UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549________________ FORM 10-K(Mark One) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35435 Proto Labs, Inc.(Exact name of Registrant as specified in its charter) Minnesota 41-1939628(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.) 5540 Pioneer Creek Drive Maple Plain, Minnesota 55359(Address of principal executive offices) (Zip Code) (763) 479-3680(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, Par Value $0.001 Per ShareNew 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 of1934 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 suchfiling 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 Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theRegistrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☐ 1 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒Accelerated filer ☐ Non-accelerated filer ☐(Do not check if a smaller reporting company)Smaller reporting company ☐ 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, 2014 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stockheld by non-affiliates of the Registrant was approximately $1.9 billion. As of February 20, 2015, there were 25,872,439 shares of the Registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement for its 2015 Annual Meeting of Shareholders are incorporated by reference to Part III of this Annual Reporton Form 10-K. 2 Table of Contents PagePART IItem 1. Business 5Item 1A. Risk Factors 12Item 1B. Unresolved Staff Comments 26Item 2. Properties 26Item 3. Legal Proceedings 26Item 4. Mine Safety Disclosures 26 PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27Item 6. Selected Financial Data 29Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47Item 8. Financial Statements and Supplementary Data 48Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 74Item 9A. Controls and Procedures 74Item 9B. Other Information 74 PART IIIItem 10. Directors, Executive Officers and Corporate Governance 75Item 11. Executive Compensation 75Item 12. Security Ownership of Certain Beneficial Owners and Management 75Item 13. Certain Relationships and Related Transactions, and Director Independence 75Item 14. Principal Accountant Fees and Services 75 PART IVItem 15. Exhibits and Financial Statement Schedules 76 3 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 followingwords: “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 thoseexpressed 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 to continue to sell to existing and new customers; •our ability to meet product developers’ and engineers’ 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 business; •any failure 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, integrate 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 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 onForm 10-K and uncertainties detailed in this and other reports and filings with the Securities and Exchange Commission (SEC). Other unknown orunpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance orachievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent orobligation to update any forward-looking statements to reflect subsequent events or circumstances. 4 PART I Item 1. Business 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 thebusiness and operations of Proto Labs, Inc. and its subsidiaries. We are a leading online and technology-enabled, quick-turn, on-demand manufacturer ofcustom parts for prototyping and short-run production. We manufacture parts for product developers and engineers worldwide who are under increasingpressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC)machining and additive manufacturing to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consumingand expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over theInternet. 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 webelieve are three of the largest geographic markets where these product developers and engineers are located. We believe our use of advanced technologyenables us to offer significant advantages at competitive prices to many product developers and engineers and is the primary reason we have become aleading supplier of custom parts. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipmentset-up and non-recurring engineering processes required to produce custom parts. Our customers typically order low volumes of custom parts for a varietyof reasons, including: •they need a prototype to confirm the form, fit and function of one or more components of a product under development; •they need an initial supply of parts to support pilot production while their high-volume production mold is being prepared; •they need on-demand manufacturing due to disruptions in their manufacturing process; •their product will only be released in a limited quantity; or •they need end-of-life production support. In each of these instances, we believe our solution provides product developers and engineers with an exceptional combination of speed,competitive pricing, ease of use and reliability that they typically cannot find among conventional custom parts manufacturers. Our technology enablesus to ship parts in as little as the same day after receipt of a customer’s design submission. Our manufacturing product lines currently include injection molding, CNC machining and additive manufacturing. We continually seek to expandthe 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 toidentify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of productdevelopers and engineers. We have experienced significant growth since our inception in 1999. We have grown our total revenue from $64.9 million in 2010 to $209.6million in 2014. We have grown our income from operations from $15.9 million in 2010 to $60.5 million in 2014. Our increase in revenue and income from operations is due to our expansion of product lines offered. Product lines have expanded over the years bythe introduction of: •plastic injection molding in 1999; •CNC machining through our Firstcut product line in 2007; •liquid silicone rubber (LSR) and metal injection molding (MIM) that expanded the breadth and scope of our injection molding productline in 2014; and •additive manufacturing technologies, often referred to as 3D printing, including stereolithography (SL), selective laser sintering (SLS), anddirect metal laser sintering (DMLS), through our acquisition of FineLine Prototyping, Inc. (FineLine) in 2014. 5 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 usedto create physical parts for concept modeling, prototyping, functional testing, market evaluation or production. Custom prototype parts play a criticalrole in the product development process, as they provide product developers and engineers with the ability to confirm their intended performancerequirements and explore design alternatives. Early in the product development process, additive rapid prototyping processes such as stereolithography, selective laser sintering, fused depositionmodeling (FDM) or direct metal laser sintering can be used to quickly produce an approximate physical representation of a part, but these representationsmay not meet product developers’ and engineers’ requirements for dimensional accuracy, cosmetics or material properties. As an alternative orsupplement to additive rapid prototyping, CNC machining 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. Both CNC machiningand injection molding yield a finished product or part with the look, feel and performance of the finished product. Our Solution We have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required inquoting, production engineering and manufacturing of custom parts. We believe our interactive web-based interface and highly automated processesaddress the desires of many product developers and engineers for a fast, efficient and cost-effective means of obtaining custom parts and is the primaryreason we have become a leading supplier of custom parts. Key elements of our solution include: Sophisticated Technology that Reduces Turnaround Time Our web-based interface and proprietary software automate many of the manual and time-consuming processes typically required to obtain customadditive manufactured (3D printed), CNC-machined or injection-molded parts from conventional suppliers. This platform automates many aspects of theentire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generationand mold or part manufacture. A prospective customer uploads a 3D CAD file of their required part through our website, and often within minutes oursoftware analyzes the manufacturability of the product and, if we are able to make the part, returns a firm price quotation with any recommendations fordesign modifications. In the case of CNC machining, this manufacturability analysis identifies features that may be too fragile to be machined and areasthat cannot be machined at all. For injection molding, problematic features such as undercuts, thin areas, thick areas and areas requiring geometryadjustments to allow the part to be ejected from the mold are identified. Many of our customers find this analysis particularly helpful, as it diagnoses andprevents potential problems prior to manufacturing. We can also provide a flow analysis to identify parts that may be so thin and large that plastic willsolidify before the mold can be completely filled. Our manufacturability analysis plays a significant role in our automated pricing algorithms. 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 laborrequired to manufacture parts that normally require skilled labor. As a result, in many cases we are able to quote orders in minutes and ship parts in aslittle 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 itsmanufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3DCAD part design submissions and provide feedback to our prospective product developer and engineer customers. In 2014 alone, we generatedquotations for over 470,000 design submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to processlarge numbers of unique designs and efficiently manufacture the related parts to meet the needs of product developers and engineers. 6 Enhanced Customer Experience Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysisthen quickly analyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides suggested designmodifications to enhance manufacturability, presented to the product developer or engineer in an interactive quotation containing a color-coded 3Drepresentation of the part. This allows product developers and engineers to quickly determine the manufacturability of their parts, what they will cost andwhen they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an order’s various parameters such asmaterial, finish, quantity or shipping schedule. As a result, we provide product developers and engineers with an easy-to-use and consistent means ofobtaining custom parts. Attractive Custom Pricing Based on internal market research, we believe we generally have competitive pricing on custom orders. We believe this is a direct result of ourtechnology and the efficiency of our operations, both of which were designed specifically for custom parts production. By limiting these costs, we cantypically offer attractive pricing not normally possible in the custom parts market, and as a result, we can typically offer product developers andengineers competitive prices on custom manufactured parts. Monitoring and Control We have developed a proprietary, intranet-based monitoring and control system that allows us to monitor key aspects of our entire worldwideoperations in real time using an easy to understand management dashboard. This system provides us with the ability to quickly react to new informationacross our organization. Our Product Lines Our Fineline, Firstcut and Protomold product lines offer many product developers and engineers the ability to quickly and efficiently outsourcetheir quick-turn custom parts manufacturing. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” forthe historical revenue generated by each of Fineline, Firstcut and Protomold. Fineline Our Fineline additive manufacturing product line, often referred to as 3D printing, includes SL, SLS and DMLS processes, which offers customers awide-variety of high-quality, precision rapid prototyping. These processes create parts with a high level of accuracy, detail, strength and durability. Firstcut Our Firstcut product line uses commercially available CNC machines to cut plastic or metal blocks into one or more custom parts based on the 3DCAD model uploaded by the product developer or engineer. Our efficiencies derive from the automation of the programming of these machines and aproprietary fixturing process. The Firstcut product line is well suited to produce small quantities, typically in the range of one to 100 parts. Protomold Our Protomold product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic, metal, orliquid silicone injection molds, which are then used to produce custom injection-molded parts on commercially available equipment. Our Protomoldproduct line is used for prototype, on-demand and short-run production. Prototype quantities typically range from 25 to 100 parts. Because we retainpossession of the molds, customers who need short-run production often come back to Protomold for additional quantities typically ranging up to 10,000parts or more. They do so to support pilot production while their tooling for high-volume production is being prepared, because they need on-demandmanufacturing due to disruptions in their manufacturing process, because their product will only be released in a limited quantity, or because they needend-of-life production support. These additional part orders typically occur on approximately half of the molds that we make, typically accounting forapproximately half of our total Protomold revenue. 7 Our Process The process for Fineline, Firstcut and Protomold begins when the product developer or engineer uploads one or more 3D CAD models representingthe desired part geometry. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and supportthe creation of an interactive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to theproduct developer or engineer, who can access the quotation, change a variety of order parameters and instantly see the effect on price before finalizingthe order. For Fineline, the quote is reviewed to ensure the part is able to be built and then scheduled for production. For Firstcut, the tool paths arereviewed and routed to our high-speed CNC machining centers for execution. In the case of Protomold, our proprietary software supports the creation ofthe 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 Fineline product line, we ship parts ina few days from the date of design submission. For our Firstcut product line, we ship parts in as little as the same day as the order is received. For ourProtomold product line, we ship parts in as little as one business day from design submission. We ship our parts via small parcel common carriers onstandard terms and conditions. Our Growth Strategy The principal elements of our growth strategy are to: Expand the Customer Base We plan to expand our customer base to include more product developers and engineers within the companies that have already used our productlines. Individual product developers and engineers typically make or influence the choice of vendor when sourcing custom parts. We believe a significantopportunity exists for us to leverage highly satisfied product developers and engineers to encourage others within the same organization to utilize ourproduct lines. We have historically generated a significant number of new customers through word-of-mouth referrals from other product developers andengineers, and we plan to combine these referrals with the efforts of our marketing and sales force to identify and market our product lines to thecolleagues 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 yetused our products. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential newcustomer 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 theUnited States, Europe and Japan, where we believe a substantial portion of the world’s product developers and engineers are located. We entered theEuropean market in 2005 and launched operations in Japan in 2009. For 2014, revenue earned in these markets represents approximately 21% of our totalrevenue. While we currently do not have specific plans to expand into any particular geographic markets, we believe opportunities exist to serve theneeds 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 furtherincrease automation and meet the evolving needs of product developers and engineers worldwide. We believe product developers and engineers havecome to expect advanced web-based tools and a fully integrated Internet platform from their vendors. We will continue to use the Internet to provideproduct developers and engineers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactivequotations quickly and efficiently. Add Manufacturing Processes We seek to identify additional manufacturing processes to which we can apply our technology and expertise to meet a greater range of productdevelopers’ and engineers’ needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunityto cross-sell our existing product lines to our existing customer base. We regularly evaluate new manufacturing processes to offer to product developersand engineers and introduce such new processes when we are confident that a sufficient market demand exists and that we can offer the same advantagesour customers have come to expect from us. See Item 6. “Selected Financial Data” for disclosure of our historical research and development expenses. 8 Examples of new manufacturing processes include Firscut, the acquisition of FineLine and the launch of metal injection molding and liquidsilicone rubber injection molding. Our Firstcut product line was first introduced in the United States in 2007 and has grown to represent 29% of our totalrevenue in the year ended December 31, 2014. In April 2014, we added additive manufacturing technologies through our acquisition of FineLinePrototyping, Inc. During 2014, we introduced metal injection molding of steel alloys and stainless steel, and liquid silicone rubber injection molding tofurther expand our product offerings. 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 researchand development efforts to expand the range of parts that we can produce. Since we first introduced our Protomold injection molding product line in1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extendthe diversity of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining product line in 2007, we have expandedthe range of part sizes, design geometries and materials we can support. As we continue to expand the range of our existing process capabilities, webelieve we will meet the needs of a broader set of product developers and engineers and consequently convert a higher number of quotation requests intoorders. Marketing Our international, integrated marketing effort generates leads for our sales teams and seeks to strengthen our reputation as a leader in the field ofquick-turn custom parts manufacturing. Much of our marketing activities occur over the Internet. We use marketing automation software to enhance theproductivity of our sales and marketing teams and to track results of all campaigns to enhance our marketing return on investment. We maintain brand awareness with product developers and engineers through the regular distribution of technical information including designguidelines, engineering white papers and a quarterly journal targeted at product developers and engineers. We also send out product giveaways thathighlight technical aspects of injection molding we feel would be of interest to product developers and engineers. We believe these educational materialsare key aspects of our lead generation efforts. In our Cool Idea! marketing program, we plan to award up to a total of $250,000 of our product lines toentrepreneurs with a “cool idea.” In addition to supporting entrepreneurs and innovative product development, we believe this program can generategood will, press coverage and word-of-mouth brand awareness. 