 2015: Weighted- Weighted- Average Average Grant Date Grant Date Restricted Fair Value Restricted Fair Value Stock Awards Per Share Stock Awards Per Share Restricted stock at December 31, 2014 Restricted stock at January 1, 2015 Granted Restrictions lapsed Forfeited Restricted stock at December 31, 2015 Granted Restrictions lapsed Forfeited Restricted stock at December 31, 2016 Granted Restrictions lapsed Forfeited Restricted stock at December 31, 2017 As of Proto Labs, Inc. Notes to Consolidated Financial Statements Performance Stock Performance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. The following table summarizes performance stock activity for the years ended December 31, 2017, 2016 and 2015: Weighted- Average Grant Date Performance Fair Value Stock Awards Per Share Performance stock at January 1, 2015 Granted Restrictions lapsed Forfeited Performance stock at December 31, 2015 Granted Restrictions lapsed Forfeited Performance stock at December 31, 2016 Granted Restrictions lapsed Forfeited Performance stock at December 31, 2017 As of December 31, 2017, there was $1.1 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.1 years. Employee Stock Purchase Plan The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended December31,2017,2016 Year ended December 31, Year ended December 31, 2016 2015 2014 2017 2016 2015 Risk-free interest rate Expected life (months) Expected volatility Expected dividend yield Note 13– Commitments The Company leases property from third parties. The Company leases Operating Leases (in thousands) Years Ending December 31, 2017 2018 2019 2020 2021 After 2021 Total future minimum lease payments Proto Labs, Inc. Notes to Consolidated Financial Statements Future minimum commitments under non-cancelable leases at December31,2017, are as follows: Operating Leases (in thousands) Years Ending December 31, 2018 2019 2020 2021 2022 After 2022 Total future minimum lease payments Rental expense was approximately $3.0 million, $3.6 million and $1.4 million for the years ended December 31,2017,2016 and 2015, respectively. The Company acquired a software company in December 2017, which was accounted for as an asset acquisition. The asset acquisition included an additional $5.0 million in contingent consideration to be recognized and paid upon completion of certain milestones over a 24-month period. The completion of each milestone will result in additional value to the software technology intangible asset. We did not recognize any of the contingent consideration for the year ended December 31, 2017 as the contingency was not resolved. Note Other comprehensive loss is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive loss balances for Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Foreign currency translation adjustments Balance at beginning of period Other comprehensive loss before reclassifications Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current-period other comprehensive loss Net current-period other comprehensive income (loss) Balance at end of period Note 15 The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the years ended December 31,2017,2016 The effective tax rate decreased by 3.0% for the year ended December 31, 2017 when compared to 2016 primarily due to the impact of tax reform. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The reduction to the U.S. tax rate resulted in revaluing deferred tax liabilities which provided a tax benefit of $4.2 million. At December 31, The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income before income taxes are as follows: Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Domestic Foreign Total Proto Labs, Inc. Notes to Consolidated Financial Statements Significant components of the provision for income taxes for the following periods are as follows: Year Ended December 31, (in thousands) 2016 2015 2014 Current: Federal State Foreign Deferred Federal State Foreign Valuation Allowance Total Year Ended December 31, (in thousands) 2017 2016 2015 Current: Federal State Foreign Deferred Federal State Foreign Valuation Allowance Total A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: Year Ended December 31, Year Ended December 31, 2016 2015 2014 2017 2016 2015 Federal tax statutory rate State tax (net of federal benefit) Qualified subsidiary election Valuation allowance against deferred tax assets Research and development credit Foreign rate differential Tax reserves Domestic manufacturing deduction Miscellaneous Revaluation of deferred tax liability Total As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, we have recorded a transition tax and recognized a provisional amount of $2.4 million which is included as a component of our 2017 income tax expense from continuing operations. In addition, we recorded a tax benefit of $4.2 million in 2017 resulting from the revaluation of our net deferred tax liabilities utilizing the new U.S. federal corporate income tax rate. Proto Labs, Inc. Notes to Consolidated Financial Statements Significant components of deferred tax assets and liabilities are as follows: December 31, December 31, (in thousands) 2016 2015 2017 2016 Deferred tax assets: Accrued expenses Warrants and stock options Intangibles Inventories Other assets Net operating loss Less valuation allowance Total deferred tax assets Deferred tax liabilities: Depreciation Goodwill Total deferred tax liabilities Net deferred tax liability The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, As of December 31, The Company establishes valuation allowances for deferred tax assets when, after consideration of all positive and negative evidenc The Company files a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or foreign income tax examinations by tax The Company has liabilities related to unrecognized tax benefits totaling Proto Labs, Inc. Notes to Consolidated Financial Statements A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, December 31, 2016 2015 2017 2016 Balance at beginning of period Additions for tax positions of current year Additions for tax positions of prior years Decrease related to expiration of statutes of limitations Balance at period end Note 16– Litigation From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to any litigation the outcome of which, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Note 17–Segment Reporting The Company’s reportable segments are based on the internal reporting used by the Company’s CEO, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. Revenue in the United States is derived from Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Revenue in Europe is derived from Injection Molding, CNC Machining, and 3D Printing product lines. Revenue in Japan is derived from Injection Molding and CNC Machining product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined customer parts. 3D Printing revenue consists of sales of The accounting policies of the reportable segments are the same as those described in Revenue and income from operations by reportable segment are as follows: Year Ended December 31, (in thousands) 2016 2015 2014 Revenue: United States Europe Japan Total revenue Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Income from Operations: Revenue: United States Europe Corporate Unallocated and Japan Total income from operations Japan Total revenue Proto Labs, Inc. Notes to Consolidated Financial Statements Year Ended December 31, (in thousands) 2017 2016 2015 Income from Operations: United States Europe Corporate Unallocated and Japan Total income from operations Total long-lived assets, expenditures for additions to long-lived assets and depreciation and amortization expense are as follows: December 31, December 31, December 31, December 31, December 31, December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Long-lived assets: United States Europe Japan Total long-lived assets Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Expenditures for additions to long-lived assets: United States Europe Japan Total expenditures for additions to long-lived assets Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Depreciation and Amortization: United States Europe Japan Total depreciation and amortization Proto Labs, Inc. Notes to Consolidated Financial Statements The Company’s revenue is derived primarily from its Injection Molding, CNC Machining, 3D Printing and Year Ended December 31, Year Ended December 31, (in thousands) 2016 2015 2014 2017 2016 2015 Revenue: Injection Molding CNC Machining 3D Printing Sheet Metal Other Product Total revenue Note 18 – Subsequent Events Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on the assessment, management concluded that, as of December 31, Management has excluded certain elements of RAPID from its assessment of internal control over financial reporting as of December 31, 2017 given that the acquisition of RAPID was not consummated until November 2017. Subsequent to the acquisition, RAPID maintained its revenue, inventory and payroll systems and processing through the year ended December 31, 2017. Those elements of the acquired business’s internal control over financial reporting that were not fully integrated into the Company’s existing internal control over financial reporting during 2017 have been excluded from management’s assessment of the effectiveness of internal control over financial reporting. RAPID is a wholly-owned subsidiary of the Company; its combined total assets and total revenues excluded from our assessment represent approximately 3% and 1%, respectively, of the related consolidated financial statements amounts as of the year ended December 31, 2017. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. None. Item 10. Directors, Executive Officers and Corporate Governance The information required by this item with respect to Item 401 relating to executive officers is contained in Item 1 of this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant” and with respect to other information relating to our directors will be set forth in our The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to the section titled “Corporate Governance — Section 16(a) Beneficial Ownership Reporting Compliance” of our We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Ethics and Business Conduct is available on our website at www.protolabs.com under the Investors Relations section. We plan to post to our website at the address described above any future amendments or waivers of our Code of Ethics and Business Conduct. Item 11. Executive Compensation Information related to this item is incorporated herein by reference to the sections titled “Compensation Discussion and Analysis,” “Corporate Governance — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” of our Item 12. Security Ownership of Certain Beneficial Owners and Management Information related to security ownership required by this item is incorporated herein by reference to the section titled “Security Ownership of Certain Beneficial Owners and Management” of our 201 Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated herein by reference to the sections titled Item 14. Principal Accountant Fees and Services Information required by this item is incorporated herein by reference to the section titled “Fees Paid to Independent Registered Public Accounting Firm” of our 201 Item (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements See Index to Consolidated Financial Statement at Item 8 herein. 2. Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statement or notes herein. 3. Exhibits See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Principal Executive Officer) Date: February /s/ John A. Way John A. Way Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. President and Chief Executive Officer and Director (Principal Executive Officer) Date: February /s/ John A Way Chief Financial Officer (Principal Financial and Accounting Officer) Chairman of the Board of Directors: Archie C. Black* Sujeet Chand* Rainer John B. Goodman* *Victoria M. Holt, by signing her name hereto, does hereby sign this document on behalf of each of the above named officers and directors of the registrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto. President and Chief Executive Officer (Principal Executive Officer) (1) Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (2) Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed with the Commission on November 8, 2016. (3) Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February (4) Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the Commission on November 3, 2015. (5) Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (6) Incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (7) Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (8) Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (9) Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (10) Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 (File No. 333-179651), filed with the Commission on February 23, 2012. (11) Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (12) Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (13) Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (14) Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (15) Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (16) Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission on July 25, 2011. (17) Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on October 26, 2011. (18) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on December 1, 2017. (19) Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K, filed with the Commission on March 1, 2013. Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the Commission on May 8, 2013. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on February 6, 2014. Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the Commission on February 6, 2014. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on February 12, 2014. Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the Commission on February 12, 2014. Incorporated by reference to Exhibit 99.6 to the Company's Registration Statement on Form S-8 (file No. 333-194272), filed with the Commission on March 3, 2014. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on December 19, 2014. Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed with the Commission on May 21, 2015. Incorporated by reference to Exhibit (30) Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, filed with the Commission on November 21, 2017. # Indicates management contract or compensatory plan or arrangement. * The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. ** Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. 85Comparison39Table of Years Ended December 31, 2015 and 2014Revenue Revenue by reportable segment and the related changes for 2015 and 2014 is summarized as follows: $ $ $ $ 208,018 78.7 % $ 165,117 78.8 % $ 42,901 26.0 % 47,433 18.0 37,491 17.9 9,942 26.5 8,655 3.3 6,975 3.3 1,680 24.1 $ 264,106 100.0 % $ 209,583 100.0 % $ 54,523 26.0 % Our revenue increased $54.5 million, or 26.0%, for 2015 compared with 2014, driven primarily by an increase in the product developers and engineers we served. By reportable segment, revenue in the United States increased $42.9 million, or 26.0%, for 2015 compared with 2014. Revenue in Europe increased $9.9 million, or 26.5%, for 2015 compared with 2014. Revenue in Japan increased $1.7 million, or 24.1%, for 2015 compared with 2014.Our revenue growth in 2015 was the result of increased volume of the product developers and engineers we served. During 2015, we served 27,235 unique product developers and engineers, an increase of 26% over 2014. Average revenue per product developer or engineer remained consistent during 2015 as compared to 2014.Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue decreased by $7.5 million in 2015 compared to 2014 due to strengthening of the United States dollar relative to the British Pound and Japanese Yen, as well as the strengthening of the British Pound relative to the Euro. The effect of pricing changes on international revenue was immaterial for 2015 compared to 2014.Revenue by product line and the related changes for 2015 and 2014 is summarized as follows: $ 163,387 61.8 % $ 140,282 66.9 % $ 23,105 16.5 % 74,368 28.2 59,914 28.6 14,454 24.1 25,132 9.5 9,387 4.5 15,745 167.7 1,219 0.5 - - 1,219 100.0 $ 264,106 100.0 % $ 209,583 100.0 % $ 54,523 26.0 % By product line, our revenue growth was driven by a 16.5% increase in Injection Molding revenue and a 24.1% increase in CNC Machining revenue, in each case for 2015 compared with 2014, as well as $15.7 million increase in revenue from 3D Printing and $1.2 million in Other Product revenue through our acquisition of Alphaform.Cost of Revenue, Gross Profit and Gross MarginCost of Revenue. Cost of revenue increased $28.5 million, or 35.1%, for 2015 compared to 2014, which was greater than the rate of revenue increase of 26.0% for 2015 compared to 2014. The increase in cost of revenue was due to raw material and production cost increases of $10.8 million to support increased sales volumes, equipment and facility-related cost increases of $3.1 million and an increase in direct labor headcount resulting in personnel and related cost increases of $14.6 million.Gross Profit and Gross Margin. Gross profit increased from $128.4 million in 2014 to $154.4 million in 2015 primarily due to increasing revenue growth as noted above. Gross margin decreased from 61.3% of revenue in 2014 to 58.5% of revenue in 2015 primarily as a result of our 3D Printing product line having a lower gross margin than our CNC Machining and Injection Molding product lines, revenue earned through our acquisition of Alphaform having lower gross margins than our legacy operations, the cost of increased capacity, which has not been fully leveraged, and the impact of fluctuations in foreign currency exchange rates.