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 keyadvantages of our product lines over alternate methods of custom parts manufacturing. We organize our sales team into complementary roles: businessdevelopment, account management and national account management, with the former focused on selling to new customer companies and the latter twofocused on expanding sales within existing customer companies. We believe our sales staff is adept at researching customer companies and networking tofind additional product developers and engineers who may have a need for our products. We also have a team of customer service engineers who cansupport highly technical engineering discussions with product developers and engineers as required during the sales process. Our revenue is generatedfrom a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2014. Competition The market for custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. Ourpotential competitors include: •Captive in-house manufacturing. Many larger companies undertaking product development have established additive rapid prototyping,CNC machining or injection molding capabilities internally to support prototyping or manufacturing requirements of their productdevelopers and engineers. •Other custom parts manufacturers. There are thousands of alternative manufacturing machine shops, injection molding suppliers, andvendors worldwide. The size and scale of these businesses range from very small specialty shops to large, high-volume productionmanufacturers. We believe that the key competitive factors in our industry include: •Speed: turnaround time for quotations and parts; 9 •Price: mold and part pricing; •Service: overall customer experience, from web interface to post-sales support; •Capability: size and dimensional complexity of the part, various manufacturing processes offered, materials supported and post-processingprovided; •Quality: dimensional accuracy, surface finish, material properties, color and cleanliness; and •Capacity: ability to support multiple part designs in parallel. We believe that we have competitive strengths that position us favorably and have enabled us to become a leader in our markets. We also believethat substantially all of our current direct competitors are relatively small in terms of size of operations, revenue, number of customers and volume of partssold, and generally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger andmore established companies with developed technological capabilities, may begin to focus on custom parts manufacturing. These companies could moredirectly compete with us, along with our existing competitors, and both could also launch new products and product lines that we do not offer that mayquickly 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 toour 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 otherjurisdictions as we deem appropriate. As of December 31, 2014, we own and have applications pending for patents relating to various aspects of ourquoting and manufacturing processes as follows: Issued Applications Jurisdiction Patents Pending United States 16 2 United Kindgom 2 0 Germany 0 2 Our patents have expiration dates ranging from 2022 to 2032. We also own approximately 13 registered United States trademarks or service marksas of December 31, 2014, with corresponding registered protection in Europe and Japan for the most important of these marks such as PROTO LABS,PROTOMOLD, FIRSTCUT, PROTOQUOTE, FIRSTQUOTE and PROTOFLOW and corresponding registered protection in Australia, Canada and Mexicofor 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 infringeor 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 ordinarycourse of our business. In particular, we may face claims from third parties that we have infringed their patents, trademarks or other intellectual propertyrights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Any unauthorized disclosureor use of our intellectual property could make it more expensive to do business and harm our operating results. Employees As of December 31, 2014, we had 1,077 full-time employees. None of our employees is covered by a collective bargaining agreement. We considerour current relationship with our employees to be good. We also regularly use independent contractors and other temporary employees across theorganization to augment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retainqualified personnel. 10 Available Information Our principal executive offices are located 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 wefile 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 reasonablypracticable after they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly Reports onForm 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 ofour website or through the SEC’s website at 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 forthe past five years: Victoria M. Holt 57 President, Chief Executive Officer and DirectorRobert Bodor 42 Vice President/General Manager - AmericasJohn A. Way 42 Chief Financial Officer and Executive Vice President of DevelopmentDonald G. Krantz 59 Executive Vice President and Technology OfficerJacqueline D.Schneider 50 Vice President of Global SalesJohn B. Tumelty 44 Vice President/General Manager and Managing Director – Europe, Middle East and Africa Executive officers of the Company are elected at the discretion of the board of directors with no fixed terms. There are no family relationshipsbetween 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 asPresident and Chief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September2010 until Spartech was purchased by PolyOne Corporation in March 2013. Prior to Spartech, Ms. Holt worked at PPG Industries, a leading coatings andspecialty products company, serving as Senior Vice President, Glass and Fiber Glass, from May 2005 until September 2010. Ms. Holt also is a member ofthe 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 tojoining Proto Labs, from January 2011 to December 2012, Dr. Bodor held several roles at Honeywell, most recently leading SaaS business offerings forHoneywell’s Life Safety Division. From August 2009 to October 2010, Dr. Bodor served as Chief Technology Officer for Luma, LLC (formerly known asInveni LLC), a web-based technology company. From September 2005 to August 2009, Dr. Bodor held various positions with McKinsey & Company,advising Fortune 500 companies in the high technology, industrial, and medical sectors, most recently as Engagement Manager. John A. Way. Mr. Way has served as our Chief Financial Officer and Executive Vice President of Development since December 2014. From October2013 to September 2014, Mr. Way served as Chief Financial Officer of Univita Health Inc., a privately held home healthcare service provider. FromSeptember 2012 to July 2013, Mr. Way served as Chief Financial Officer of Virtual Radiologic, a global telemedicine company. From October 2002 toNovember 2012, Mr. Way worked in senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer ofOptum Collaborative Care, SecureHorizons and OptumHealth. Before joining UnitedHealth, from 1996 to 2002, Mr. Way worked forPricewaterhouseCoopers LLP, including a two-year assignment in Germany. Donald G. Krantz. Dr. Krantz has served as our Executive Vice President and Technology Officer since January 2015. From January 2007 to January2015, Dr. Krantz served as our Chief Operating Officer. From November 2005 to January 2007, Dr. Krantz served as our Vice President of Development.Prior to joining Proto Labs, Dr. Krantz served in various roles at MTS Systems, Inc., a builder of custom precision testing and advanced manufacturingsystems, including as a business unit Vice President, Vice President of Engineering, and most recently, Chief Technology Officer. Dr. Krantz was anEngineering Fellow at Alliant Techsystems and Honeywell, Inc., and was named the 2005 Distinguished Alumnus of the Department of Computer Scienceand Engineering at the University of Minnesota. 11 Jacqueline D. Schneider. Ms. Schneider has served as our Vice President of Global Sales since January 2015. From February 2007 to January 2015,Ms. Schneider served as our Vice President of Sales and Customer Service. From November 2005 to February 2007, Ms. Schneider served as NationalSales Director for Comm-Works, LLC, a global technology provider. John B. Tumelty. Mr. Tumelty has served as the Vice President/General Manager and Managing Director – Europe, Middle East and Africa sinceJanuary 2015. Mr. Tumelty served as the Managing Director of Proto Labs, Limited from its inception in July 2005 to January 2015. Mr. Tumelty leadsour company’s operations in Europe. From March 1997 to June 2005, Mr. Tumelty held various positions at Western Thomson Plastics Ltd, anautomotive systems supplier, most recently as Managing Director. Item 1A. Risk Factors The following are the significant factors that could materially adversely affect our business, financial condition, or operating results, as well asadversely 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 tosuffer. The market for custom parts manufacturing is fragmented and highly competitive. We compete for customers with a wide variety of custom partsmanufacturers and methods. Some of our current and potential competitors include captive in-house product lines, other custom parts manufacturers, andalternative manufacturing vendors such as those utilizing stereolithography, selective laser sintering, fused deposition modeling and 3D printing.Moreover, some of our existing and potential competitors are researching, designing, developing and marketing other types of products and productlines. We also expect that future competition may arise from the development of allied or related techniques for custom parts manufacturing that are notencompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products and fromimprovements to existing technologies. And our competitors may attempt to adopt and improve upon key aspects of our business model, such asdevelopment of technology that automates much of the manual labor conventionally required to quote and manufacture custom parts, implementation ofinteractive web-based and automated user interface and quoting systems and/or building scalable operating models specifically designed for efficientcustom production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could useto compete with our business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that couldmore effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potentialcompetitors. To the extent companies terminate such relationships and establish alliances and relationships with our competitors, our business could beharmed. Existing and potential competitors may have substantially greater financial, technical, sales and marketing, manufacturing, distribution and otherresources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain internationallocations, 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 beable to maintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developingnew products is finding product lines for which our automated quotation and manufacturing processes offer an attractive value proposition, and we maynot be able to find any new product lines with potential economies of scale similar to our molding and machining product lines. If we do not keep pacewith technological change and introduce new technologies, processes and product lines, the demand for our products and product lines may decline andour operating results may suffer. Our success depends on our ability to deliver products and product lines that meet the needs of product developers and engineers and to effectivelyrespond 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 partsfor prototyping, support of internal manufacturing and limited quantity product release. Our business has been and we believe will continue to be affectedby changes in product developer and engineering requirements and preferences, rapid technological change, new product and product line introductionsand the emergence of new standards and practices, any of which could render our technology, products and product lines less attractive, uneconomical orobsolete. To the extent that our customers’ need for quick-turn parts decreases for any reason, it would likely have a material adverse effect on ourbusiness and operating results and harm our competitive position. In addition, CAD simulation and other technologies may reduce the demand forphysical prototype parts. Therefore, we believe that to remain competitive, we must continually expend resources to enhance and improve ourtechnology, product offerings and product lines. 12 In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to furtherdevelop our technology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processeswithin the research and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture. We believesuccessful 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 noguarantees 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 inmanufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted toexecuting on this aspect of our business plan will improve our business and operating results or result in increased demand for our products and productlines. Failures in this area could adversely impact our operating results and harm our reputation and brand. And even if we are successful in executing inthese areas, our industry is subject to rapid and significant technological change, and our competitors may develop new technologies, processes andproduct lines that are superior to ours. Our research and development costs were approximately $16.6 million, $11.9 million and $9.1 million for the yearsended December 31, 2014, 2013 and 2012, respectively, and there is no guarantee that these costs will enable us to maintain or grow our revenueprofitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form10-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 timelybasis, 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 andresults of operations. We believe many product developers and engineers are facing increased pressure from global competitors to be first to market with their finishedproducts, often resulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts hasbeen an important factor in our results to date. There are no guarantees we will be able to meet product developers’ and engineers’ increasing expectationsregarding quick turnaround time, especially as we increase the scope of our operations. If we fail to meet our customers’ expectations regardingturnaround 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 productionand personnel costs and our 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 ofoperations 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 abilityto 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’specifications in any given period, demand for our products and product lines could be negatively impacted and our business and results of operationscould 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 expandour 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 andrepeat customers to our websites in order to increase business and grow our revenue. Customer awareness, and the perceived value, of our brand willdepend largely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the required timeframesand positive customer experiences, which we may not do successfully. A primary component of our business strategy is the continued promotion andstrengthening of our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing effortsdirected toward enhancing our brand. We have initiated marketing efforts through social media, but this method of marketing may not be successful andsubjects us to a greater risk of inconsistent messaging and bad publicity. We may choose to increase our branding expense materially, but we cannot besure that this investment will be profitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on ourbusiness and ability to generate revenue. 13 Our business depends in part on our ability to process a large volume of new part designs from a diverse group of product developers andengineers 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 ourprospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new partdesigns we process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our businessand meet the needs of product developers and engineers could be negatively impacted. In addition, even if we do continue to process a large number ofnew part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we extract from thoseinteractions will be successfully utilized to help us identify significant business opportunities or better understand the needs of product developers andengineers. 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 thefuture, 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 ofany of these individuals, each of whom is “at will” and may terminate his or her employment relationship with us at any time, could disrupt ouroperations and significantly delay or prevent the achievement of our business objectives. We believe that our future success will also depend in part onour continued ability to identify, hire, train and motivate qualified personnel. A possible shortage of qualified individuals in the regions where weoperate might require us to pay increased compensation to attract and retain key employees, thereby increasing our costs. In addition, we face intensecompetition for qualified individuals from numerous companies, many of whom have substantially greater financial and other resources and namerecognition 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 retainqualified 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 ourbusiness, including investments in our infrastructure, technology, and sales and marketing efforts. These investments include dedicated facilitiesexpansion and increased staffing, both domestic and international. If our business does not generate the level of revenue required to support ourinvestment, 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 andresults of operations may be harmed. Over the past several years, we have experienced rapid growth. For example, we have grown from 341 full-time employees as of January 1, 2010 to1,077 full-time employees as of December 31, 2014. We have expanded internationally, including establishing manufacturing operations in Europe in2005 and in Japan in late 2009. In 2014, we expanded our product lines with additive manufacturing technologies, often referred to as 3D printing,through our acquisition of FineLine Prototyping, Inc. We expect this growth to continue and the number of countries and facilities from which we operateto increase in the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among otherthings, the following: •enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems andprocedures, in particular as we continue to operate as a global organization; 14 •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. These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employeeresources. And our growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on ouroperational, financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, inpart, 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 timelymanner, 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’ 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 andengineer submissions across geographies and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existingtechnology, processes and infrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may becomeincreasingly difficult to maintain and improve their performance, especially during periods of heavy usage and as our solutions become more complexand our user traffic increases across geographies. Similarly, our manufacturing automation technology may not enable us to process the large numbers ofunique designs and efficiently manufacture the related parts in a timely fashion to meet the needs of product developers and engineers as our businesscontinues to grow. Any failure in our ability to timely and effectively scale and adapt our existing technology, processes and infrastructure couldnegatively impact our ability to retain existing customers and attract new customers, damage our reputation and brand, result in lost revenue, andotherwise 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 from $64.9 million for the year ended December 31, 2010 to $209.6 million for the year ended December 31, 2014,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, anumber 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 asuperior experience; •develop new technologies or manufacturing processes, and broaden the range of parts we offer; •successfully execute on our international strategy and expand into new geographic markets; •capitalize on product developer and engineer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours perday/7 days per week; •increase the strength and awareness of our brand across geographies; •respond to changes in product developer and engineer needs, technology and our industry; and 15 •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 anumber 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 securitiesanalysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our commonstock will likely decline. Our operating results and financial condition may fluctuate due to a number of factors, including those listed below and those identified throughoutthis “Risk Factors” section: •the development of new competitive systems or processes by others; •the entry of new competitors into our market whether by established companies or by new companies; •changes in the size and complexity of our organization, including our international operations; •levels of sales of our products and product lines to new and existing customers; •the geographic distribution of our sales; •changes in product developer and engineer preferences or needs; •changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generallyincrease and may fluctuate in the future; •delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto; •our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth; •limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue; •changes in our pricing policies or those of our competitors, including our responses to price competition; •changes in the amount we spend in our marketing and other efforts; •unexpected increases in expenses as compared to our related accounting accruals or operating plan; •the volatile global economy; •general economic and industry conditions that affect customer demand and product development trends; •interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processesor other operations; •changes in accounting rules and tax and other laws; and •plant shutdowns due to a health pandemic or weather conditions. 16 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 otheroperations 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, informationtechnology systems, manufacturing processes and other operations are critical to our reputation and brand, and our ability to effectively service productdevelopers and engineers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technologysystems 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 ofoperations. 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, politicalinstability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce related issues, capacity constraintsdue 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 andturnaround speed are often of critical importance to these product developers and engineers. We are dependent upon our facilities through which wesatisfy all of our production demands and in which we house all of the computer hardware necessary to operate our websites and systems as well asmanagerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fullyredundant 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 productionsystems, 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, includingthe 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 partsmanufacturers 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 notwidespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD software. Concerns about privacy and technologicaland other problems may discourage some product developers and engineers from adopting the Internet as the medium for procuring their custom parts oradopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets orwith 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 theircustomer parts. If product developers and engineers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface andquotation system, or product developers and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could beadversely impacted. Our business depends on the development and maintenance of the Internet infrastructure. The success of our product lines will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenanceof a reliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, forproviding reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers ofusers and amount of traffic. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasingbandwidth requirements, or problems caused by “viruses,” “worms,” malware and similar programs may harm the performance of the Internet. Thebackbone computers of the Internet have been the targets of such programs. The Internet has experienced a variety of outages and other delays as a resultof 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 Internetusage generally as well as the level of usage of our product lines, which could adversely impact our business. 17 If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, ourreputation or brand may be harmed, and we may be exposed to liability. Our system stores, processes and transmits our customers’ confidential information, including the intellectual property in their part designs, creditcard information and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well asadministrative and physical safeguards, to secure such confidential information. Any compromise of our information security could damage ourreputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. Wemay not have adequately assessed the internal and external risks posed to the security of our company’s systems and information and may not haveimplemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most states haveenacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. Thesemandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospective customersto lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brandand 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 issuessuch as reduced access to capital for businesses may cause product developers and engineers to further delay or reduce the product development projectsthat our business supports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficultiesexperienced by our suppliers, product developers and engineers and other related risks to our business. 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. As ofDecember 31, 2014, 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 26%, 27% and 25% of our total revenue in the years endedDecember 31, 2014, 2013 and 2012, respectively. The future growth and profitability of our international business is subject to a variety of risks anduncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the UnitedStates and may again in the future: •difficulties in staffing and managing foreign operations, particularly in new geographic locations; •challenges in providing solutions across a significant distance, in different languages and among different cultures; •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; •fluctuations in foreign currency exchange rates; •differences in product developer and engineer preferences and means of procuring parts; •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; •different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certainareas; 18 •differing levels of use of the Internet or 3D CAD software; •seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe; •higher costs of doing business internationally; •interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad; •protectionist laws and business practices that favor local producers and service providers; •taxation; •energy costs; •restrictions imposed by local labor practices and laws on our business and operations; •workforce uncertainty in countries where labor unrest is more common than in the United States; •transportation delays; and •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 prospectivecustomers, and companies’ desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or socialconditions could affect potential customers in ways that reduce demand for our product lines, disrupt our manufacturing and sales plans and efforts orotherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways thatcould impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedgingtransactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively impact reported revenue andexpenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a givencountry or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results ofoperations 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 amountof time and our sales will decline. We manufacture all of our products in eight manufacturing facilities, two of which are located in each of Maple Plain, Minnesota and Raleigh, NorthCarolina, one of which is located in each of Rosemount, Minnesota; Plymouth, Minnesota; Telford, United Kingdom; and Yamato-Shi, 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. Ourfacilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, hurricanes, tsunamis andnuclear disasters. In the event any of our facilities are affected by a disaster, we may: •be unable to meet the shipping deadlines of our customers; •experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide sales andmarketing support and customer service, and otherwise operate our business, any of which could negatively impact our business; •be forced to rely on third-party manufacturers; •need to expend significant capital and other resources to address any damage caused by the disaster; and 19 •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 tocover 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 financialcondition 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 growthof 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 fromsingle or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable orinadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expenseto 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 futureshortages or increases in pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material, wecould be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited sourcesupplier 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, invalidatedor circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreignpatents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Ifour 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 toincreased 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 developedpatents in the fields of CNC machining, injection molding or part production for purposes of developing competing products or for the sole purpose ofasserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit orresolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwiseimpair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitabilitycould 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 complexand costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficientinventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations ofthose laws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuableintellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in thejurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property. 20 We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to ourbusiness 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 discovereduntil after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business andreputation 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 arisingfrom defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions orlaws 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 itsmerit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us tofail 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 couldsubstantially 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. Existingand 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 othercommunications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and qualityof 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 andpersonal privacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do notcontemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by thecourts and their applicability and reach are therefore uncertain. The costs of compliance with these regulations may increase in the future as a result ofchanges in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significantliabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results ofoperations. 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 futureeffective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules and regulations in jurisdictions in which wedo 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 taxassets 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 otherdomestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision forincome 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 financialposition. 21 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 ourtechnology, intellectual property or product line capabilities. Accordingly, we may need to engage in equity or debt financings to secure additionalfunds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significantdilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debtfinancing 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 notbe 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 tous when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, andour 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 pursueacquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market sharein our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. For example, in April2014, we acquired FineLine for total consideration (net of cash acquired) of approximately $36.9 million to enable us to offer our customers additivemanufacturing processes. We cannot forecast the number, timing or size of any future acquisitions or other similar strategic transactions, or the effect thatany such transactions might have on our operating or financial results. We have limited experience engaging in these types of transactions. And suchtransactions may be complex, time consuming and expensive, and may present numerous challenges and risks including: •an acquired company, asset or technology not furthering our business strategy as anticipated; •difficulties entering and competing in new product or geographic markets and increased competition, including price competition; •integration challenges; •challenges in working with strategic partners and resolving any related disagreements or disputes; •high valuation for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decisionto make an acquisition; •significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated withacquired businesses, assets or technologies; •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 stockcompensation 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 orinvestments after we have expended resources on them, as well as divert our management’s attention. And any failure to successfully address thesechallenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewedfavorably 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 ultimatelyconsummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs. 22 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 onthe 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, theirfunction in our business is integral to our operations. We cannot be certain that these third-party licenses will be available to us on commerciallyreasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party licenses may expose us to increasedrisk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability toobtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delaysin 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 beexpensive 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 aswell as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believethat the safety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by theselaws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal orforeign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materialsinsurance coverage. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may beadversely 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, ourbusiness, financial condition or operating results could be harmed. As a manufacturer of CNC-machined and injection-molded custom parts, we are required to meet certain regulatory standards, includingInternational Organization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in Minnesota. In North Carolina, we are required tomeet ISO 9001:2008 standards for our plastics manufacturing and AS9100 standards for our metals manufacturing. If any regulatory inspection revealsthat 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 reputationas well as our business, financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there areno guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costlyand 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 weoffer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain paymentmethods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lowerprofitability. 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 cardassociation operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make itdifficult 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 andlose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of onlinepayments, 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, 2014, our common stock had traded as high as $94.23 and as low as $54.97. The market for our common stock maybecome 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 ourcontrol, that may cause the market price of our common stock to fluctuate include: •fluctuations in our financial condition and operating results; 23 •our ability to retain and attract customers and increase net sales; •pricing pressures due to competition or otherwise and changes in gross margins; •changes in general economic and market conditions, economic uncertainty and changes in product development activity levels; •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 andExchange Commission, or SEC, 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; •share price and volume fluctuations attributable to inconsistent trading levels of our shares; •the expiration of contractual lock-up agreements; and •other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events. In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices ofequity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If wewere to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be divertedfrom our business. 24 If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume coulddecline. The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or ourbusiness. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes theiropinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of theseanalysts 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 thefinancial 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-OxleyAct or prevent or detect misstatements in our financial statements in the future could harm our business and cause a decrease in our stock price. Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timelybasis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that wemaintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual systemand process evaluation and testing of our internal control over financial reporting to allow management and our independent registered publicaccounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If weare 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 weinclude 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 considerfavorable. Our Third Amended and Restated Articles of Incorporation and Amended and Restated By-Laws contain provisions that may make the acquisitionof our company more difficult without the approval of our board of directors. These provisions: •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 maydesignate, including the right to approve an acquisition or other change in our control; •provide that the authorized number of directors may be changed by resolution of the board of directors; •provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative voteof a majority of directors then in office, even if less than a quorum; •provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors ata meeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of ashareholder’s notice; and •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.673generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means anyshareholder that purchases 10% or more of the corporation’s voting shares within four years following the date the person became an interestedshareholder, unless the business combination is approved by a committee composed solely of one or more disinterested members of the corporation’sboard 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 sowould benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to electdirectors of your choosing and to cause us to take other corporate actions you desire. 25 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 theforeseeable future. We anticipate that we will retain all of our future earnings for use in the business and for general corporate purposes. Anydetermination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financialcondition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Item 1B. Unresolved Staff Comments None. Item 2. Properties We believe that our facilities are well maintained and of sufficient capacity to support our current operations. We have facilities in the followingregions: United States Our corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of officespace. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We lease an additional facility on aproperty adjacent to our headquarters that encompasses approximately 40,000 square feet of manufacturing space. The lease for this facility expires in2017, subject to our option to renew for up to two additional five-year terms. We own a facility in Rosemount, Minnesota that encompassesapproximately 130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses approximately170,000 square feet of manufacturing and office space. In April 2014, we purchased FineLine Protyping, Inc. (FineLine) in Raleigh, North Carolina.FineLine leases two facilities. One facility is approximately 10,000 square feet, and the lease for this facility is expires in 2018. The other facility isapproximately 10,000 feet, and the lease for the facility expires in 2018 with the option to extend the lease for three successive periods of five years each. Europe Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing approximately 135,000 square feet ofoffice and manufacturing space. We also lease office space in Mosbach, Germany; Le Bourget du Lac, France; and Novara, Italy for sales and customerservice and technical support staff. Japan Our Japan operations are headquartered in Yamato-Shi, Kanagawa, Japan (southwest of Tokyo) in a leased facility encompassing approximately30,000 square feet of office and manufacturing space. The lease expires in November 2021 and has a cancellation clause with six months’ prior noticewithout penalty. Item 3. Legal Proceedings From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although theresults 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 toany litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a materialadverse effect on our business. Item 4. Mine Safety Disclosures Not applicable. 26 PART II 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, therewas no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sales prices for ourcommon stock as reported on the NYSE: Fiscal 2014 Fiscal 2013 High Low High Low First Quarter $84.00 $62.09 $53.91 $37.23 Second Quarter $83.06 $58.06 $67.40 $43.61 Third Quarter $94.23 $68.88 $80.66 $61.46 Fourth Quarter $73.46 $54.97 $89.97 $65.52 On February 20, 2015, the last reported sale price of our common stock on the NYSE was $71.27 per share. As of February 20, 2015, we had 15holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders whoare 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 funds and any future earnings tosupport our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for theforeseeable future. Any future determination related to 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 otherfactors our board of directors may deem relevant. 27 Outstanding Equity Awards The following table summarizes, as of December 31, 2014, information about shares of our common stock that may be issued under equitycompensation plans approved by shareholders and plans not approved by shareholders: Plan Category Number of sharesto be issued uponexercise ofoutstanding optionsand rights Weighted-averageexercise price ofoutstandingoptions and rights Number of sharesremainingavailable forfuture issuanceunder equitycompensationplans (excludingshares in firstcolumn) Equity compensation plans approved by shareholders 1,075,561 $24.60 6,386,433 Equity compensation plans not approved by shareholders None N/A None Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan The 2012 Long-Term Incentive Plan contains an "evergreen" provision, pursuant to which the number of shares of common stock reserved forissuance under the 2012 Long-Term Incentive Plan shall be increased on January 1 of each year beginning in 2012 and ending on (and including)January 1, 2021 in an amount equal to the lesser of (a) 3% of the total number of our shares outstanding as of December 31 of the immediatelypreceding calendar year and (b) a number of shares determined by our board of directors. Includes 1,357,498 shares remaining available for issuance as of December 31, 2014 under our Employee Stock Purchase Plan. 28(1)(2)(3)(1)(2)(3) Performance Graph The following graph shows a comparison from February 24, 2012 (the date our common stock commenced trading on the NYSE) through December31, 2014 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 Indexbecause the Russell 2000 Index measures the performance of the small market capitalization segment of U.S. equity instruments and we are a membercompany included in the Russell 2000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for theS&P 500 Index and the Russell 2000 Index assume reinvestment of dividends. Period Ending Index 02/23/12 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 Proto Labs, Inc. 100.00 179.75 246.38 406.06 444.88 512.00 419.75 S&P 500 100.00 99.90 104.60 117.81 135.56 143.77 151.01 Russell 2000 100.00 96.29 102.43 117.88 140.33 143.86 145.28 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, 2014. 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 ofcomprehensive income data for the years ended December 31, 2014, 2013 and 2012 and selected consolidated balance sheets data as of December 31,2014 and 2013 are derived from our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of thisAnnual Report on Form 10-K. The selected consolidated statements of comprehensive income data for the years ended December 31, 2011 and 2010 andselected consolidated balance sheet data as of December 31, 2012, 2011 and 2010 are derived from our audited consolidated financial statements notincluded 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 selectedconsolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” andthe consolidated financial statements and related notes appearing in Item 8. “Financial Statements and Supplementary Data” of this Annual Report onForm 10-K. 29 Year Ended December 31, (in thousands, except share and per share amounts) 2014 2013 2012 2011 2010 Consolidated Statements of Comprehensive Income Data Revenue $209,583 $163,112 $125,991 $98,939 $64,919 Cost of revenue 81,182 61,410 49,853 39,324 25,443 Gross profit 128,401 101,702 76,138 59,615 39,476 Operating expenses: Marketing and sales 29,144 22,386 18,098 15,752 10,867 Research and development 16,607 11,863 9,137 5,222 4,281 General and administrative 22,122 16,154 13,957 11,772 7,629 Loss on impairment of foreign subsidiary assets - - - - 773 Total operating expenses 67,873 50,403 41,192 32,746 23,550 Income from operations 60,528 51,299 34,946 26,869 15,926 Other income (expense), net 3 279 23 (114) (213)Income before income taxes 60,531 51,578 34,969 26,755 15,713 Provision for income taxes 18,896 16,301 10,944 8,783 4,762 Net income 41,635 35,277 24,025 17,972 10,951 Less: dividends on redeemable preferred stock - - - (4,179) (4,179)Less: undistributed earnings allocated to preferredshareholders - - - (4,507) (2,377)Net income attributable to common shareholders $41,635 $35,277 $24,025 $9,286 $4,395 Net income per share Basic $1.62 $1.40 $1.03 $0.75 $0.40 Diluted $1.60 $1.36 $0.98 $0.67 $0.34 Weighted average shares outstanding Basic 25,692,699 25,198,556 23,373,593 12,352,004 11,079,432 Diluted 26,100,320 25,859,741 24,443,665 13,939,072 13,051,458 Other Comprehensive Income (Loss) (net of tax) Foreign currency translation adjustments $(1,838) $(163) $(190) $(280) $(214)Comprehensive income $39,797 $35,114 $23,835 $17,692 $10,737 Other Financial Data: Non-GAAP net income (unaudited) $45,242 $37,891 $26,220 $18,764 $11,226 30(1)(1)(1)(2) Stock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (in thousands) 2014 2013 2012 2011 2010 Stock options and grants $4,386 $3,084 $2,539 $1,130 $331 Employee stock purchase plan 423 377 500 - - Total stock-based compensation expense $4,809 $3,461 $3,039 $1,130 $331 Cost of revenue $386 $316 $335 $78 $39 Operating expenses: Marketing and sales 927 610 418 215 84 Research and development 1,048 754 486 274 73 General and administrative 2,448 1,781 1,800 563 135 Total stock-based compensation expense $4,809 $3,461 $3,039 $1,130 $331 Year Ended December 31, (in thousands) 2014 2013 2012 2011 2010 Consolidated Balance Sheets Data Cash and cash equivalents $43,329 $43,039 $36,759 $8,135 $6,101 Working capital 89,585 96,132 78,617 18,138 10,424 Total assets 287,514 230,175 172,722 62,326 38,354 Total liabilities 21,975 18,532 16,023 15,675 11,730 Redeemable convertible preferred stock and redeemablecommon stock - - - 66,894 62,715 Total shareholders' equity (deficit) $265,539 $211,643 $156,699 $(20,243) $(36,091) (1)See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and dilutedshare attributable to common shareholders and weighted average shares outstanding for the years ended December 31, 2014, 2013 and 2012,respectively. (2)The measure of non-GAAP net income presented is net income adjusted for stock-based compensation and amortization expenses. See “Non-GAAP Net Income” below for more information and for a reconciliation of non-GAAP net income to net income, the most directly comparablemeasure calculated and presented in accordance with GAAP. Non-GAAP Net Income To provide investors with additional information regarding our financial results, we have disclosed in the table above non-GAAP net income,adjusted for stock-based compensation and amortization expenses, which is a non-GAAP financial measure. We have provided a reconciliation below ofnon-GAAP net income, adjusted for stock-based compensation and amortization expenses, to net income, the most directly comparable measurecalculated and presented in accordance with GAAP. We have included non-GAAP net income, adjusted for stock-based compensation and amortization expenses, in this Annual Report on Form 10-Kbecause it is a key measure used by our management and board of directors to understand and evaluate operating performance and trends and provides auseful measure for period-to-period comparisons of our business. Accordingly, we believe that non-GAAP net income, adjusted for stock-basedcompensation and amortization expenses, provides useful information to investors and others in understanding and evaluating our operating results inthe same manner as our management and board of directors. 31 The following table presents a reconciliation of non-GAAP net income, adjusted for stock-based compensation and amortization expenses, to netincome for each of the periods indicated: Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands) (unaudited) Non-GAAP net income, adjusted for stock-basedcompensation and amortization expenses: GAAP net income $41,635 $35,277 $24,025 $17,972 $10,951 Add back: Stock-based compensation expense Cost of revenue 386 316 335 78 39 Marketing and sales 927 610 418 215 84 Research and development 1,048 754 486 274 73 General and administrative 2,448 1,781 1,800 563 135 Total stock-based compensation expense 4,809 3,461 3,039 1,130 331 Income tax benefits on stock-based compensation expense (1,524) (847) (844) (338) (56)Add back: Amortization expense General and administrative 496 - - - - Income tax benefits on amortization expense (174) - - - - Non-GAAP net income adjusted for stock-basedcompensation and amortization expenses $45,242 $37,891 $26,220 $18,764 $11,226 32 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 consolidatedfinancial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-lookingstatements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as aresult of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Overview We are a leading online and technology-enabled manufacturer of quick-turn, on-demand additive manufactured (3D printed), CNC-machined andinjection-molded custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast” to product developers andengineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe custom partsmanufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurringengineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled laborconventionally 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 ofend-markets. Our primary manufacturing product lines currently include Protomold, which is our injection molding product line, Firstcut, which is ourCNC machining product line, and Fineline, which is our additive-manufactured (3D printing) product line. We have experienced significant growth since our inception. Since we first introduced our Protomold injection molding product line in 1999, wehave steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend thediversity of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining product line in 2007, we have expanded therange of part sizes, design geometries and materials we can support. Also, since the acquisition of Fineline Prototyping, Inc. (FineLine) and theintroduction of our Fineline product line, we have expanded the number of process types we offer to include stereolithography (SLA), selective lasersintering (SLS) and direct metal laser sintering (DMLS). We also continually seek to enhance other aspects of our technology and manufacturingprocesses, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly to enhanceour technology and manufacturing processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set ofproduct developers and engineers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoingneeds, with approximately 87%, 86% and 84% of our revenue in 2014, 2013 and 2012, respectively, derived from existing customers, excludingcustomers gained through the acquisition of FineLine, who had placed orders with us in prior years. We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets whereproduct developers and engineers are located. We entered the European market in 2005 and launched operations in Japan in late 2009. As of December31, 2014, we had sold products into approximately 60 countries. Our revenue outside of the United States accounted for approximately 26%, 27% and25% of our consolidated revenue in the years ended December 31, 2014, 2013 and 2012, respectively. We intend to continue to expand our internationalsales 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 $64.9 million in 2010 to $209.6 million in 2014. During this period, our operating expenses increased from$23.6 million in 2010 to $67.9 million in 2014. We have grown our income from operations from $15.9 million in 2010 to $60.5 million in 2014. Ourrecent growth in revenue and income from operations has been accompanied by increased cost of revenues and operating expenses. We expect toincreasingly invest in our operations to support anticipated future growth as discussed more fully below. 33 In addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. Forexample, we believe that many of our target product developer and engineer customers have increasing e-commerce expectations, are facing increasedpressure 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. Webelieve we continue to be well positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate themajority of activities involved in procuring custom parts, starting with our elegant web interface through which a product developer or engineer submits a3D CAD part design. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by othertrends that affect product developer and engineer orders for custom parts in low volumes, including, among others, changes in product developer andengineer preferences or needs, developments in our industry and among our competitors and factors impacting new product development volume such aseconomic conditions. For a more complete discussion of the risks facing our business, see Item 1A. “Risk Factors.” Key Financial Measures and Trends Revenue Our operations are comprised of three geographic business units in the United States, Europe and Japan. Revenue is derived from our Protomold,Firstcut and Fineline product lines. Protomold revenue consists of sales of custom injection molds and injection-molded parts. Firstcut revenue consists ofsales of CNC-machined custom parts. Fineline revenue consists of sales of additive-manufactured parts, often referred to as 3D printed parts. Our revenueis generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2014. Our historical andcurrent efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing andselling activities, offering additional product lines such as the introduction of our Firstcut product line in 2007 and Fineline through our acquisition ofFineLine Prototyping, Inc. in 2014, expanding internationally such as the opening of our Japanese office in 2009, improving the usability of our productlines such as our web-centric applications, and expanding the breadth and scope of our products such as by adding more sizes and materials to ourofferings. During 2014, we served approximately 9,840 existing product developers and engineers, an increase of 26% over the comparable period in 2013,and approximately 11,710 new product developers and engineers, an increase of 41% over the comparable period in 2013. During 2013, we servedapproximately 7,820 existing product developers and engineers, an increase of 30% over the comparable period in 2012, and approximately 8,300 newproduct developers and engineers, an increase of 12% over the comparable period in 2012. During 2012, we served approximately 6,020 existing productdevelopers and engineers, an increase of 38% over the comparable period in 2011, and approximately 7,430 new product developers and engineers, anincrease of 23% over the comparable period in 2011. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilitiescosts and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolutedollars, 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 deliveryof our products to our customers. Therefore, during each of 2014 and 2013 we made significant investments in additional factory space and infrastructurein the United States. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space andequipment. We expect that these additional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins toremain 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. Ourgross profit and gross margin are affected by many factors, including our pricing, sales volume and manufacturing costs, the costs associated withincreasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates. 34 Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories, available capacity and ouroperating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generallyconsistent through all our markets. Operating Expenses Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs arethe most significant component of the marketing and sales, research and development and general and administrative expense categories. Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend tocontinue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand additive-manufactured (3D printing), CNC-machined and injection-molded custom parts for prototyping and short-run production. For us to achieve our goals, weanticipate continued substantial investments in technology and personnel, resulting in increased operating expenses. Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation,marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketingexpense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customerbase. Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation,depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. Weexpect research and development expense to increase in the future as we seek to enhance and expand our product line offerings. 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 thefuture as we continue to grow and expand as a global organization. Other Income (Expense), Net Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, andinterest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Ourinterest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable securityportfolio and the current level of interest rates. Our interest expense will vary based on borrowings and interest rates. Provision for Income Taxes Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as ourtaxable income increases and our effective tax rate to remain relatively constant. 35 Results of Operations The following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are notnecessarily indicative of the results for future periods. Year Ended Year Ended December 31, Change December 31, Change (dollars inthousands) 2014 2013 $ % 2013 2012 $ % Revenue $209,583 100.0% $163,112 100.0% $46,471 28.5% $163,112 100.0% $125,991 100.0% $37,121 29.5%Cost of revenue 81,182 38.7 61,410 37.6 19,772 32.2 61,410 37.6 49,853 39.6 11,557 23.2 Gross profit 128,401 61.3 101,702 62.4 26,699 26.3 101,702 62.4 76,138 60.4 25,564 33.6 Operating expenses: Marketing andsales 29,144 13.9 22,386 13.7 6,758 30.2 22,386 13.7 18,098 14.4 4,288 23.7 Research anddevelopment 16,607 7.9 11,863 7.3 4,744 40.0 11,863 7.3 9,137 7.2 2,726 29.8 General andadministrative 22,122 10.6 16,154 9.9 5,968 36.9 16,154 9.9 13,957 11.1 2,197 15.7 Total operatingexpenses 67,873 32.4 50,403 30.9 17,470 34.7 50,403 30.9 41,192 32.7 9,211 22.4 Income fromoperations 60,528 28.9 51,299 31.5 9,229 18.0 51,299 31.5 34,946 27.7 16,353 46.8 Other income, net 3 0.0 279 0.1 (276) * 279 0.1 23 0.1 256 * Income beforeincome taxes 60,531 28.9 51,578 31.6 8,953 17.4 51,578 31.6 34,969 27.8 16,609 47.5 Provision for incometaxes 18,896 9.0 16,301 10.0 2,595 15.9 16,301 10.0 10,944 8.7 5,357 48.9 Net income $41,635 19.9% $35,277 21.6% $6,358 18.0% $35,277 21.6% $24,025 19.1% $11,252 46.8% *Percentage change not meaningful Stock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (dollars in thousands) 2014 2013 2012 Stock options and grants $4,386 $3,084 $2,539 Employee stock purchase plan 423 377 500 Total stock-based compensation expense $4,809 $3,461 $3,039 Cost of revenue $386 $316 $335 Operating expenses: Marketing and sales 927 610 418 Research and development 1,048 754 486 General and administrative 2,448 1,781 1,800 Total stock-based compensation expense $4,809 $3,461 $3,039 Comparison of Years Ended December 31, 2014 and 2013 Revenue Revenue and the related changes for 2014 and 2013 were as follows: Year Ended December 31, 2014 2013 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Protomold $140,282 66.9% $115,069 70.5% $25,213 21.9%Firstcut 59,914 28.6 48,043 29.5 11,871 24.7 Fineline 9,387 4.5 - - 9,387 100.0 Total revenue $209,583 100.0% $163,112 100.0% $46,471 28.5% 36 Revenue by geographic region, based on the billing location of the end customer, is summarized as follows: Year Ended December 31, 2014 2013 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $156,033 74.4% $119,870 73.5% $36,163 30.2%International 53,550 25.6 43,242 26.5 10,308 23.8 Total revenue $209,583 100.0% $163,112 100.0% $46,471 28.5% Our revenue increased $46.5 million, or 28.5%, for 2014 compared to 2013. By geographic region, this revenue growth was driven by a 30.2%increase in United States revenue and a 23.8% increase in international revenue. By product line, this revenue growth was driven by a 21.9% increase inProtomold revenue and a 24.7% increase in Firstcut revenue, in each case for 2014 compared to 2013, as well as $9.4 million in revenue from theFineLine acquisition. Our revenue growth in 2014 was the result of increased volume of the product developers and engineers we served. During 2014, we servedapproximately 21,550 unique product developers and engineers, an increase of 34% over 2013. Average revenue per product developer orengineer decreased 4% during 2014 as compared to 2013. In addition to revenue gained through the acquisition of FineLine, our revenue increases were primarily driven by increases in sales personnel andmarketing 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 was negatively impacted by $0.1 million in 2014 compared to 2013 due to strengthening of the United States dollar relative tocertain foreign currencies. The effect of pricing changes on revenue was immaterial for 2014 compared to 2013. Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $19.8 million, or 32.2%, for 2014 compared to 2013, which was greater than the rate of revenue increaseof 28.5% for 2014 compared to 2013. The increase in cost of revenue was due to raw material and production cost increases of $5.8 million to supportincreased sales volumes, equipment and facility-related cost increases of $3.5 million and an increase in direct labor headcount resulting in personnel andrelated cost increases of $10.5 million. Gross Profit and Gross Margin. Gross profit increased from $101.7 million, or 62.4% of revenues, in 2013 to $128.4 million, or 61.3% of revenues,in 2014 primarily due to increasing revenue growth as noted above. Gross margin decreased primarily as a result of our Fineline product line having alower gross margin than our legacy Firstcut and Protomold product lines and the cost of increased capacity, which has not been fully leveraged. Operating Expenses, Other Income, Net and Provision for Income Taxes Marketing and Sales. Marketing and sales expense increased $6.8 million, or 30.2%, for 2014 compared to 2013 due to an increase in headcountresulting in personnel and related cost increases of $4.9 million and marketing program cost increases of $1.9 million. The increase in marketing programcosts 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 $4.7 million, or 40.0%, for 2014 compared to 2013 due to an increasein headcount resulting in personnel and related cost increases of $4.0 million and other operating cost increases of $0.7 million. General and Administrative. Our general and administrative expense increased $6.0 million, or 36.9%, for 2014 compared to 2013 due to anincrease in headcount resulting in personnel and related cost increases of $2.1 million, facility and administrative cost increases of $1.4 million,professional service cost increases of $1.3 million for outside legal and accounting services, stock-based compensation cost increases of $0.7 million andintangible amortization expenses of $0.5 million. 37 Other Income, Net. Other income, net decreased $0.3 million for 2014 compared with 2013 due to $0.4 million in unfavorable changes in foreigncurrency rates partially offset by $0.1 million increase in interest income. Provision for Income Taxes. Our income tax provision increased $2.6 million for 2014 compared to 2013 due an increase of taxable income. Oureffective tax rate decreased marginally to 31.2% in 2014 from 31.6% in 2013 due primarily to the mix of revenue earned in domestic and foreign taxjurisdictions and deductions for which we qualify in the current year. Comparison of Years Ended December 31, 2013 and 2012 Revenue Revenue and the related changes for 2013 and 2012 were as follows: Year Ended December 31, 2013 2012 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Protomold $115,069 70.5% $90,371 71.7% $24,698 27.3%Firstcut 48,043 29.5 35,620 28.3 12,423 34.9 Total revenue $163,112 100.0% $125,991 100.0% $37,121 29.5% Revenue by geographic region, based on the billing location of the end customer, is summarized as follows: Year Ended December 31, 2013 2012 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $119,870 73.5% $94,866 75.3% $25,004 26.4%International 43,242 26.5 31,125 24.7 12,117 38.9 Total revenue $163,112 100.0% $125,991 100.0% $37,121 29.5% Our revenue increased $37.1 million, or 29.5%, for 2013 compared to 2012. By geographic region, this revenue growth was driven by a 26.4%increase in United States revenue and a 38.9% increase in international revenue. By product line, this revenue growth was driven by a 27.3% increase inProtomold revenue and a 34.9% increase in Firstcut revenue, in each case for 2013 compared to 2012. Our revenue growth in 2013 was the result of increased volume and spending of the product developers and engineers we served. During 2013, weserved approximately 16,120 unique product developers and engineers, an increase of 20% over 2012. Average revenue per product developer orengineer also increased 8% during 2013 as compared to 2012. Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining newcustomer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities thathave proven to result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $1.7 million in2013 compared to 2012 due to strengthening of the United States dollar relative to certain foreign currencies. The effect of pricing changes on revenuewas immaterial for 2013 compared to 2012. 38 Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $11.6 million, or 23.2%, for 2013 compared to 2012, which was slower than the rate of revenue increaseof 29.5% for 2013 compared to 2012. The increase in cost of revenue was due to raw material and production cost increases of $4.8 million to supportincreased sales volumes, equipment and facility-related cost increases of $1.9 million and an increase in direct labor headcount resulting in personnel andrelated cost increases of $4.9 million. Gross Profit and Gross Margin. Gross profit increased from $76.1 million, or 60.4% of revenues, in 2012 to $101.7 million, or 62.4% of revenues, in2013 primarily due to revenue increasing faster than cost of revenue as discussed above. Gross margin increased primarily as a result of increasedproductivity as we leveraged production equipment and resources and additional capacity added in prior years. Operating Expenses, Other Income, Net and Provision for Income Taxes Marketing and Sales. Marketing and sales expense increased $4.3 million, or 23.7%, for 2013 compared to 2012 due to an increase in headcountresulting in personnel and related cost increases of $3.6 million and marketing program cost increases of $0.7 million. The increase in marketing programcosts is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business.Marketing and sales expense as a percentage of revenue decreased to 13.7% for 2013 from 14.4% in 2012, primarily due to the fixed nature of certainmarketing and sales costs as well as focus on effective marketing spending as previously discussed. Research and Development. Our research and development expense increased $2.7 million, or 29.8%, for 2013 compared to 2012 due to an increasein headcount resulting in personnel and related cost increases of $2.2 million and other operating cost increases of $0.6 million, which were partiallyoffset by a decrease in professional services of $0.1 million. General and Administrative. Our general and administrative expense increased $2.2 million, or 15.7%, for 2013 compared to 2012 due to anincrease in headcount resulting in personnel and related cost increases of $0.8 million, facility and administrative cost increases of $0.6 million andprofessional service cost increases of $0.8 million for outside legal and accounting services. Other Income, Net. Other income, net increased $0.3 million for 2013 compared with 2012 due to an increase in interest income of $0.4 millionpartially offset by $0.1 million due to unfavorable changes in foreign currency rates. Provision for Income Taxes. Our income tax provision increased $5.4 million for 2013 compared to 2012 due to an increase of taxable income. Oureffective tax rate increased marginally to 31.6% in 2013 from 31.3% in 2012 due primarily to the mix of revenue earned in domestic and foreign taxjurisdictions and deductions for which we qualify in the current year. Selected Quarterly Results of Operations Data The following tables set forth selected unaudited quarterly results of operations data for 2014 and 2013 as well as the percentage that each line itemrepresents of total revenue. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financialstatements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, thatwe consider necessary to present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in conjunction withour 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 notnecessarily indicative of the results to be expected in any future period. 39 Three Months Ended (in thousands, except shareand per share amounts) Dec. 31,2014 Sep. 30,2014 Jun. 30,2014 Mar. 31,2014 Dec. 31,2013 Sep. 30,2013 Jun. 30,2013 Mar. 31,2013 (unaudited) Consolidated Statementsof Comprehensive IncomeData: Revenue $56,069 $54,574 $52,866 $46,074 $44,042 $42,008 $39,749 $37,313 Cost of revenue 22,457 21,492 20,183 17,050 16,427 16,053 14,896 14,034 Gross profit 33,612 33,082 32,683 29,024 27,615 25,955 24,853 23,279 Operating expenses: Marketing and sales 8,115 7,351 7,261 6,417 6,164 5,409 5,550 5,263 Research anddevelopment 4,682 4,555 3,914 3,456 3,458 3,026 2,751 2,628 General andadministrative 6,152 5,733 5,534 4,703 4,119 4,118 3,923 3,994 Total operatingexpenses 18,949 17,639 16,709 14,576 13,741 12,553 12,224 11,885 Income from operations 14,663 15,443 15,974 14,448 13,874 13,402 12,629 11,394 Other income (expense),net 22 (56) (66) 103 129 31 116 3 Income before incometaxes 14,685 15,387 15,908 14,551 14,003 13,433 12,745 11,397 Provision for income taxes 4,492 5,003 4,952 4,449 4,496 4,561 4,134 3,110 Net income $10,193 $10,384 $10,956 $10,102 $9,507 $8,872 $8,611 $8,287 Net income per share: Basic $0.39 $0.40 $0.43 $0.40 $0.37 $0.35 $0.34 $0.33 Diluted $0.39 $0.40 $0.42 $0.39 $0.36 $0.34 $0.33 $0.32 Shares used to compute netincome per share: Basic 25,815,973 25,757,593 25,620,005 25,573,851 25,506,107 25,384,940 25,258,932 25,014,907 Diluted 26,152,891 26,200,741 26,146,848 26,091,069 26,115,866 26,002,240 25,850,247 25,645,744 Three Months Ended Dec. 31,2014 Sep. 30,2014 Jun. 30,2014 Mar. 31,2014 Dec. 31,2013 Sep. 30,2013 Jun. 30,2013 Mar. 31,2013 (unaudited) Consolidated Statements ofComprehensive IncomeData: Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Cost of revenue 40.1 39.4 38.2 37.0 37.3 38.2 37.5 37.6 Gross profit 59.9 60.6 61.8 63.0 62.7 61.8 62.5 62.4 Operating expenses: Marketing and sales 14.5 13.5 13.7 13.9 14.0 12.9 13.9 14.2 Research and development 8.3 8.3 7.4 7.5 7.8 7.2 6.9 7.0 General and administrative 10.9 10.5 10.5 10.2 9.3 9.8 9.9 10.7 Total operatingexpenses 33.7 32.3 31.6 31.6 31.1 29.9 30.7 31.9 Income from operations 26.2 28.3 30.2 31.4 31.6 31.9 31.8 30.5 Other income (expense), net 0.0 (0.1) (0.1) 0.2 0.3 0.1 0.3 0.0 Income before income taxes 26.2 28.2 30.1 31.6 31.9 32.0 32.1 30.5 Provision for income taxes 8.0 9.2 9.4 9.7 10.2 10.9 10.4 8.3 Net income 18.2% 19.0% 20.7% 21.9% 21.6% 21.1% 21.7% 22.2% 40 Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the years ended December 31, 2014, 2013 and 2012: Year Ended December 31, (dollars in thousands) 2014 2013 2012 Net cash provided by operating activities $57,210 $48,441 $25,675 Net cash used in investing activities (63,499) (58,481) (79,617)Net cash provided by financing activities 7,036 16,111 82,786 Effect of exchange rates on cash and cash equivalents (457) 209 (220)Net increase in cash and cash equivalents $290 $6,280 $28,624 Sources of Liquidity Historically, we have financed our operations and capital expenditures primarily through cash flow from operations and, to a lesser extent, leasefinancing. In February 2012, we completed the initial public offering of our common stock, which provided us with $71.5 million of cash, net ofunderwriting discounts and commissions and offering expenses payable by us. In November 2012, we completed a follow-on offering of our commonstock, which provided us with $2.5 million of cash, net of underwriting discounts and commissions and offering expenses payable by us. 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 inour cash was due primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment activity. Wehad cash and cash equivalents of $43.0 million as of December 31, 2013, an increase of $6.3 million from December 31, 2012. The increase in our cashwas due primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment activity. We had cashand cash equivalents of $36.8 million as of December 31, 2012, an increase of $28.6 million from December 31, 2011. The increase in our cash was dueprimarily to cash received from the initial public offering and follow-on offering of our common stock and generated through operations and partiallyreduced by investment activity As of December 31, 2014, the amount of cash and cash equivalents held by foreign subsidiaries was $10.1 million. If these funds are needed for ourdomestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest thesefunds 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 existingcash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for atleast the next 12 months. Cash Flows from Operating Activities Cash flow from operating activities during 2014 primarily consisted of net income of $41.6 million, adjusted for certain non-cash items, includingdepreciation 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 toincreases in net income of $6.4 million, depreciation and amortization of $3.5 million, stock-based compensation expense of $1.3 million and a decreasein excess tax benefit from stock-based compensation of $5.4 million, which were partially offset by decreases in deferred taxes of $2.3 million andchanges in operating assets and liabilities of $5.5 million. Cash flow from operating activities during 2013 primarily consisted of net income of $35.3 million, adjusted for certain non-cash items, includingdepreciation and amortization of $7.6 million and stock-based compensation expense of $3.5 million, partially offset by excess tax benefit from stock-based compensation expense of $9.9 million. The cash flow from operating activities during 2013 compared to 2012 increased $22.8 million due toincreases in net income of $11.3 million, changes in operating assets and liabilities of $11.2 million, depreciation and amortization of $1.5 million,amortization of held-to-maturity securities of $1.1 million, deferred taxes of $1.0 million and stock-based compensation expense of $0.4 million, whichwere partially offset by an increase in excess tax benefit from stock-based compensation of $3.7 million. Cash flow from operating activities during 2012 primarily consisted of net income of $24.0 million, adjusted for certain non-cash items, includingdepreciation and amortization of $6.1 million and stock-based compensation expense of $3.0 million, partially offset by excess tax benefit from stock-based compensation expense of $6.2 million and changes in operating assets and liabilities of $1.2 million. 