ContentsIncome from Operations Income from operations increased $6.6 million, or 10.9%, for 2015 compared with 2014. By reportable segment, income from operations for the United States increased 16.1% as a percentage of revenue for 2015 compared with 2014. Income from operations for Europe and Corporate Unallocated and Japan decreased 9.7% and 13.8%, respectively, as a percentage of revenue for 2015 compared with 2014.Operating Expenses, Other Expense, Net and Provision for Income TaxesMarketing and Sales. Marketing and sales expense increased $10.0 million, or 34.5%, for 2015 compared to 2014 due to an increase in headcount resulting in personnel and related cost increases of $8.2 million and marketing program cost increases of $1.8 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business.Research and Development. Our research and development expense increased $1.7 million, or 10.5%, for 2015 compared to 2014 due to an increase in headcount resulting in personnel and related cost increases of $3.4 million and other operating cost increases of $0.2 million, which were partially offset by decreases in professional service costs of $1.9 million.General and Administrative. Our general and administrative expense increased $7.6 million, or 34.3%, for 2015 compared to 2014 due to an increase in headcount resulting in personnel and related cost increases of $4.4 million, facility and administrative cost increases of $1.5 million, professional service cost increases of $0.7 million for outside legal and accounting services, stock-based compensation cost increases of $0.8 million and intangible amortization expenses of $0.2 million.Other Income (Expense), Net. Other income, net increased $0.7 million for 2015 compared with 2014 due to $0.3 million gain on the bargain purchase of Alphaform, $0.2 million increase in interest income and $0.2 million in other non-operating activity.Provision for Income Taxes. Our income tax provision increased $2.4 million for 2015 compared to 2014 due to an increase of taxable income. Our effective tax rate increased marginally to 31.5% in 2015 from 31.2% in 2014 due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current year.20162017 and 2015.2016. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in conjunction with our selected financial data and consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Operating results for any quarter are not necessarily indicative of results for a full-year period, and the historical results presented below are not necessarily indicative of the results to be expected in any future period. $ 72,353 $ 78,173 $ 74,961 $ 72,568 $ 73,759 $ 67,842 $ 63,969 $ 58,536 $ 94,178 $ 88,105 $ 82,040 $ 80,167 $ 72,353 $ 78,173 $ 74,961 $ 72,568 32,041 33,448 32,715 32,914 32,485 27,517 26,419 23,282 41,290 38,793 35,671 34,894 32,041 33,448 32,715 32,914 40,312 44,725 42,246 39,654 41,274 40,325 37,550 35,254 52,888 49,312 46,369 45,273 40,312 44,725 42,246 39,654 11,949 11,787 11,453 10,942 10,805 10,027 9,502 8,854 15,393 13,846 14,630 12,987 11,949 11,787 11,453 10,942 5,278 5,976 5,816 5,318 4,879 4,760 4,397 4,314 5,776 5,877 6,084 5,823 5,278 5,976 5,816 5,318 8,254 10,020 10,126 8,251 9,033 8,134 6,304 6,245 12,944 10,222 9,253 8,781 8,254 10,020 10,126 8,251 25,481 27,783 27,395 24,511 24,717 22,921 20,203 19,413 34,113 29,945 29,967 27,591 25,481 27,783 27,395 24,511 14,831 16,942 14,851 15,143 16,557 17,404 17,347 15,841 18,775 19,367 16,402 17,682 14,831 16,942 14,851 15,143 112 625 1,092 625 612 593 (36 ) (457 ) 430 291 1,173 315 112 625 1,092 625 14,943 17,567 15,943 15,768 17,169 17,997 17,311 15,384 19,205 19,658 17,575 17,997 14,943 17,567 15,943 15,768 5,571 5,585 5,252 5,106 5,176 5,615 5,625 4,931 4,933 6,438 5,489 5,797 5,571 5,585 5,252 5,106 $ 9,372 $ 11,982 $ 10,691 $ 10,662 $ 11,993 $ 12,382 $ 11,686 $ 10,453 $ 14,272 $ 13,220 $ 12,086 $ 12,200 $ 9,372 $ 11,982 $ 10,691 $ 10,662 $ 0.35 $ 0.45 $ 0.41 $ 0.41 $ 0.46 $ 0.47 $ 0.45 $ 0.40 $ 0.53 $ 0.50 $ 0.46 $ 0.46 $ 0.35 $ 0.45 $ 0.41 $ 0.41 $ 0.35 $ 0.45 $ 0.40 $ 0.40 $ 0.45 $ 0.47 $ 0.44 $ 0.40 $ 0.53 $ 0.49 $ 0.45 $ 0.46 $ 0.35 $ 0.45 $ 0.40 $ 0.40 26,457,302 26,416,041 26,368,001 26,222,148 26,164,340 26,083,405 25,921,111 25,850,274 26,705,909 26,617,349 26,541,978 26,466,731 26,457,302 26,416,041 26,368,001 26,222,148 26,609,929 26,609,878 26,561,148 26,442,357 26,465,043 26,381,313 26,277,503 26,214,204 27,009,017 26,802,034 26,649,152 26,599,200 26,609,929 26,609,878 26,561,148 26,442,357 yearsyears ended December 31, 2017, 2016 2015 and 2014:2015: $ 74,967 $ 58,557 $ 57,210 $ 81,748 $ 77,499 $ 64,096 (60,755 ) (63,594 ) (63,499 ) (123,975 ) (60,755 ) (63,594 ) 7,847 10,238 7,036 9,192 5,315 4,699 (917 ) (877 ) (457 ) 947 (917 ) (877 ) $ 21,142 $ 4,324 $ 290 $ (32,088 ) $ 21,142 $ 4,324 due to cash generated through operations and, to a lesser extent, proceeds from exercises of stock options and purchases through our employee stock purchase plan, which were partially offset by investing activity. We had cash and cash equivalents of $47.7 million as of December 31, 2015, an increase of $4.3 million from December 31, 2014. The increase in our cash was due primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment activity. We had cash and cash equivalents of $43.3 million as of December 31, 2014, an increase of $0.3 million from December 31, 2013. The increase in our cash was due primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment activity.2016,, the amount of cash and cash equivalents held by foreign subsidiaries was $18.7$18.4 million. If these funds are needed forThe Tax Cuts and Jobs Act imposes a transition tax on foreign earnings previously treated as permanently reinvested, resulting in an increase to our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds.tax liability. However, our intent is to continue to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the next 12 months.held-to-maturityheld-to-maturity securities of $1.2 million, which were partially offset by excess tax benefit from stock-based compensation expense of $2.5 million. The cash flow from operating activities during 2016 compared to 2015 increased $16.4$13.4 million due to changes in operating assets and liabilities of $14.0 million, increases in depreciation and amortization of $3.4 million driven by an increase in capital investments, stock-based compensation expense of $0.7 million driven by an increased level of equity grants to employees, loss on impairment of assets of $0.5 million driven by the decision to exit certain product lines, an increase in excess tax benefits of $3.0 million,and a $0.3 million of gain from the Alphaform acquisition in 2015 that did not recur and changes in operating assets and liabilities of $14.0 million driven by general growth of the business.recur. These increases were partially offset by a decrease in net income of $3.8 million, a decrease in deferred taxes of $0.1 million, a decrease in amortization of held-to-maturity securities of $0.1 million, as well as other adjustments of $1.5 million primarily related to unrealized gains on the translation of foreign currency denominated cash.compensationcompensation expense of $6.1 million, partially offset by excess tax benefit from stock-based compensation expense of $5.5 million. The cash flow from operating activities during 2015 compared to 2014 increased $1.3$2.4 million due to increases in net income of $4.9 million, depreciation and amortization of $3.0 million, deferred taxes of $4.7 million and stock-based compensation expense of $1.3 million, which were partially offset by a gain on acquisition of $0.3 million an increase in excess tax benefit from stock-based compensation of $1.1 million, and decreases in amortization of held-to-maturity securities of $0.3 million and changes in operating assets and liabilities of $10.9 million.Cash flow from operating activities during 2014 primarily consisted of net income of $41.6 million, adjusted for certain non-cash items, including depreciation and amortization of $11.1 million and stock-based compensation expense of $4.8 million, partially offset by excess tax benefit from stock-based compensation expense of $4.5 million. The cash flow from operating activities during 2014 compared to 2013 increased $8.8 million due to increases in net income of $6.4 million, depreciation and amortization of $3.5 million, stock-based compensation expense of $1.3 million and a decrease in excess tax benefit from stock-based compensation of $5.4 million, which were partially offset by decreases in deferred taxes of $2.3 million and changes in operating assets and liabilities of $5.5 million.activitiesactivities was $60.8 million for the year ended December 31, 2016, consisting of $33.6 million for the purchase of property and equipment primarily to expand our production capacity, and $89.3 million for the purchase of marketable securities, which were partially offset by $62.1 million in proceeds from maturities and call redemption of marketable securities.Cash used in investing activities was $63.5 million for the year ended December 31, 2014, consisting41Table of $43.5 million for the purchase of property and equipment primarily to expand our production capacity, $33.9 million for payments on business acquisitions and $60.2 million for the purchases of marketable securities, which were partially offset by $74.1 million in proceeds from maturities and call redemption of marketable securities.