41 Cash Flows from Investing Activities Cash used in investing activities was $63.5 million for the year ended December 31, 2014, consisting of $43.5 million for purchases of property andequipment primarily to expand our production capacity, $33.9 million for payments on business acquisitions and $60.2 million for purchases ofmarketable securities, which were partially offset by $74.1 million in proceeds from maturities and call redemption of marketable securities. Cash used in investing activities was $58.5 million for the year ended December 31, 2013, consisting of $18.8 million for purchases of property andequipment primarily to expand our production capacity and $106.3 million for purchases of marketable securities, which were partially offset by $66.6million in proceeds from maturities and call redemption of marketable securities. Cash used in investing activities was $79.6 million for the year ended December 31, 2012, consisting of $17.4 million for purchases of property andequipment primarily to expand our production capacity and $84.6 million for purchases of marketable securities, which were partially offset by $22.4million in proceeds from maturities and call redemption of marketable securities. Cash Flows from Financing Activities Cash provided by financing activities was $7.0 million for the year ended December 31, 2014, consisting of excess tax benefit on stock-basedcompensation 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 $1.2million for payments of acquisition-related contingent consideration. Cash provided by financing activities was $16.1 million for the year ended December 31, 2013, consisting of excess tax benefit on stock-basedcompensation of $9.9 million and $6.5 million in proceeds from exercises of stock options, partially offset by $0.3 million for payments of debt. Cash provided by financing activities was $82.8 million for the year ended December 31, 2012, consisting of $71.5 million from the initial publicoffering of our common stock, $2.5 million from the follow-on offering of our common stock, excess tax benefit on stock-based compensation of $6.2million and $3.0 million in proceeds from exercises of stock options and warrants, which were partially offset by $0.4 million for payments of debt. 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 sufficientto 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 securitiesor enter into credit facilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional fundsthrough the issuance of convertible debt securities or enter into credit facilities, these securities and debt holders could have rights senior to those of ourcommon stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our currentlyforecasted 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 generated by Protomold, Firstcut and Fineline 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 inlitigation-related activities; and 42 •the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of thesetypes of transactions. Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We believe future capitalexpenditures, excluding any expenditures for buildings we might purchase for our operations, are likely to vary between approximately 8% and 12% ofannual revenue. Contractual Obligations As of December 31, 2014, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in futureperiods were as follows: Payment Due by Period (in thousands) Total Less than 1Year 1-3 Years 3-5 Years More than 5Years Operating leases $4,580 $906 $1,640 $986 $1,048 Capital leases 165 154 11 - - Total $5,218 $1,095 $2,310 $875 $938 The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate to three of ourUnited States facilities as well as our European sales and Japanese facilities. Our commitments for capital leases relate to equipment financing for ourEuropean operation. There have been no new material lease agreements entered into during the year ended December 31, 2014. Financing Arrangements The following table summarizes our financing arrangements as of December 31, 2014 and 2013: December 31, (in thousands) 2014 2013 Various obligations under capital leases, with interest rates from 6.8% to 7.4%, due in various monthlyinstallments, including interest, through various dates through January 2016, secured by equipment $149 $363 Less current portion 139 204 Long-term obligation $10 $159 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 orvariable interest entities. 43 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 havebeen prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires usto make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On anongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill, other intangible assets, stock-basedcompensation, allowance for doubtful accounts, inventory valuation, and income taxes. We base our estimates of the carrying value of certain assets andliabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many cases, we couldreasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur fromperiod to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board ofdirectors. 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 financialstatements. See the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” in this AnnualReport 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 Accounting Standards Codification (ASC) 605, Revenue Recognition (ASC 605), which states thatrevenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery hasoccurred 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 Protomold, Firstcut and Finelineproduct lines.Goodwill We recognize goodwill in accordance with ASC 350, Intangibles - Goodwill and Other. Goodwill is the excess of cost of an acquired entity over theamounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairmentannually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that wouldindicate 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, 2014 no impairment charges for goodwill have been recognized. Other Intangible Assets We recognize other intangibles assets in accordance with ASC 350, Intangibles - Goodwill and Other. Other intangible assets include internallydeveloped software, customer relationships and other intangible assets acquired from an independent party. Other intangible assets with a definite life areamortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairmentwhenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognizedwhen the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. As of December 31,2014 no impairment charges for intangible assets have been recognized. Stock-Based Compensation We determine our stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718), which requires themeasurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on thegrant date fair value of the award. 44 Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjectiveassumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to ourconsolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’sjudgment. 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 dividendyield. 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 maturitiessimilar to the expected term of the award being valued. The expected term represents the weighted average period that our stock options are expected tobe outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employeedirectors and considers the impact of post-vesting award forfeitures. As we operated as a private company with a limited market for our stock from ourinception to the completion of our initial public offering on February 29, 2012, we have estimated the volatility of stock price using outside valuationservices and an estimate of the volatility of our common stock based on volatility of a peer group of comparable publicly traded companies for whichhistorical information is available. We have never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use anexpected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vestingforfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data toestimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If our actual forfeiture rateis materially different from our estimate, stock-based compensation expense could be significantly different from what has been recorded. 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 theBlack-Scholes option pricing model with the following assumptions: Year Ended December 31, 2014 2013 2012 Risk-free interest rate 0.43 - 2.14% 1.03 - 1.98% 0.95 - 1.16% Expected life (years) 2.00 - 6.50 5.50 - 6.50 5.50 - 6.50 Expected volatility 47.29 - 49.30% 49.36 - 53.54% 53.00 - 53.14% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $32.65 $25.86 $14.79 Our Employee Stock Purchase Plan (ESPP) became effective on February 23, 2012. The ESPP allows eligible employees to purchase shares of ourcommon stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP providesfor six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair marketvalue of our common stock on the first trading day of the offering period or on the last trading day of the offering period. The fair value of each offering period was estimated using the Black-Scholes option pricing model with the following assumptions: Year Ended December 31, 2014 2013 2012 Risk-free interest rate 0.01- 0.11% 0.11 - 0.13% 0.13 - 0.16% Expected life (months) 6.00 6.00 6.00 - 8.50 Expected volatility 37.64 - 39.80% 39.80 - 53.32% 53.00 - 53.14% Expected dividend yield 0% 0% 0% There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that usedifferent models, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods, or ifwe 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 718may differ significantly from what we have recorded using the Black-Scholes option pricing model and could materially affect our operating results. 45 We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded stock-based compensationexpense of $4.8 million, $3.5 million and $3.0 million during the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31,2014, we had $7.5 million of unrecognized stock-based compensation costs related to unvested stock options, net of estimated forfeitures, that areexpected to be recognized over a weighted average period of 3.1 years. We issued options to purchase 116,050, 187,615 and 259,800 shares of ourcommon stock in 2014, 2013 and 2012, respectively. In addition, employees purchased 25,393, 30,690 and 86,419 shares of common stock under theESPP at an average exercise price of $52.22, $36.74 and $13.60 during 2014, 2013 and 2012, respectively. In future periods, our stock-based compensation expense is expected to increase due to the issuance of additional stock-based awards to continue toattract and retain employees and non-employee directors and our existing unrecognized stock-based compensation. Allowance for Doubtful Accounts We carry our accounts receivable at the invoiced amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accountsreceivable and establish an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking intoaccount the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon inthe invoice. Accounts receivable are written off after all collection efforts have been exhausted. To date, we have not incurred any write-offs of accountsreceivable significantly different than the amounts reserved. We believe appropriate reserves have been established, but they may not be indicative offuture write-offs. Our allowance for doubtful accounts as of December 31, 2014 and 2013 was $0.2 million and $0.1 million, respectively. Our allowancefor doubtful accounts has increased due increased sales growth. The following table summarizes changes to the allowance for doubtful accounts for the years ended December 31, 2014 and 2013: (in thousands) Balance atBeginning ofPeriod Charged toExpenses Write-offs Balance at Endof Period Year ended December 31, 2014 $90 $284 $176 $198 Year ended December 31, 2013 $154 $42 $106 $90 Inventory Valuation and Inventory Reserves Inventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average- cost method, which approximatesfirst-in, first-out, or FIFO, cost. We periodically review our inventory for slow-moving, damaged and discontinued items and provide reserves to reducesuch items identified to their recoverable amounts. Our inventory allowance for obsolescence as of December 31, 2014 and 2013 was $0.2 million and$0.1 million, respectively. Income Taxes We account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method, we determine tax assets and liabilitiesbased upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect forthe year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financialstatements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in theirrecognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxableincome 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 anasset 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 relatedliabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. We establish a valuation allowancefor any portion of our deferred tax assets that we believe will not be recognized. 46 ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion thatan 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, andtransition. Including interest and penalties, we have established a liability for uncertain tax positions of $1.4 million as of December 31, 2014. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contractswith Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods orservices to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Companyis required to adopt the new pronouncement on January 1, 2017 using one of two retrospective application methods. The Company is evaluating theapplication method and the impact of this new standard on our financial statements. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue asa going concern and to provide related footnote disclosures. The Company is required to adopt the new pronouncement on January 1, 2017, with earlyadoption permitted. We believe the impact of ASU 2014-15 will not affect the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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 arepreservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income fromour investments without assuming significant risk. To achieve our goals, we maintain a portfolio of debt securities with various maturities ranging fromone 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 tomaturity. 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 and expenses, assets and liabilities that are denominated in foreign currencies. We generaterevenue in the British Pound, Euro and Yen. Our production costs are incurred in the British Pound and Yen. A number of our employees are located inEurope and Japan. Therefore, a portion of our payrolls and operating expenses are incurred and paid in the British Pound, Euro and Yen. Our operatingresults and cash flows are adversely impacted when the United States dollar appreciates relative to other foreign currencies. Additionally, our operatingresults and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results ofoperations and cash flows will become increasingly subject to changes in foreign exchange rates. We have not used any forward contracts or currencyborrowings to hedge our exposure to foreign currency exchange risk. Foreign currency risk can be quantified by estimating the change in cash flowsresulting from a hypothetical 10% adverse change in foreign exhange rates. We believe such a change would not have a material impact on our results ofoperations. 47 Item 8. Financial Statements and Supplementary Data Proto Labs, Inc.Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm on Consolidated Financial Statements 49Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 50Consolidated Balance Sheets at December 31, 2014 and 2013 51Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 52Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012 53Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 54Notes to Consolidated Financial Statements 55 48 Report of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersProto Labs, Inc. We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. as of December 31, 2014 and 2013, and the related consolidatedstatements of comprehensive income, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014.These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Proto Labs, Inc. atDecember 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Proto Labs, Inc.’s internalcontrol over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015, expressed anunqualified opinion thereon. /s/ Ernst & Young LLPMinneapolis, MinnesotaFebruary 27, 2015 49 Report of Independent Registered Public Accounting Firm The Board of Directors and ShareholdersProto Labs, Inc. We have audited Proto Labs, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). ProtoLabs, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other proceduresas we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree ofcompliance with the policies or procedures may deteriorate. As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of andconclusion on the effectiveness of internal control over financial reporting did not include certain elements of the internal controls of FineLinePrototyping, Inc., the results of which are included in the 2014 consolidated financial statements of Proto Labs, Inc. and constituted approximately 3% oftotal assets as of December 31, 2014, and 5% of total revenues for the year then ended. Our audit of internal control over financial reporting of Proto Labs,Inc. also did not include an evaluation of the internal control over financial reporting of FineLine Prototyping, Inc. In our opinion, Proto Labs, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based onthe COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, shareholders’ equity (deficit), and cashflows for the three years in the period ended December 31, 2014, and our report dated February 27, 2015, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Minneapolis, MinnesotaFebruary 27, 2015 50 Proto Labs, Inc.Consolidated Balance Sheets(In thousands, except share and per share amounts) December 31, 2014 2013 Assets Current assets Cash and cash equivalents $43,329 $43,039 Short-term marketable securities 30,706 36,339 Accounts receivable, net of allowance for doubtful accounts of $198 and $90 as of December 31, 2014and December 31, 2013, respectively 24,226 18,320 Inventory 6,194 5,166 Prepaid expenses and other current assets 3,406 3,569 Income taxes receivable - 2,907 Deferred tax assets 483 455 Total current assets 108,344 109,795 Property and equipment, net 91,626 56,101 Goodwill 28,916 - Other intangible assets, net 4,083 - Long-term marketable securities 54,318 64,023 Other long-term assets 227 256 Total assets $287,514 $230,175 Liabilities and shareholders' equity Current liabilities Accounts payable $7,882 $6,455 Accrued compensation 6,067 6,196 Accrued liabilities and other 2,718 808 Income taxes payable 1,953 - Current portion of long-term debt obligations 139 204 Total current liabilities 18,759 13,663 Long-term deferred tax liabilities 1,846 3,682 Long-term debt obligations 10 159 Other long-term liabilities 1,360 1,028 Total liabilities 21,975 18,532 Shareholders' equity Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as ofDecember 31, 2014 and December 31, 2013, respectively - - Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 25,838,110and 25,546,107 shares as of December 31, 2014 and December 31, 2013, respectively 26 26 Additional paid in capital 180,960 166,861 Retained earnings 87,482 45,847 Accumulated other comprehensive loss (2,929) (1,091)Total shareholders' equity 265,539 211,643 Total liabilities and shareholders' equity $287,514 $230,175 The accompanying notes are an integral part of these consolidated financial statements. 