Contents7.85.3 million for the year ended December 31, 2016, consisting of excess tax benefit on stock-based compensation of $2.5 million and $5.7 million in proceeds from exercises of stock options, partially offset by $0.4 million for payments of acquisition-related contingent consideration.$10.2$4.7 million for the year ended December 31, 2015, consisting of excess tax benefit on stock-based compensation of $5.5 million and $6.3 million in proceeds from exercises of stock options, partially offset by $0.2 million for payments of debt and $1.4 million for payments of acquisition-related contingent consideration.Cash provided by financing activities was $7.0 million for the year ended December 31, 2014, consisting of excess tax benefit on stock-based compensation of $4.5 million and $4.8 million in proceeds from exercises of stock options, partially offset by $1.1 million for payments of debt and $1.2 million for payments of acquisition-related contingent consideration.•the revenue growth in Injection Molding, CNC Machining and 3D Printing product lines;•costs of operations, including costs relating to expansion and growth;•the emergence of competing or complementary technological developments;•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in litigation-related activities; and•the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.believebelieve future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue.2016,2017, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future periods were as follows: $ 13,851 $ 3,531 $ 4,905 $ 3,267 $ 2,148 $ 12,965 $ 4,322 $ 4,534 $ 3,923 $ 186 $ 13,851 $ 3,531 $ 4,905 $ 3,267 $ 2,148 $ 12,965 $ 4,322 $ 4,534 $ 3,923 $ 186 forfor operating leases relate to twothree of our United States manufacturing facilities:facilities; our European sales, customer service and technical support offices; three former Alphaform manufacturing and office facilities located in Germany and Finland; and our Japan facility.We have noThe following table summarizes our financing arrangements as of December 31, 2016 or 2015.2017 and 2016: $ 5,000 $ - $ 5,000 $ - Intangibles—Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. As of December 31, 20162017 no impairment charges for goodwill have been recognized.Intangibles—Intangibles—Goodwill and Other. Other intangible assets include internally developed software, customer relationships and other intangible assets acquired from an independent party.parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. As of December 31, 20162017 no impairment charges for intangible assets have been recognized.CompensationCompensation (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grant date fair value of the award. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. We estimated the volatility of our stock price based on the historic volatility of our common stock. We have never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vestingWe account for forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what has been recorded.as they occur. 1.53 - 2.68% 1.69 - 1.77% 0.43 - 2.14% 2.24 - 2.36% 1.53 - 2.68% 1.69 - 1.77% 6.50 5.50 - 6.50 2.00 - 6.50 6.50 6.50 5.50 - 6.50 44.38 - 45.93% 46.80 - 47.23% 47.29 - 49.30% 42.68 - 44.68% 44.38 - 45.93% 46.80 - 47.23% 0% 0% 0% 0% 0% 0% $26.61 $32.42 $32.65 $32.26 $26.61 $32.42 0.56 - 0.59% 0.08 - 0.39% 0.01 - 0.11% 0.97 - 1.48% 0.56 - 0.59% 0.08 - 0.39% 6.00 6.00 6.00 6.00 6.00 6.00 39.51 - 49.13% 29.41 - 37.64% 37.64 - 39.80% 24.49 - 34.51% 39.51 - 49.13% 29.41 - 37.64% 0% 0% 0% 0.00% 0% 0% stock-basedstock-based compensation expense relating to stock options, restricted stock awards and our ESPP of $8.6 million, $6.8 million $6.1 million and $4.8$6.1 million during the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively. As of December 31, 2016,2017, we had $5.3$3.8 million of unrecognized stock-based compensation costs related to unvested stock options net of estimated forfeitures, that are expected to be recognized over a weighted average period of 3.03.3 years. We issued options to purchase 60,100, 117,480 110,335 and 116,050110,335 shares of our common stock in 2017, 2016 2015 and 2014,2015, respectively.TaxesTaxes (ASC 740). Under this method, we determine tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. We establish a valuation allowance for any portion of our deferred tax assets that we believe will not be recognized.$4.0$4.6 million as of December 31, 2016.2017.Recent Accounting PronouncementsThe effective tax rate decreased by 3.0% for the year ended December 31, 2017 when compared to 2016 primarily due to the impact of tax reform. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The reduction to the U.S. tax rate resulted in revaluing deferred tax liabilities which provided a tax benefit of $4.2 million. At December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a reasonable estimate on the effects of the transition tax and recognized a provisional amount of $2.4 million which is included as a component of income tax expense from continuing operations. The foreign tax effects of the transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed our calculation of the total post-1986 E&P. Furthermore, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.In May 2014,Recently adopted accounting pronouncementsissued Accounting StandardStandards Update (ASU) 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. As a result of the adoption, the amount in excess tax benefits from stock-based compensation is recorded in our provision for income taxes. For the three and twelve months ended December 31, 2017, the amount recorded in the provision for income taxes was $0.4 million and $0.7 million, respectively. Historically, these amounts were recorded as additional paid-in capital as required by the accounting pronouncements in force during the periods presented. In addition, for each period presented, cash flows related to excess tax benefits are now classified as an operating activity along with other income tax cash flows. Retrospective application of the cash flow presentation requirements resulted in an increase to net cash provided by operations and a decrease to net cash provided by financing activities of $2.5 million and $5.5 million for the twelve months ended December 31, 2016 and 2015, respectively.TheAs of January 1, 2018, the Company expects to adopthas adopted the new revenue standard using the modified retrospective approach and expectsapproach. The Company manufactures parts that have no alternative use to quantify and disclose the expected impact, if any, of adopting this amended guidance in the third quarter Form 10-Q. While the Company (since the parts are custom made to specific customer orders), and the Company believes for certain customers there is still evaluatinga legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the impact of the amended guidance, it does not expect the impactCompany will recognize revenue over time. The expected transition adjustment to be material.recorded is an increase to the Company’s retained earnings balance on January 1, 2018 of $1.5 million. as well asbut does not expect the timingimpact to be material because the Company owns a majority of such adoption.its buildings and significant assets. In March 2016, the FASB issued ASU 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company will adopt this standard on January 1, 2017. The Company expects the impact on its effective tax rate to be less than 0.2%.as well as the timing of such adoption, but does not expect the impact to be material.Item 7A.Item 7A. Quantitative and Qualitative Disclosures About Market Risk, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incur production costs and operating expenses in British Pound, Euro and Japanese Yen.a foreign currency gaingains of $0.4 million and $1.4 million for the year ended December 31, 2017 and 2016, respectively and foreign currency losses of $0.5 million and $0.4 million for the two yearsyear ended December 31, 2015 and 2014, respectively.2015. ReportReports of Independent Registered Public Accounting Firm on Consolidated Financial Statements4951Report of Independent Registered Public Accounting Firm5020162017 and 201520165153525453552015 and 2014201554565557TheTo the Shareholders and the Board of Directors and Shareholders
Opinion on the Financial Statementsand 2015, and the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These2017, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. referred to above present fairly, in all material respects, the consolidated financial position of Proto Labs, Inc.the Company at December 31, 20162017 and 2015,2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016,2017, in conformity with U.S. generally accepted accounting principles.Proto Labs, Inc.’sthe Company's internal control overover financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 201723, 2018 expressed an unqualified opinion thereon.LLLLPP’s auditor since 2011.22, 201723, 2018TheTo the Shareholders and the Board of Directors and Shareholders2016,2017, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Proto Labs, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financialfinancial reporting was maintained in all material respects.effectivenesseffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.circumstances. We believe that our audit provides a reasonable basis for our opinion.evaluationevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Proto Labs, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of December 31, 2016 and December 31, 2015, related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for the three years in the period ended December 31, 2016, and our report dated February 22, 2017, expressed an unqualified opinion thereon.MinnesotaMinnesota22, 201723, 2018 $ 68,795 $ 47,653 $ 36,707 $ 68,795 39,477 33,201 57,424 39,477 34,060 36,125 51,503 34,060 9,310 9,771 11,271 9,310 5,697 5,224 6,267 5,697 445 6,028 1,832 445 157,784 138,002 165,004 157,784 139,474 125,475 166,440 139,474 28,916 28,916 128,504 28,916 2,655 3,337 19,084 2,655 84,479 64,789 37,034 84,479 933 517 2,672 933 $ 414,241 $ 361,036 $ 518,738 $ 414,241 $ 11,322 $ 13,643 $ 15,876 $ 11,322 7,670 9,993 12,100 7,670 4,435 2,626 8,408 4,435 5,000 - 2,371 - 23,427 26,262 43,755 23,427 2,181 - 7,003 4,240 6,966 7,003 3,978 2,889 4,621 3,978 34,408 33,391 57,523 34,408 - - 26 26 - - 27 26 213,857 198,835 241,725 213,857 176,703 133,996 224,697 176,703 (10,753 ) (5,212 ) (5,234 ) (10,753 ) 379,833 327,645 461,215 379,833 $ 414,241 $ 361,036 $ 518,738 $ 414,241 $ 298,055 $ 264,106 $ 209,583 $ 344,490 $ 298,055 $ 264,106 131,118 109,703 