51 Proto Labs, Inc.Consolidated Statements of Comprehensive Income(In thousands, except share and per share amounts) Year Ended December 31, 2014 2013 2012 Statements of Operations: Revenue $209,583 $163,112 $125,991 Cost of revenue 81,182 61,410 49,853 Gross profit 128,401 101,702 76,138 Operating expenses Marketing and sales 29,144 22,386 18,098 Research and development 16,607 11,863 9,137 General and administrative 22,122 16,154 13,957 Total operating expenses 67,873 50,403 41,192 Income from operations 60,528 51,299 34,946 Other income, net 3 279 23 Income before income taxes 60,531 51,578 34,969 Provision for income taxes 18,896 16,301 10,944 Net income $41,635 $35,277 $24,025 Net income per share: Basic $1.62 $1.40 $1.03 Diluted $1.60 $1.36 $0.98 Shares used to compute net income per share: Basic 25,692,699 25,198,556 23,373,593 Diluted 26,100,320 25,859,741 24,443,665 Other Comprehensive Income (Loss), net of tax Foreign currency translation adjustments $(1,838) $(163) $(190)Comprehensive income $39,797 $35,114 $23,835 The accompanying notes are an integral part of these consolidated financial statements. 52 Proto Labs, Inc.Consolidated Statements of Shareholders' Equity (Deficit)(In thousands, except share and per share amounts) Common Stock AdditionalPaid-In Accumulated AccumulatedOtherComprehensive Shares Amount Capital Earnings (Deficit) Income (Loss) Total Balance at January 1, 2012 9,706,270 $10 $8,229 $(27,744) $(738) $(20,243)Common shares issued upon initialpublic offering 4,945,000 5 71,525 - - 71,530 Common shares issued upon follow-on offering 100,000 - 2,451 - - 2,451 Common shares issued uponconversion of redeemableconvertible preferred stock 5,991,790 6 66,069 - - 66,075 Common shares issued uponconversion of redeemable commonstock 3,189,648 3 816 - - 819 Common shares issued on exercise ofoptions and other 870,932 1 2,974 - - 2,975 Excess tax benefit from stock optionexercises - - 6,218 - - 6,218 Preferred stock dividends - - (14,289) 14,289 - - Stock-based compensation expense - - 3,039 - - 3,039 Net income - - - 24,025 - 24,025 Other comprehensive income (loss) Foreign currency translationadjustment - - - - (190) (190)Comprehensive income 23,835 Balance at December 31, 2012 24,803,640 25 147,032 10,570 (928) 156,699 Common shares issued on exercise ofoptions and other 742,467 1 6,495 - - 6,496 Excess tax benefit from stock optionexercises - - 9,873 - - 9,873 Stock-based compensation expense - - 3,461 - - 3,461 Net income - - - 35,277 - 35,277 Other comprehensive income (loss) Foreign currency translationadjustment - - - - (163) (163)Comprehensive income 35,114 Balance at December 31, 2013 25,546,107 26 166,861 45,847 (1,091) 211,643 Common shares issued on exercise ofoptions and other 292,003 - 4,820 - - 4,820 Excess tax benefit from stock optionexercises - - 4,470 - - 4,470 Stock-based compensation expense - - 4,809 - - 4,809 Net income - - - 41,635 - 41,635 Other comprehensive income (loss) Foreign currency translationadjustment - - - - (1,838) (1,838)Comprehensive income 39,797 Balance at December 31, 2014 25,838,110 $26 $180,960 $87,482 $(2,929) $265,539 The accompanying notes are an integral part of these consolidated financial statements. 53 Proto Labs, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2014 2013 2012 Operating activities Net income $41,635 $35,277 $24,025 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,138 7,569 6,080 Stock-based compensation expense 4,809 3,461 3,039 Deferred taxes (1,875) 467 (583)Excess tax benefit from stock-based compensation (4,470) (9,873) (6,218)Loss on disposal of property and equipment - 110 154 Amortization of held-to-maturity securities 1,517 1,468 369 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (5,304) (2,470) (4,372)Inventories (896) (579) (829)Prepaid expenses and other 107 1,630 (1,887)Income taxes 9,373 8,845 4,314 Accounts payable 1,435 1,651 306 Accrued liabilities and other (259) 885 1,277 Net cash provided by operating activities 57,210 48,441 25,675 Investing activities Purchases of property and equipment (43,507) (18,753) (17,397)Cash used for acquisitions (33,864) - - Purchases of marketable securities (60,186) (106,298) (84,588)Proceeds from maturities of marketable securities 74,058 66,570 22,368 Net cash used in investing activities (63,499) (58,481) (79,617) Financing activities Proceeds from initial public offering, net of offering costs - - 71,530 Proceeds from follow-on offering, net of offering costs - - 2,451 Payments on debt (1,054) (258) (388)Acquisition-related contingent consideration (1,200) - - Proceeds from exercises of stock options and other 4,820 6,496 2,975 Excess tax benefit from stock-based compensation 4,470 9,873 6,218 Net cash provided by financing activities 7,036 16,111 82,786 Effect of exchange rate changes on cash and cash equivalents (457) 209 (220)Net increase in cash and cash equivalents 290 6,280 28,624 Cash and cash equivalents, beginning of period 43,039 36,759 8,135 Cash and cash equivalents, end of period $43,329 $43,039 $36,759 Supplemental cash flow disclosure Cash paid for interest $19 $35 $63 Cash paid for taxes $11,549 $6,593 $7,990 The accompanying notes are an integral part of these consolidated financial statements. 54 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 online and technology-enabled manufacturer of quick-turn, on-demand additive manufactured (3D printed), computer numerical control (CNC) machined and injection-molded 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 toobtain low volumes of parts. The Company’s proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionallyrequired to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet. TheCompany targets its product lines to the millions of product developers and engineers who use three-dimensional (3D) computer-aided design (CAD)software to design products across a diverse range of end-markets. The Company has established operations in the United States, Europe and Japan, whichthe Company believes are among the largest geographic markets where these product developers and engineers are located. The Company’s primarymanufacturing product lines currently include Fineline, which is an additive manufacturing (3D printing) product line, Firstcut, which is a CNCmachining product line, and Protomold, which is an injection molding product line. Proto Labs, Inc. is located in Maple Plain, Minnesota. TheCompany’s subsidiaries, Proto Labs Limited, Proto Labs G.K. and PL Euro Services, Ltd. are located in Telford, United Kingdom; Yamato-Shi, Kanagawa,Japan; Mosbach, Germany; Le Bourget du Lac, France; and Novara, Italy. 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, Proto Labs Limited, Proto LabsG.K., and PL Euro Services, Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. Public offerings In February 2012, the Company issued 4.9 million shares of common stock (including the exercise of the underwriters’ over-allotment shares) inconjunction with its initial public offering (IPO). The public offering price of the shares sold in the offering was $16.00 per share. The total gross proceedsfrom the IPO to the Company were $79.1 million. After deducting underwriting discounts and commissions and offering expenses payable by theCompany, the aggregate net proceeds received by the Company totaled approximately $71.5 million. Immediately prior to the consummation of the IPO, all outstanding shares of redeemable convertible preferred stock and redeemable common stockwere converted into shares of common stock. Shares of redeemable convertible preferred stock were converted into 5,991,790 shares of common stock. Allpreviously accrued dividends on the preferred stock were released back into retained earnings as of December 31, 2012. Shares of redeemable commonstock were converted into 3,189,648 shares of common stock. In November 2012, the Company issued 100,000 shares of common stock in connection with a follow-on offering. The public offering price of theshares sold in the offering was $31.00 per share. The total gross proceeds from the follow-on offering to the Company were $3.1 million. After deductingunderwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaledapproximately $2.5 million. Stock split On February 21, 2012, the Company executed a 14-for-1 forward stock split of the Company’s common stock. The consolidated financial statementsfor all periods and dates presented give effect to the stock split. Comprehensive income Components of comprehensive income include net income and foreign currency translation adjustments. Comprehensive income is disclosed in theaccompanying consolidated statements of comprehensive income and consolidated statements of shareholders’ equity (deficit). 55 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 thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include cash and other investments, including marketable securities, with maturities of three months or less at the date ofpurchase. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has notexperienced any losses on such accounts. Marketable securities Marketable securities include held-to-maturity debt securities recorded at amortized cost. The classification of marketable securities as current ornon-current is dependent upon the security’s maturity date. Securities with maturities of three months or less at the time of purchase are categorized ascash equivalents as described above. The Company reviews impairments associated with its marketable securities in accordance with the measurementguidance provided by Accounting Standards Codification (ASC) 320, Investments – Debt and Equity Securities, when determining the classification ofimpairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-temporary include assessmentof the quality of the security, credit ratings actions and management’s intent to hold the security to maturity as well as other factors. Accounts receivable and allowance for doubtful accounts Accounts receivable are reported at the invoiced amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates itsaccounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditionstaking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the periodagreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previouslywritten off are recorded when received. Inventory Inventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average-cost method, which approximatesfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowancesto reduce such items identified to their recoverable amounts. Property, equipment and leasehold improvements Property, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an asset’s useful life arecapitalized. Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including amortization of leaseholdimprovements and assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assetsand ranges from 3 to 39 years. Manufacturing equipment is depreciated over 3 to 7 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 depreciatedover 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 to39 years. Assets not in service are not depreciated until the related asset is put into use. 56 Proto Labs, Inc.Notes to Consolidated Financial Statements Goodwill The Company recognizes goodwill in accordance with ASC 350, Intangibles - Goodwill and Other. Goodwill is the excess of cost of an acquiredentity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested forimpairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change thatwould indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reportingunit, including goodwill, is less than its carrying amount. Other Intangible Assets The Company recognizes other intangibles assets in accordance with ASC 350, Intangibles - Goodwill and Other. Other intangible assets includeinternally developed software, customer relationships and other intangible assets acquired from an independent party. Other intangible assets with adefinite 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 forimpairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss isrecognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. Theamount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Accounting for long-lived assets The Company periodically reviews the carrying amount of its property, equipment and leasehold improvements to determine if circumstances existindicating an impairment or if depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company willprepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based onthese 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 anarrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonablyassured. Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our Fineline, Firstcut andProtomold product lines. Freight billed to customers is included in revenues, and all freight expenses paid by the Company are included in cost ofrevenue. Income taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method, the Company determines taxassets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enactedtax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in thecurrent year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accountingstandards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between theamount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in thefinancial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, adifference 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 somefuture 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. TheCompany establishes a valuation allowance for any portion of its deferred tax assets that the Company believes will not be recognized. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion thatan 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, andtransition. 57 Proto Labs, Inc.Notes to Consolidated Financial Statements Stock-based compensation The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). Under the fairvalue recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes thecompensation expense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-basedcompensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting award forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ fromthose estimates. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are noteligible to vest early in the event of retirement, however, the awards vest early in the event of a change in control. In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the date of grant using theBlack-Scholes option-pricing model. Advertising costs Advertising is expensed as incurred and was approximately $8.5 million, $6.8 million and $5.9 million for the years ended December 31, 2014,2013 and 2012, respectively. Research and development Research and development expenses consist primarily of personnel and outside service costs related to the development of new processes andproduct lines, enhancement of existing product lines, quality assurance, and testing. The Company follows ASC 350-40, Internal-Use Software (ASC350-40), in accounting for internally developed software. As of December 31, 2014, 2013 and 2012, 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$16.6 million, $11.9 million and $9.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Foreign currency translation/transactions The Company translated the balance sheets of its foreign subsidiaries, Proto Labs Limited, Proto Labs G.K. and PL Euro Services, Ltd. at period-endexchange rates and the income statement at the average exchange rates in effect throughout the period. The Company has recorded the translationadjustment as a separate component of consolidated shareholders’ equity (deficit). Foreign currency transaction gains and losses are recognized in theconsolidated statements of comprehensive income. Recent accounting pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contractswith Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods orservices to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Companyis required to adopt the new pronouncement on January 1, 2017 using one of two retrospective application methods. The Company is evaluating theapplication method and the impact of this new standard on our financial statements. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, toprovide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a goingconcern and to provide related footnote disclosures. The Company is required to adopt the new pronouncement on January 1, 2017, with early adoptionpermitted. We believe the impact of ASU 2014-15 will not affect the Company. 58 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 iscomputed based on the weighted average number of common shares outstanding, increased by the number of additional shares that would have beenoutstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from theproceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awardsgranted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. The following table presents the calculation of net income per basic and diluted share attributable to common shareholders: Year Ended December 31, (in thousands, except share and per share amounts) 2014 2013 2012 Net Income $41,635 $35,277 $24,025 Basic - weighted-average shares outstanding: 25,692,699 25,198,556 23,373,593 Effect of dilutive securities: Employee stock options, warrants and other 407,621 661,185 1,070,072 Diluted - weighted-average shares outstanding: 26,100,320 25,859,741 24,443,665 Net income per share attributable to common shareholders: Basic $1.62 $1.40 $1.03 Diluted $1.60 $1.36 $0.98 Note 4 – Business Combinations On April 23, 2014, the Company acquired 100% of the outstanding shares of FineLine Prototyping, Inc. (FineLine) for $33.9 million net cashconsideration, which was funded with cash available in the United States and the sale of $15.5 million of held-to-maturity securities. The shares ofFineLine acquired through the Stock Purchase Agreement (the Agreement) were purchased in a private transaction exempt from registration under theSecurities Act of 1933 and the operations of FineLine will be integrated into the operations of the Company. Under the terms of the Agreement, theCompany is obligated to make additional cash payments totaling up to $3.0 million, contingent upon both the achievement of 2014 revenue goals andcertain milestones relating to the integration of FineLine’s operations with the Company. As of December 31, 2014, the Company had made payments of$1.2 million related to the attainment of milestones and as of December 31, 2014, the contingent consideration balance totaled $1.8 million, which isclassified under Accrued Liabilities and Other on the Consolidated Balance Sheet. FineLine is based in Raleigh, North Carolina and is a leading producer of parts using additive manufacturing technologies, often times referred to as3D printing. FineLine produces high-quality parts using stereolithography (SLA), 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 industrialmachinery, among others. Along with Protomold and Firstcut, the Company offers these technologies to its customers under the Fineline product name. Consistent with the provisions of ASC 805, Business Combinations (ASC 805), the Company accrued the contingent payment on the date ofacquisition 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 thecontingent consideration was determined using Level 3 inputs based on the present value of various payment scenarios, weighted on the basis ofprobability. The contingent payment continues to be remeasured to fair value at each reporting period with changes in fair value reflected in theConsolidated Statements of Comprehensive Income. 