81,182 150,648 131,118 109,703 166,937 154,403 128,401 193,842 166,937 154,403 46,131 39,188 29,144 56,856 46,131 39,188 22,388 18,350 16,607 23,560 22,388 18,350 36,651 29,716 22,122 41,200 36,651 29,716 105,170 87,254 67,873 121,616 105,170 87,254 61,767 67,149 60,528 72,226 61,767 67,149 2,454 712 3 2,209 2,454 712 64,221 67,861 60,531 74,435 64,221 67,861 21,514 21,347 18,896 22,657 21,514 21,347 $ 42,707 $ 46,514 $ 41,635 $ 51,778 $ 42,707 $ 46,514 $ 1.62 $ 1.79 $ 1.62 $ 1.94 $ 1.62 $ 1.79 $ 1.61 $ 1.77 $ 1.60 $ 1.93 $ 1.61 $ 1.77 26,365,173 26,005,858 25,692,699 26,647,610 26,365,173 26,005,858 26,564,639 26,320,284 26,100,320 26,845,071 26,564,639 26,320,284 $ (5,541 ) $ (2,283 ) $ (1,838 ) $ 5,519 $ (5,541 ) $ (2,283 ) $ 37,166 $ 44,231 $ 39,797 $ 57,297 $ 37,166 $ 44,231 Additional Other Comprehensive Loss Paid-In Retained Capital Loss 25,546,107 26 166,861 45,847 (1,091 ) 211,643 292,003 - 4,820 - - 4,820 - - 4,470 - - 4,470 - - 4,809 - - 4,809 - - - 41,635 - 41,635 - - - - (1,838 ) (1,838 ) 39,797 25,838,110 $ 26 $ 180,960 $ 87,482 $ (2,929 ) $ 265,539 25,838,110 26 180,960 87,482 (2,929 ) 265,539 362,608 - 6,254 - - 6,254 362,608 - 6,254 - - 6,254 - - 5,539 - - 5,539 - - 5,539 - - 5,539 - - 6,082 - - 6,082 - - 6,082 - - 6,082 - - - 46,514 - 46,514 - - - 46,514 - 46,514 - - - - (2,283 ) (2,283 ) - - - - (2,283 ) (2,283 ) 44,231 44,231 26,200,718 $ 26 $ 198,835 $ 133,996 $ (5,212 ) $ 327,645 26,200,718 $ 26 $ 198,835 $ 133,996 $ (5,212 ) $ 327,645 304,150 - 5,715 - - 5,715 304,150 - 5,715 - - 5,715 - - 2,532 - - 2,532 - - 2,532 - - 2,532 - - 6,775 - - 6,775 - - 6,775 - - 6,775 - - - 42,707 - 42,707 - - - 42,707 - 42,707 - - - - (5,541 ) (5,541 ) - - - - (5,541 ) (5,541 ) 37,166 37,166 26,504,868 $ 26 $ 213,857 $ 176,703 $ (10,753 ) $ 379,833 26,504,868 $ 26 $ 213,857 $ 176,703 $ (10,753 ) $ 379,833 283,449 1 8,603 - - 8,604 Common shares issued for RAPID acquisition 118,140 1 11,335 - - 11,336 - - 8,558 - - 8,558 (77,806 ) (1 ) (628 ) (3,784 ) (4,413 ) - - - 51,778 - 51,778 - - - - 5,519 5,519 57,297 26,828,651 $ 27 $ 241,725 $ 224,697 $ (5,234 ) $ 461,215 $ 42,707 $ 46,514 $ 41,635 $ 51,778 $ 42,707 $ 46,514 17,485 14,126 11,138 18,474 17,485 14,126 6,775 6,082 4,809 8,558 6,775 6,082 2,780 2,837 (1,875 ) 1,174 2,780 2,837 (2,532 ) (5,539 ) (4,470 ) 455 - - 513 455 - - (344 ) - - - (344 ) 1,173 1,234 1,517 1,063 1,173 1,234 (1,541 ) (153 ) (1,541 ) - 900 (11,371 ) (5,304 ) (9,933 ) 900 (11,371 ) 136 (2,097 ) (896 ) (985 ) 136 (2,097 ) (1,312 ) (2,047 ) 107 (691 ) (1,312 ) (2,047 ) 8,207 (2,310 ) 9,373 1,646 8,207 (2,310 ) (1,116 ) 5,781 1,435 3,176 (1,116 ) 5,781 850 5,691 (259 ) 7,128 850 5,691 74,967 58,557 57,210 81,748 77,499 64,096 (33,616 ) (44,362 ) (43,507 ) (32,635 ) (33,616 ) (44,362 ) - (5,032 ) (33,864 ) (110,533 ) - (5,032 ) (8,742 ) - - (89,315 ) (66,393 ) (60,186 ) (20,037 ) (89,315 ) (66,393 ) 62,176 52,193 74,058 47,972 62,176 52,193 (60,755 ) (63,594 ) (63,499 ) (123,975 ) (60,755 ) (63,594 ) - (152 ) (1,054 ) - - (152 ) 5,000 - - (400 ) (1,400 ) (1,200 ) - (400 ) (1,400 ) (4,410 ) - - 5,715 6,251 4,820 8,602 5,715 6,251 2,532 5,539 4,470 7,847 10,238 7,036 9,192 5,315 4,699 (917 ) (877 ) (457 ) 947 (917 ) (877 ) 21,142 4,324 290 (32,088 ) 21,142 4,324 47,653 43,329 43,039 68,795 47,653 43,329 $ 68,795 $ 47,653 $ 43,329 $ 36,707 $ 68,795 $ 47,653 $ 1 $ 5 $ 19 $ 19 $ 1 $ 5 $ 9,802 $ 20,330 $ 11,549 $ 19,113 $ 9,802 $ 20,330 3D printed,injection-molded, computer numerical control (CNC) machined, 3D-printed and injection-moldedsheet metal-fabricated custom parts for prototyping and short-run production. The Company’s customers are product developers and engineers throughout the world who require a faster and less expensive way to obtain low volumes of parts. The Company’s proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet. The Company targets its product lines to the millions of product developers and engineers who use three-dimensional (3D)three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has established operations in the United States, Europe and Japan, which the Company believes are among the largest geographic markets where these product developers and engineers are located. The Company’s primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal. Proto Labs, Inc. is located in Maple Plain, Minnesota. The Company’s subsidiaries are: HoldingHoldings, UK, Ltd.United KingdomPLJ Ltd. , as listed within organization“Organization and businessbusiness” above. All intercompany accounts and transactions have been eliminated in consolidation., including marketable securities, with maturities of three months or less at the date of purchase. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses on such accounts.security’ssecurity’s maturity date. Securities with maturities of three months or less at the time of purchase are categorized as cash equivalents as described above. The Company reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by Accounting Standards Codification (ASC) 320, Investments – Debt and Equity Securities, when determining the classification of impairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-temporary include assessment of the quality of the security, credit ratings actions and management’s intent to hold the security to maturity as well as other factors.costcost or market, using the average cost method, which approximates first-in, first-outfirst-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.In August 2015, the Company adjusted the useful lives of its primary production equipment based on experience and condition of current equipment. This change in accounting estimate was accounted for prospectively, and therefore had no effect on property and equipment, net as previously reported. This change was not material.GoodwillIntangibles—Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount.thethe Company’s forecasting process. The annual impairment test was performed as of December 31, 2015 and was performed as of October 1, 2016. This change in method of applying an accounting principal was not material.another independent party.parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’sasset’s carrying value over its fair value.3D PrintingSheet Metal product lines. Freight billed to customers is included in revenues, and all freight expenses paid by the Company are included in cost of revenue.740)740). Under this method, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. The Company establishes a valuation allowance for any portion of its deferred tax assets that the Company believes will may not be recognized.more-likely-than-notmore-likely-than-not criterion. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.718)718). Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes the compensation expense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting awardaccounts for forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.as they occur. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the awards vest early in the event of a change in control.approximately approximately $10.7 million, $10.5 million, $10.0 million and $8.5$10.0 million for the years ended December 31,2017,2016 2015 and 2014,2015, respectively.The Company follows ASC 350-40,Internal-Use Software, in accounting for internally developed software. As of December 31, 2016, 2015 and 2014, all internal use software projects were in the post-implementation/operation stage and therefore, no software development costs were capitalized. Research and development costs were approximately $22.4$23.6 million, $18.4$22.4 million and $16.6$18.4 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.conconsolidated shareholderssolidated shareholders’’ equity. Foreign currency transaction gains and losses are recognized in the consolidated statements of comprehensive income.Recent accounting pronouncementsadopted accounting pronouncementsIn May 2014,During the first quarter of 2017, the Company adopted the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) 2016-09,Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. As a result of the adoption, the amount in excess tax benefits from stock-based compensation is recorded in our provision for income taxes. For the three and twelve months ended December 31, 2017, the amount recorded in the provision for income taxes was $0.4 million and $0.7 million, respectively. Historically, these amounts were recorded as additional paid-in capital as required by the accounting pronouncements in force during the periods presented. In addition, for each period presented, cash flows related to excess tax benefits are now classified as an operating activity along with other income tax cash flows. Retrospective application of the cash flow presentation requirements resulted in an increase to net cash provided by operations and a decrease to net cash provided by financing activities of $2.5 million and $5.5 million for the twelve months ended December 31, 2016 and 2015, respectively. 2014-09, 2014-09,Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application methods.2014-092014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. TheAs of January 1, 2018, the Company expects to adopthas adopted the new revenue standard using the modified retrospective approach and expectsapproach. The Company manufactures parts that have no alternative use to quantify and disclose the expected impact, if any, of adopting this amended guidance in the third quarter Form 10-Q. While the Company (since the parts are custom made to specific customer orders), and the Company believes for certain customers there is still evaluatinga legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the impact of the amended guidance, it does not expect the impactCompany will recognize revenue over time. The expected transition adjustment to be material.recorded is an increase to the Company’s retained earnings balance on January 1, 2018 of$1.5 million.2016-02, 2016-02,Leases, which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its consolidated financial statements, as well as the timing of such adoption.In March 2016, the FASB issued ASU 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company will adopt this standard on January 1, 2017. The Companybut does not expect the impact to be material.material because the Company owns a majority of its buildings and significant assets. 2016-15, 2016-15,Statement of Cash Flows, which is intended to reduce diversity in how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance on its consolidated financial statements, as well as the timing of such adoption, but does not expect the impact to be material.Income Per Common ShareProto Labs, Inc.Notes to Consolidated Financial Statements $ 42,707 $ 46,514 $ 41,635 $ 51,778 $ 42,707 $ 46,514 26,365,173 26,005,858 25,692,699 26,647,610 26,365,173 26,005,858 199,466 314,426 407,621 197,461 199,466 314,426 26,564,639 26,320,284 26,100,320 26,845,071 26,564,639 26,320,284 $ 1.62 $ 1.79 $ 1.62 $ 1.94 $ 1.62 $ 1.79 $ 1.61 $ 1.77 $ 1.60 $ 1.93 $ 1.61 $ 1.77 4 –Business Combinations $ 6,720 Goodwill 99,588 Other intangible assets 8,700 9,013 124,021 2,067 85 2,152 $ 121,869 $ 115,288 (4,755 ) 110,533 11,336 $ 121,869 (in thousands) (unaudited) $ 386,677 $ 336,634 55,070 41,805 , the Company acquired certain assets including shares of select subsidiaries, of Alphaform AG (Alphaform) through insolvency proceedings administered through the Insolvency Court of Munich, Germany. Included in the acquisition were select assets of Alphaform AG and Alphaform Claho GmbH and shares of Alphaform RPI Oy and Alphaform Ltd., for $5.0$5.0 million net cash consideration, which was funded with cash available in the United States and Europe. As of December 2016, the operations of Alphaform have been integrated into the operations of the Company.waswas a leading service bureau headquartered in Feldkirchen (Munich), Germany and also had locations in Eschenlohe, Germany; Rusko, Finland and Reading, UK. Alphaform produces high-quality parts using stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies as well as injection molding capabilities and other production processes. The revenue associated with these processes is reported under the 3D Printing, Injection Molding and Other product lines. In the second quarter of 2016, the Company made the decision to exit the resin resale business.full yearfull-year effects of Alphaform have not been separately presented since the impact to the Company's results of operations was not material.Proto Labs, Inc.Notes to Consolidated Financial Statements$0.3$0.3 million. The bargain purchase gain was recorded in Other Income, Net in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2015. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows: $ 2,766 3,876 6,642 1,266 1,266 $ 5,376 $ 5,570 (538 ) $ 5,032 $ 344 On April 23, 2014, the Company acquired 100% of the outstanding shares of FineLine Prototyping, Inc. (FineLine) for $33.9 million net cash consideration, which was funded with cash available in the United States and the sale of $15.5 million of held-to-maturity securities. The shares of FineLine acquired through the Stock Purchase Agreement (the Agreement) were purchased in a private transaction exempt from registration under the Securities Act of 1933 and the operations of FineLine have been integrated into the operations of the Company. Under the terms of the Agreement, the Company was obligated to make additional cash payments totaling up to $3.0 million, contingent upon both the achievement of 2014 revenue goals and certain milestones relating to the integration of FineLine’s operations with the Company. As of December 31, 2016, the Company had made payments of $3.0 million related to the attainment of milestones and as of December 31, 2016 the Company had no remaining contingent consideration.FineLine was based in Raleigh, North Carolina and was a leading producer of parts using additive manufacturing technologies, often times referred to as 3D printing. FineLine produced high-quality parts using stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies to customers in a wide variety of industries, including medical, aerospace, computer/electronics, consumer products and industrial machinery, among others.Consistent with the provisions of ASC 805, Business Combinations(ASC 805), the Company accrued the contingent payment on the date of acquisition after determining its fair value of $3.0 million in arriving at $36.9 million of total consideration, net of cash acquired. The fair value of the contingent consideration was determined by using Level 3 inputs based on the present value of various payout scenarios, weighted on the basis of probability. The contingent payment continues to be remeasured to fair value at each reporting period with changes in fair value reflected in the Consolidated Statements of Comprehensive Income.The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill. The goodwill associated with the acquisition is deductible for tax purposes and represents the strategic and growth opportunities from strengthening the Company’s portfolio of rapid prototyping product offerings. The addition of additive manufacturing expands Proto Labs’ products to address a wider spectrum of needs for the product developer and engineer. From concept models, to form and fit testing, to functional testing and short-run production, the acquisition of FineLine allows the Company to offer a broader range of quick-turn, on-demand custom parts with speed, reliability and consistency.Proto Labs, Inc.Notes to Consolidated Financial StatementsThe results of FineLine since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the full year effects of FineLine have not been separately presented since the impact to the Company's results of operations was not material.The FineLine acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows: $ 1,248 4,580 28,916 3,849 38,593 1,729 1,729 36,864 34,468 (604 ) 33,864 3,000 $ 36,864 20162017 and 20152016 were as follows: $ 28,916 $ - $ - $ 28,916 $ - $ (4,869 ) $ 24,047 $ 28,916 $ - $ (4,869 ) $ 24,047 $ 99,588 $ - $ 123,635 - - - - - 4,239 4,239 - - 4,239 4,239 - - 4,239 - - - - - 630 630 - - 630 630 - - 630 $ 28,916 $ - $ - $ 28,916 $ - $ - $ 28,916 $ 28,916 $ - $ - $ 28,916 $ 99,588 $ - $ 128,504 As described in Note 17 – Segment Reporting, effectiveEffective in the fourth quarter of 2016, the Company changed its reportable segments to be based upon geographic regions, which also resulted in the revision of reporting units. The Company has three reporting units and applied the relativeallocation of goodwill to the reportable segments. As described in Note 4 – Business Combinations, the Company acquired RAPID in November 2017. The fair value method to allocate goodwill to each of the reporting units. Duringconsideration paid exceeded the fourth quarterfair value of 2016, the Company completed its annual assessmentassets acquired and liabilities assumed, which resulted in goodwill in the United States of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.$99.6 million.20162017 and 20152016 were as follows:
(in years)
Useful Life Remaining
(in years) $ 930 $ (248 ) $ 682 $ 930 $ (155 ) $ 775 10.0 7.3 $ 930 $ (341 ) $ 589 $ 930 $ (248 ) $ 682 10.0 6.3 190 (190 ) - 190 (158 ) $ 32 2.0 0 270 (190 ) 80 190 (190 ) $ - 2.0 - 5.0 5.0 250 (133 ) 117 250 (83 ) $ 167 5.0 2.3 250 (183 ) 67 250 (133 ) $ 117 5.0 1.3 Trade names 1,080 - 1,080 - - - 2.0 2.0 680 (604 ) 76 680 (378 ) $ 302 3.0 0.3 680 (680 ) - 680 (604 ) $ 76 3.0 - Software technology 8,229 - 8,229 - - - 10.0 10.0 2,530 (750 ) 1,780 2,530 (469 ) $ 2,061 9.0 6.3 10,070 (1,031 ) 9,039 2,530 (750 ) $ 1,780 6.0 - 9.0 5.4 $ 4,580 $ (1,925 ) $ 2,655 $ 4,580 $ (1,243 ) $ 3,337 $ 21,509 $ (2,425 ) $ 19,084 $ 4,580 $ (1,925 ) $ 2,655 was$0.5 million for the year ended December 31, 2017 and $0.7 million for each of the years ended December 31,2016 and 2015, respectively.20162017. The acquisition did not meet the definition of a business under ASC 805. The asset acquisition included an additional $5.0 million in contingent consideration to be recognized and 2015, respectively, and $0.5 millionpaid upon completion of certain milestones over a 24 month period. The completion of each milestone will result in additional value to the software technology intangible asset. We did not recognize any of the contingent consideration for the year ended December 31, 2014.2017 as the contingency was not resolved. $ 500 424 $ 3,060 391 3,026 374 2,470 374 2,470 2,470 592 5,588 $ 2,655 $ 19,084 6– Fair Value MeasurementsValue Measurements820)820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value: 20162017 and 2015,2016, respectively, consist of money market mutual funds. The Company determines the fair value of these financial assets using Level I inputs.20162017 and 20152016 measured at fair value on a recurring basis: $ 11,771 $ - $ - $ 11,896 $ - $ - $ 3,034 $ - $ - $ 11,771 $ - $ - $ 11,771 $ - $ - $ 11,896 $ - $ - $ 3,034 $ - $ - $ 11,771 $ - $ - 7– Marketable Securities, commercial paper and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’sCompany’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of December 31, 20162017 and 20152016 is as follows: $ 31,706 $ 1 $ (141 ) $ 31,566 $ 32,320 $ - $ (199 ) $ 32,121 38,490 2 (147 ) 38,345 29,806 - (128 ) 29,678 46,578 1 (187 ) 46,392 28,364 - (104 ) 28,260 7,182 12 (22 ) 7,172 3,968 - (32 ) 3,936 $ 123,956 $ 16 $ (497 ) $ 123,475 $ 94,458 $ - $ (463 ) $ 93,995 $ 26,784 $ 2 $ (99 ) $ 26,687 28,133 - (114 ) 28,019 1,497 - (2 ) 1,495 35,667 8 (56 ) 35,619 5,909 2 (11 ) 5,900 $ 97,990 $ 12 $ (282 ) $ 97,720 $ 31,706 $ 1 $ (141 ) $ 31,566 38,490 2 (147 ) 38,345 46,578 1 (187 ) 46,392 7,182 12 (22 ) 7,172 $ 123,956 $ 16 $ (497 ) $ 123,475 1)1). Fair values for the U.S. municipal securities, U.S. government agency securities and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2)2).issuer’sissuer’s ability to pay its debt. The Company intends, and has the ability, to hold the investments to maturity and recover the full principal.20167 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Due in one year or less $ 39,477 $ 57,424 Due after one year through five years 84,479 37,034 Total marketable securities $ 123,956 $ 94,458 8–Property and Equipment $ 8,805 $ 8,301 $ 8,910 $ 8,805 48,467 37,297 49,921 48,467 114,729 103,205 148,535 114,729 15,053 13,273 17,634 15,053 6,688 3,404 6,634 6,688 3,491 6,712 8,988 3,491 197,233 172,192 240,622 197,233 (57,759 ) (46,717 ) (74,182 ) (57,759 ) $ 139,474 $ 125,475 $ 166,440 $ 139,474 2015 and 20142015 was $16.8$18.0 million, $13.4$16.8 million and $10.6$13.4 million, respectively.9– Inventoryfirst-in, first-outfirst-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. $ 8,057 $ 8,589 $ 9,767 $ 8,057 1,531 1,529 1,998 1,531 9,588 10,118 11,765 9,588 (278 ) (347 ) (494 ) (278 ) $ 9,310 $ 9,771 $ 11,271 $ 9,310 10– Financing ObligationsCompany has noCompany’s debt asconsists of December 31, 2016 and 2015.the following: $ 5,000 $ - $ 5,000 $ - 11– Employee Benefit Plans401(k)401(k) retirement plan that covers employees in the United States. Under the plan, a full-time or regular part-time (over 20 hours/week) employee becomes a participant after completing three months of employment. Employees may elect to contribute up to 50 percent of regular gross pay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions and may make a discretionary contribution to the plan. Total employer contributions were approximately $1.6$1.9 million, $1.2$1.6 million and $0.8$1.2 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.contributionscontributions were approximately $0.2$0.3 million, $0.2$0.2 million and $0.1$0.2 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.12– Stock-Based Compensation(2000(2000 Plan) and the 2012 Long-Term Incentive Plan (2012(2012 Plan). Upon the adoption of the 2012 Plan on February 21,2012, all shares that were reserved but not issued under the 2000 Plan were assumed by the 2012 Plan. No additional shares will be issued under the 2000 Plan. Under the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, performance stock, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee of the board of directors may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant. Restricted stock is valued at fair market value on the date of grant.six-monthsix-month offering periods with a single purchase period, and at the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. The Company determines the fair value stock-based compensation related to its ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.EmployeesEmployees purchased 40,27941,307 and 31,90540,279 shares of common stock under the ESPP at an average exercise price of $48.38$48.91 and $53.64$48.38 during 20162017 and 2015,2016, respectively. As of December 31, 2016, 1,285,3142017, 1,244,007 shares remained available for future issuance under the ESPP.grantsgrants requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using the Company’sCompany’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expected term, stock price volatility and forfeiture rates.Proto Labs, Inc.Notes to Consolidated Financial StatementsCompany’sCompany's stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. Prior to its IPO, the Company estimated the fair value of its common stock using the assistance of an independent third-party valuation specialist using the income and market approach.outstanding. The Company estimatedestimates the volatility of its stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, the Company is required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vestingaccounts for forfeitures and record stock-based compensation expense for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, stock-based compensation expense could be significantly different from what has been recorded.as they occur. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period.TheThe following table summarizes stock-based compensation expense for thethe years ended December 31,2017,2016 2015 and 2014,2015, respectively: $ 6,177 $ 5,580 $ 4,386 $ 7,954 $ 6,177 $ 5,580 598 502 423 604 598 502 $ 6,775 $ 6,082 $ 4,809 $ 8,558 $ 6,775 $ 6,082 $ 691 $ 513 $ 386 $ 970 $ 691 $ 513 977 1,074 927 1,429 977 1,074 1,396 1,285 1,048 1,091 1,396 1,285 3,711 3,210 2,448 5,068 3,711 3,210 $ 6,775 $ 6,082 $ 4,809 $ 8,558 $ 6,775 $ 6,082 (2,042 ) (1,859 ) (1,524 ) $ 4,733 $ 4,223 $ 3,285 2015 and 2014:2015: 1.53 - 2.68% 1.69 - 1.77% 0.43 - 2.14% 2.24 - 2.36% 1.53 - 2.68% 1.69 - 1.77% 6.50 5.50 - 6.50 2.00 - 6.50 6.50 6.50 5.50 - 6.50 44.38 - 45.93% 46.80 - 47.23% 47.29 - 49.30% 42.68 - 44.68% 44.38 - 45.93% 46.80 - 47.23% 0% 0% 0% 0% 0% 0% $26.61 $32.42 $32.65 $32.26 $26.61 $32.42 2015 and 2014:2015: 1,143,250 $ 19.03 116,050 72.17 (253,544 ) 13.77 (6,769 ) 26.23 998,987 26.49 998,987 $ 26.49 110,335 67.36 110,335 67.36 (316,761 ) 14.36 (316,761 ) 14.36 (26,519 ) 51.72 (26,519 ) 51.72 766,042 36.52 766,042 36.52 117,480 57.99 117,480 57.99 (226,164 ) 16.65 (226,164 ) 16.65 (87,719 ) 61.41 (87,719 ) 61.41 569,639 $ 45.00 569,639 45.00 60,100 69.06 (187,313 ) 35.93 (43,371 ) 61.02 399,055 $ 51.13 320,973 $ 34.65 239,482 $ 42.08 generally have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vesting period, which is generally a five-yearfive-year period, beginning on the first anniversary of the grant date, subject to the employee’semployee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date. 2015 and 2014,2015, was $11.1$7.0 million, $18.6$11.1 million and $16.3$18.6 million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices.2016,7, the weighted-average remaining contractual term was 6.05.2 years and the aggregate intrinsic value was $7.4$20.7 million. For options exercisable at December 31, 2016, 2017, the weighted-average remaining contractual term was 4.63.2 years and the aggregate intrinsic value was $6.8$14.6 million. Refer to the table below for additional information. 2016:2017:
Average Remaining
Average Remaining to $7.85 29,491 1.72 $ 4.98 29,491 $ 4.98 $7.85 6,000 1.33 $ 5.56 6,000 $ 5.56 $7.86 74,100 3.87 7.86 74,100 7.86 53,100 1.44 7.86 53,100 7.86 to $31.43 102,188 5.09 27.62 80,409 26.82 $31.43 47,788 4.03 26.68 47,788 26.68 to $47.15 56,428 6.08 44.05 24,936 41.95 $47.15 7,816 1.76 47.08 5,390 47.08 to $66.87 176,743 6.85 57.89 68,116 58.47 $66.87 179,032 6.23 58.35 78,874 58.83 to $78.59 130,689 7.62 71.64 43,921 73.01 $96.20 105,319 6.29 74.69 48,330 71.57 2016,2017, there was $5.3$3.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 3.03.3 years. The total fair value of options vested was $3.6$2.8 million, $2.8$3.6 million and $3.2$2.8 million for the years ended December 31,2017,2016 2015 and 2014,2015, respectively.five-yearfive-year period, beginning on the first anniversary of the grant date, subject to the employee’semployee’s continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date. Restricted stock at January 1, 2014 - $ - Granted 77,647 69.18 Restrictions lapsed (798 ) 62.68 Forfeited (275 ) 62.68 76,574 69.27 76,574 $ 69.27 68,580 68.89 68,580 68.89 (16,863 ) 69.25 (16,863 ) 69.25 (3,898 ) 72.14 (3,898 ) 72.14 124,393 68.97 124,393 68.97 161,555 59.37 161,555 59.37 (41,415 ) 67.78 (41,415 ) 67.78 (29,428 ) 63.23 (29,428 ) 63.23 215,105 $ 62.78 215,105 62.78 210,744 63.70 (60,102 ) 63.60 (30,916 ) 61.99 334,831 $ 63.29 December December 31, 2016,2017, there was $11.0$17.5 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 3.73.8 years. - $ - - - - - - - - - - - - - - - - - 25,707 58.35 - - - - 25,707 $ 58.35 2015 and 2014:2015: 0.56 - 0.59% 0.08 - 0.39% 0.01 - 0.11% 0.97 - 1.48% 0.56 - 0.59% 0.08 - 0.39% 6.00 6.00 6.00 6.00 6.00 6.00 39.51 - 49.13% 29.41 - 37.64% 37.64 - 39.80% 24.49 - 34.51% 39.51 - 49.13% 29.41 - 37.64% 0% 0% 0% 0% 0% 0% 13 – Commitmentstwothree of its U.S. facilities and the leasewith terms expire in July 2017 and May 2018.expiring at various times from 2018 to 2022. The Company also leases office space in the United Kingdom, France, Germany and Italy with terms expiring at various times from 20172018 to 2023. The Company leases an office and manufacturing space in Japan, and the initial term expires in April 2023. The Company also leases office and manufacturing space for former Alphaform in Germany and Finland with terms expiring at various times from 20172018 to 2022.Future minimum commitments under non-cancelable leases at December 31, 2016, are as follows: $ 3,531 2,945 1,960 1,644 1,623 2,148 $ 13,851 Rental expense was approximately $3.6 million, $1.4 million and $1.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. $ 4,322 2,508 2,026 1,975 1,948 186 $ 12,965 1144– Accumulated Other Comprehensive LossLossthethe years ending December 31, 2017, 2016 2015 and 2014,2015, respectively: $ (5,212 ) $ (2,929 ) $ (1,091 ) $ (10,753 ) $ (5,212 ) $ (2,929 ) (5,541 ) (2,283 ) (1,838 ) 5,519 (5,541 ) (2,283 ) - - - - - - (5,541 ) (2,283 ) (1,838 ) 5,519 (5,541 ) (2,283 ) $ (10,753 ) $ (5,212 ) $ (2,929 ) $ (5,234 ) $ (10,753 ) $ (5,212 ) 15– Income Taxes 2015 and 2014,2015, the Company recorded an income tax provision of $21.5$22.7 million, $21.3$21.5 million and $18.9$21.3 million, respectively. The effective income tax rate for the years ended December 31,2017,2016 and 2015 was 30.4 percent, 33.4 percent and 31.5 percent, respectively.2016, 20152017, we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a reasonable estimate on the effects of the transition tax and 2014 was 33.4 percent, 31.5 percentrecognized a provisional amount of $2.4 million which is included as a component of income tax expense from continuing operations. The foreign tax effects of the transition tax is based on our total post-1986 earnings and 31.2 percent, respectively.profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed our calculation of the total post-1986 E&P. Furthermore, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. $ 59,232 $ 59,421 $ 51,052 $ 69,929 $ 59,232 $ 59,421 4,989 8,440 9,479 4,506 4,989 8,440 $ 64,221 $ 67,861 $ 60,531 $ 74,435 $ 64,221 $ 67,861 $ 15,119 $ 15,845 $ 17,413 1,091 1,074 1,185 2,439 1,591 2,149 2,758 2,798 (1,821 ) 75 (38 ) (17 ) (1,960 ) 294 130 1,992 (217 ) (143 ) $ 21,514 $ 21,347 $ 18,896 $ 17,808 $ 15,119 $ 15,845 1,367 1,091 1,074 2,215 2,439 1,591 865 2,758 2,798 193 75 (38 ) (1,918 ) (1,960 ) 294 2,127 1,992 (217 ) $ 22,657 $ 21,514 $ 21,347 Proto Labs, Inc.Notes to Consolidated Financial Statements 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 0.6 0.5 0.5 1.7 0.6 0.5 (0.8 ) 0.6 0.2 (0.6 ) (0.8 ) 0.6 3.1 (0.3 ) (0.2 ) 2.9 3.1 (0.3 ) (2.2 ) (2.9 ) (0.8 ) (2.2 ) (2.2 ) (2.9 ) (2.8 ) (1.8 ) (2.1 ) (1.9 ) (2.8 ) (1.8 ) 1.4 1.5 0.4 0.9 1.4 1.5 (1.8 ) (1.4 ) (2.1 ) (2.5 ) (1.8 ) (1.4 ) 0.9 0.3 0.3 (0.4 ) 0.9 0.3 Transition tax 3.2 - - (5.7 ) - - 33.4 % 31.5 % 31.2 % 30.4 % 33.4 % 31.5 % $ 857 $ 628 $ 756 $ 857 3,226 2,828 2,309 3,226 612 499 429 612 169 177 220 169 983 856 625 983 4,333 2,409 6,374 4,333 (4,559 ) (2,625 ) (6,633 ) (4,559 ) 5,621 4,772 4,080 5,621 (10,860 ) (7,945 ) (9,528 ) (10,860 ) (1,764 ) (1,067 ) (1,518 ) (1,764 ) (12,624 ) (9,012 ) (11,046 ) (12,624 ) $ (7,003 ) $ (4,240 ) $ (6,966 ) $ (7,003 ) 2016.2017. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2016,2017, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $26.6$26.5 million.Proto Labs, Inc.Notes to Consolidated Financial Statements2016,2017, the Company had estimated net operating loss carry forwards of $13.421.9 million for tax purposes. The net operating losses relate to operations in Japan and Germany. Japan losses can be carried forward for ten years but are limited to 8050 percent of taxable income. Germany net operating losses may be carried forward without any time limitations but are limited to €1€1 million, plus 50%50 percent of taxable income exceeding €1€1 million. Japan net operating losses begin to expire at various dates between 2018 and 2026. The Company’s Japan operations are taxed both by local authorities and in the U.S. Accordingly, a portion of Japan net operating losses has been recognized as a benefit in the U.S.evidence,e, it is considered more-likely-than-notmore-likely-than-not that a portion of the deferred tax assets will not be realized. The Company's valuation allowances of $4.6$6.6 million and $2.6$4.6 million at December 31, 2016 2017 and 2015,2016, respectively, reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient positive evidence for recognition. The increase in the valuation allowance is primarily attributable to fluctuations in foreign currency and the net operating losses incurred in Japan and Germany in 2016.2017.authoritiesauthorities for years before 2012.2013.$3.8$4.2 million and $2.8$3.8 million at December 31, 2016 2017 and 2015,2016, 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 does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2017, 2016 2015 and 2014.2015. $ 2,769 $ 1,295 $ 3,796 $ 2,769 1,077 919 831 1,077 170 555 48 170 (220 ) - (442 ) (220 ) $ 3,796 $ 2,769 $ 4,233 $ 3,796 16–LitigationBeginning in the fourth quarter of 2016, the Company revised itsThe Company’s reportable segments to beare based upon geographic region, consisting of the United States and Europe. Prior to this change, the CODM managed based on consolidated operating information. Prior period segment reporting disclosures have been restated to present such information on a comparable basis. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that are global in nature and that the Company does not allocate directly to its operating segments.Proto Labs, Inc.Notes to Consolidated Financial Statements3D-printed3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal parts.the Note 2 – Summary of Significant Accounting Policies note.Policies. Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. $ 223,930 $ 208,018 $ 165,117 63,365 47,433 37,491 10,760 8,655 6,975 $ 298,055 $ 264,106 $ 209,583 $ 89,308 $ 86,450 $ 74,445 $ 263,086 $ 223,930 $ 208,018 11,657 13,304 14,734 70,154 63,365 47,433 (39,198 ) (32,605 ) (28,651 ) $ 61,767 $ 67,149 $ 60,528 11,250 10,760 8,655 $ 344,490 $ 298,055 $ 264,106 $ 103,136 $ 89,308 $ 86,450 12,846 11,657 13,304 (43,756 ) (39,198 ) (32,605 ) $ 72,226 $ 61,767 $ 67,149 $ 108,650 $ 98,633 $ 76,923 $ 125,308 $ 108,650 $ 98,633 23,199 23,636 12,512 33,691 23,199 23,636 7,625 3,206 2,191 7,441 7,625 3,206 $ 139,474 $ 125,475 $ 91,626 $ 166,440 $ 139,474 $ 125,475 $ 21,190 $ 32,560 $ 33,480 $ 20,370 $ 21,190 $ 32,560 5,954 10,396 9,520 11,704 5,954 10,396 6,472 1,406 507 561 6,472 1,406 $ 33,616 $ 44,362 $ 43,507 $ 32,635 $ 33,616 $ 44,362 $ 12,533 $ 11,596 $ 9,233 $ 13,267 $ 12,533 $ 11,596 3,386 2,132 1,530 4,174 3,386 2,132 1,566 398 375 1,033 1,566 398 $ 17,485 $ 14,126 $ 11,138 $ 18,474 $ 17,485 $ 14,126 3D PrintingSheet Metal product lines. Total revenue by product lines is as follows: $ 175,974 $ 163,387 $ 140,282 $ 194,432 $ 175,974 $ 163,387 81,407 74,368 59,914 103,739 81,407 74,368 37,847 25,132 9,387 43,329 37,847 25,132 1,767 - - 2,827 1,219 - 1,223 2,827 1,219 $ 298,055 $ 264,106 $ 209,583 $ 344,490 $ 298,055 $ 264,106 On February 9, 2017, the Company announced that its board of directors had authorized the repurchase of shares of the Company’s common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million. The timing and amount of any share repurchases will be determined by the Company’s management based on market conditions and other factors. The term of the program runs through December 31, 2021.None.time framestimeframes specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.2016,2017, the Company’s internal control over financial reporting is effective. The Company’s registered public accounting firm’s attestation report on the Company’s internal control over financial reporting is provided in Part II, Item 8 of this Annual Report on Form 10-K.20172018 Proxy Statement under the caption “Proposal 1 — Election of Directors,” which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference.20172018 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. The information required by this item under Items 407 (c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference to the section titled “Corporate Governance” of our 2015 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.20172018 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.20178 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Information related to our equity compensation plans required by this item is incorporated herein by reference to the section titled “Compensation Discussion and Analysis – Information Regarding Equity-Based Compensation Plans” of our 20172018 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.“Corporate“Corporate Governance — Certain Relationships and Related Party Transactions,” and “Corporate Governance — Director Independence” of our 20172018 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.20178 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.15. 15. Exhibits and Financial Statement SchedulesProto Labs, Inc. Date: February 23, 2018 /s/ Victoria M. Holt Victoria M. Holt Proto Labs, Inc.President and Chief Executive Officer 22, 2017/s/ Victoria M. HoltVictoria M. HoltPresident and Chief Executive Officer(Principal Executive Officer)Date: February 22, 201723, 2018Date: February 23, 2018 /s/ Victoria M. Holt Victoria M. Holt 22, 201723, 2018Victoria M. HoltVictoria M. HoltPresident and Chief Executive Officer and Director(Principal Executive Officer)Date: February 22, 2017/s/ John A. WayDirectors:Directors:Lawrence J. LukisSven A. Wehrwein*Gawlick*Gawlick*Brian K. Smith*Sven A. WehrweinDonald G. Krantz*Date: February 23, 2018 /s/ Victoria M. Holt Date: February 22, 2017/s/ Victoria M. HoltVictoria M. HoltEXHIBIT INDEX13,1, 2012.(19)(20)(20)(21)(21)(22)(22)(23)(23)(24)(24)(25)(25)(26)(26)(27)(27)(28)3.110.1 to the Company’s Form 8-K, filed with the Commission on April 6, 2015.(28)(29)Incorporated by reference to Exhibit 10.1 to the Company'sCompany’s Form 8-K, filed with the Commission on February 17, 2017. 82