59 Proto Labs, Inc.Notes to Consolidated Financial Statements The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed based on their estimatedfair values as of the acquisition date, with any excess recorded as goodwill. The goodwill associated with the acquisition is deductible for tax purposesand represents the strategic and growth opportunities from strengthening the Company’s portfolio of rapid prototyping product offerings. The addition ofadditive 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. The results of FineLine since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the full year effectsof FineLine have not been separately presented since the impact to the Company's results of operations was not material. The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805. As of December 31, 2014, thisallocation for FineLine is final as it relates to the valuation of certain working capital accounts, intangible assets and taxes. The final allocation of thepurchase price to assets acquired and liabilities assumed is as follows: (in thousands) Assets acquired: Current assets $1,248 Intangible assets 4,580 Goodwill 28,916 Other long-term assets 3,849 Total assets acquired 38,593 Liabilities assumed: Current liabilities 1,729 Total liabilities assumed 1,729 Net assets acquired 36,864 Cash paid 34,468 Cash acquired (604)Net cash consideration 33,864 Contingent consideration 3,000 Total purchase consideration $36,864 Note 5 – Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the year ended December 31, 2014 were as follows: (in thousands) Balance as of the beginning of the period $- Goodwill acquired during the period 28,916 Balance as of the end of the period $28,916 60 Proto Labs, Inc.Notes to Consolidated Financial Statements Intangible assets other than goodwill for the years ended December 31, 2014 and 2013 were as follows: Year Ended December 31, 2014 Year Ended December 31, 2013 WeightedAverageUseful (in thousands) Gross AccumulatedAmortization Net Gross AccumulatedAmortization Net Useful Life(in years) LifeRemaining (inyears) Intangible assets withfinite lives: Marketing assets $930 $(62) $868 $- $- $- 10.0 9.3 Non-competeagreement 190 (63) 127 - - - 2.0 1.3 Trade secrets 250 (33) 217 - - - 5.0 4.3 Internally developedsoftware 680 (151) 529 - - - 3.0 2.3 Customerrelationships 2,530 (188) 2,342 - - - 9.0 8.3 Total intangible assets $4,580 $(497) $4,083 $- $- $- Amortization expense for intangible assets for the year ended December 31, 2014 was $0.5 million. There was no amortization expense in the sameperiod of the prior year. Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows: (in thousands) EstimatedAmortizationExpense 2015 $746 2016 682 2017 500 2018 424 2019 391 Thereafter 1,340 Total estimated amortization expense $4,083 61 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 6 – Fair Value Measurements ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs whenmeasuring fair value. There are three levels of inputs that may be used to measure fair value: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets orliabilities. 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, 2014 and 2013, respectively, consist of money market mutual funds.The Company determines the fair value of these financial assets using Level I inputs. A summary of financial assets measured at fair value on a recurring basis is as follows: December 31, 2014 December 31, 2013 (in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial Assets: Cash and cash equivalents Money market mutual fund $6,129 $- $- $5,524 $- $- Total $6,129 $- $- $5,524 $- $- Note 7 – Marketable Securities The Company invests in short-term and long-term agency, municipal, corporate, commercial paper and other debt securities. The securities arecategorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent tohold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of December 31, 2014 and 2013is as follows: December 31, 2014 (in thousands) AmortizedCost UnrealizedGains UnrealizedLosses Fair Value U.S. government agency securities $20,048 $- $(71) $19,977 Corporate debt securities 29,316 7 (79) 29,244 U.S. municipal securities 30,004 32 (18) 30,018 Certificates of deposit/time deposits 5,656 5 (15) 5,646 Total marketable securities $85,024 $44 $(183) $84,885 62 Proto Labs, Inc.Notes to Consolidated Financial Statements December 31, 2013 (in thousands) AmortizedCost UnrealizedGains UnrealizedLosses Fair Value U.S. government agency securities $21,713 $2 $(22) $21,693 Corporate debt securities 29,480 30 (20) 29,490 U.S. municipal securities 44,474 49 (22) 44,501 Certificates of deposit/time deposits 4,695 5 (8) 4,692 Total marketable securities $100,362 $86 $(72) $100,376 Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipalsecurities, U.S. government agency securities and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similarsecurities (Level 2). The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary innature. The investment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Thoseunrealized losses displayed above are the result of macroeconomic factors and are not indicative of the quality of the underlying security nor the issuer’sability to pay its debt. The Company intends, and has the ability, to hold the investments to maturity and recover the full principal. Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financialstatements. The December 31, 2014 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actualmaturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepaymentpenalties. December 31, (in thousands) 2014 Due in one year or less $30,706 Due after one year through five years 54,318 Total marketable securities $85,024 63 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 8 – Property and Equipment Property and equipment consists of the following: December 31, (in thousands) 2014 2013 Land $6,825 $2,830 Buildings and improvements 29,995 13,655 Machinery and equipment 72,891 48,707 Computer hardware and software 10,738 5,957 Leasehold improvements 3,501 2,932 Construction in progress 4,004 9,196 Capital leases - machinery and equipment 1,167 1,240 Total property and equipment, gross 129,121 84,517 Accumulated depreciation and amortization (37,495) (28,416)Property and equipment, net $91,626 $56,101 Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $10.6 million, $7.6 million and $6.1 million, respectively. 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 approximatesfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowancesto reduce such items identified to their recoverable amounts. The Company’s inventory consists of the following: December 31, (in thousands) 2014 2013 Raw materials $5,728 $4,875 Work in process 653 410 Total inventory 6,381 5,285 Allowance for obsolescence (187) (119)Inventory, net of allowance $6,194 $5,166 Note 10 – Financing Obligations The Company’s debt consists of the following: December 31, (in thousands) 2014 2013 Various obligations under capital leases, with interest rates from 6.8% to 7.4%, due in various monthlyinstallments, including interest, through various dates through January 2016, secured by equipment $149 $363 Less current portion 139 204 Long-term obligation $10 $159 64 Proto Labs, Inc.Notes to Consolidated Financial Statements Maturities on long-term debt obligations at December 31, 2014 are as follows: Years Ending December 31, (in thousands) 2015 $139 2016 10 2017 - 2018 - 2019 - Total $149 Note 11 – Employee Benefit Plans The Company maintains a 401(k) retirement plan that covers most of its employees. Under the plan, a full-time or regular part-time (over 20hours/week) employee becomes a participant after completing six months of employment. Employees may elect to contribute up to 50 percent of regulargross pay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches partof the employee contributions and may make a discretionary contribution to the plan. Total employer contributions were approximately $0.8 million,$0.6 million and $0.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company also sponsors a defined contribution retirement plan that covers the employees of Proto Labs Limited. Total employer contributionswere immaterial for each of the years ended December 31, 2014, 2013 and 2012. Note 12 – Stock-Based Compensation The Company has two equity incentive plans: the 2000 Stock Option Plan (2000 Plan) and the 2012 Long-Term Incentive Plan (2012 Plan). Uponthe adoption of the 2012 Plan on February 21, 2012, all shares that were reserved under the 2000 Plan but not issued were assumed by the 2012 Plan. Noadditional 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, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten yearsfrom 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 theattainment of specified performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee willdetermine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally maynot be less than the fair market value of a share of our common stock on the date of the grant. The Company’s 2012 Employee Stock Purchase Plan (ESPP) became effective on February 23, 2012. The ESPP allows eligible employees topurchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject toplan limitations. The ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85percent 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 ofthe offering period. Employees purchased 25,393, 30,690 and 86,419 shares of common stock under the ESPP at an average exercise price of $52.22, $36.74 and$13.60 during 2014, 2013 and 2012, respectively. As of December 31, 2014, 1,357,498 shares remained available for future issuance under the ESPP. The Company determines its stock-based compensation in accordance with ASC 718, which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees and non-employee directors based on fair value. Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjectiveassumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense iscalculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significantestimates include its expected term, fair value of Company common stock, stock price volatility and forfeiture rates. 65 Proto Labs, Inc.Notes to Consolidated Financial Statements The expected term represents the weighted average period that the Company’s stock options are expected to be outstanding. The expected term isbased 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-partyvaluation specialist using the income and market approach. As the Company operated as a private company with a limited market for its stock from theCompany’s inception to the completion of its IPO on February 29, 2012, the Company estimates its stock price volatility based on the volatility of a peergroup of comparable publicly traded companies for which historical information is available. The Company bases the risk-free interest rate that it uses inthe Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. TheCompany has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expecteddividend yield of zero in the option pricing model. In order to properly attribute compensation expense, the Company is required to estimate pre-vestingforfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company useshistorical data to estimate pre-vesting forfeitures and record stock-based compensation expense for those awards that are expected to vest. If theCompany’s actual forfeiture rate is materially different from its estimate, stock-based compensation expense could be significantly different from what hasbeen recorded. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period. The following table summarizes stock-based compensation expense for the years ended December 31, 2014, 2013 and 2012, respectively: Year Ended December 31, (in thousands) 2014 2013 2012 Stock options and other $4,386 $3,084 $2,539 Employee stock purchase plan 423 377 500 Total stock-based compensation expense $4,809 $3,461 $3,039 Cost of revenue $386 $316 $335 Operating expenses: Marketing and sales 927 610 418 Research and development 1,048 754 486 General and administrative 2,448 1,781 1,800 Total stock-based compensation expense $4,809 $3,461 $3,039 Income tax benefits (1,524) (847) (844)Total stock-based compensation expense, net of tax $3,285 $2,614 $2,195 66 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, 2014, 2013 and2012: Year Ended December 31, 2014 2013 2012 Risk-free interest rate 0.43 - 2.14% 1.03 - 1.98% 0.95 - 1.16% Expected life (years) 2.00 - 6.50 5.50 - 6.50 5.50 - 6.50 Expected volatility 47.29 - 49.30% 49.36 - 53.54% 53.00 - 53.14% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $32.65 $ 25.86 $ 14.79 The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31, 2014, 2013 and2012: Weighted- Average Stock Options Exercise Price Options outstanding at January 1, 2012 2,099,300 $6.18 Granted 259,800 28.67 Exercised (667,243) 2.41 Cancelled (500) 30.58 Options outstanding at December 31, 2012 1,691,357 11.11 Granted 187,615 49.69 Exercised (695,777) 7.79 Cancelled (39,945) 23.48 Options outstanding at December 31, 2013 1,143,250 19.03 Granted 116,050 72.17 Exercised (253,544) 13.77 Cancelled (6,769) 26.23 Options outstanding at December 31, 2014 998,987 $26.49 Exercisable at December 31, 2014 510,668 $13.85 The outstanding options generally have a term of 10 years. For employees, options that have been granted become exercisable ratably over thevesting period, which is generally a five-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service tothe Company. For directors, options generally become exercisable in full on the first anniversary of the grant date. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was $16.3 million, $33.2 million and$19.6 million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying commonstock and the option exercise prices. For options outstanding at December 31, 2014, the weighted-average remaining contractual term was 6.6 years and the aggregate intrinsic value was$41.5 million. For options exercisable at December 31, 2014, the weighted-average remaining contractual term was 5.6 years and the aggregate intrinsicvalue was $27.2 million. Refer to the table below for additional information. 67 Proto Labs, Inc.Notes to Consolidated Financial Statements The following table summarizes information about stock options outstanding at December 31, 2014: Options Outstanding, Vested and Expected to Vest Options Exercisable Range of Exercise Prices NumberOutstanding WeightedAverageRemainingContractualLife (Years) WeightedAverageExercisePrice ($) NumberExercisable WeightedAverageExercisePrice ($) $2.66to$5.56 130,851 3.00 $4.18 130,851 $4.18 $7.86 371,340 5.98 7.86 253,740 7.86 $20.07to$30.58 193,488 7.19 28.62 79,680 28.05 $36.41to$47.08 130,814 8.11 45.77 25,022 45.37 $53.34to$78.59 172,494 8.96 66.49 21,375 54.27 The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive income. As of December 31,2014, there was $7.5 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over aweighted average period of 3.1 years. The total fair value of options vested was $3.2 million, $2.4 million and $1.3 million for the years endedDecember 31, 2014, 2013 and 2012, respectively. Restricted Stock The 2012 Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share settled awards and restrictionslapse ratably over the vesting period, which is generally a five-year period, beginning on the first anniversary of the grant date, subject to the employee'scontinuing service to the Company. For directors, restricted stock awards generally vest in full on the first anniversary of the grant date. Non-vested restricted stock as of December 31, 2014 and changes during the year ended December 31, 2014 were as follows: Weighted- Average Grant Date Restricted Fair Value Stock Awards Per Share Nonvested restricted stock at December 31, 2013 - $- Granted 77,647 69.18 Vested (798) 62.68 Forfeited (275) 62.68 Nonvested restricted stock at December 31, 2014 76,574 $69.27 As of December 31, 2014, there was $4.2 million of unrecognized compensation expense related to non-vested restricted stock, which is expected tobe recognized over a weighted-average period of 3.7 years. 68 Proto Labs, Inc.Notes to Consolidated Financial Statements Employee Stock Purchase Plan The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended December 31, 2014, 2013 and 2012: Year ended December 31, 2014 2013 2012 Risk-free interest rate 0.01 - 0.11% 0.11 - 0.13% 0.13 - 0.16% Expected life (months) 6.00 6.00 6.00 - 8.50 Expected volatility 37.64 - 39.80% 39.80 - 53.32% 53.00 - 53.14% Expected dividend yield 0% 0% 0% Note 13 – Commitments The Company leases property from third parties. The Company leases a portion of its U.S. facilities, and the lease terms expire between July 2017and May 2018. The Company also leases office space in France, Germany and Italy with terms expiring at various times from 2015 to 2023. TheCompany leases an office and manufacturing space in Japan, and the initial term expires in November 2021. The Company has the ability to terminatethis lease, with no penalty, upon six months’ notice. In addition to those property leases described above, the Company has acquired capital equipment under capital leases. Future minimum commitments under non-cancelable leases at December 31, 2014, are as follows: (in thousands) Capital Leases Operating Leases Years Ending December 31, 2015 $154 $906 2016 11 854 2017 - 786 2018 - 544 2019 - 442 After 2019 - 1,048 Total future minimum lease payments 165 $4,580 Less interest cost 16 Net present value of minimum lease payments $149 Rental expense was approximately $1.0 million, $1.2 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. 69 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 14 – Accumulated Other Comprehensive Income (Loss) Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes inaccumulated other comprehensive income balances for the years ending December 31, 2014, 2013 and 2012, respectively: Year Ended December 31, (in thousands) 2014 2013 2012 Foreign currency translation adjustment, net of tax Balance at beginning of period $(1,091) $(928) $(738)Other comprehensive loss before reclassifications (1,838) (163) (190)Amounts reclassified from accumulated other comprehensive loss - - - Net current-period other comprehensive loss (1,838) (163) (190)Balance at end of period $(2,929) $(1,091) $(928) Note 15 – Income Taxes The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. Forthe years ended December 31, 2014, 2013 and 2012, the Company recorded an income tax provision of $18.9 million, $16.3 million and $10.9 million,respectively. The effective income tax rate for the years ended December 31, 2014, 2013 and 2012 was 31.2 percent, 31.6 percent and 31.3 percent,respectively. The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income beforeincome taxes are as follows: Year Ended December 31, (in thousands) 2014 2013 2012 Domestic $51,052 $45,659 $34,653 Foreign 9,479 5,919 316 Total income before income taxes $60,531 $51,578 $34,969 Significant components of the provision for income taxes for the following periods are as follows: Year Ended December 31, (in thousands) 2014 2013 2012 Current: Federal $17,413 $13,934 $10,288 State 1,185 379 217 Foreign 2,149 1,762 761 Deferred Federal (1,821) 168 (398)State (17) (39) 65 Foreign 130 (335) (1,060)Valuation Allowance (143) 432 1,071 Total provision for income taxes $18,896 $16,301 $10,944 70 Proto Labs, Inc.Notes to Consolidated Financial Statements A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: Year Ended December 31, 2014 2013 2012 Federal tax statutory rate 35.0% 35.0% 35.0%State tax (net of federal benefit) 0.5 0.6 0.8 Qualified subsidiary election 0.2 (0.8) (3.5)Valuation allowance against deferred tax assets (0.2) 0.8 3.5 Research and development credit (0.8) (1.8) (0.4)Foreign rate differential (2.1) (1.6) (1.1)Tax reserves 0.4 0.6 0.0 Domestic manufacturing deduction (2.1) (1.1) (2.9)Provision to return 0.0 0.2 (0.1)Miscellaneous 0.3 (0.3) 0.0 Total effective tax rate 31.2% 31.6% 31.3% On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Act) was signed into law. Included in the Act was the extension of the researchand development credit for years 2012 and 2013. As the Act was enacted during 2013, the federal portion of the 2012 research and development creditwas recognized in the first quarter of 2013. The Company recorded a tax benefit of $0.5 million for the 2012 federal research credit, which translated to aneffective income tax rate reduction of 0.9 percent for the year ended December 31, 2013. Significant components of deferred tax assets and liabilities are as follows: December 31, (in thousands) 2014 2013 Deferred tax assets: Accrued expenses $378 $243 Warrants and stock options 2,152 1,434 Intangibles 319 112 Inventories 172 136 Other assets 527 217 Net operating loss 2,842 3,240 Less valuation allowance (3,048) (3,642)Total deferred tax assets 3,342 1,740 Deferred tax liabilities: Depreciation (4,246) (4,941)Goodwill (430) - Total deferred tax liabilities (4,676) (4,941)Net deferred tax liability $(1,334) $(3,201) The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2014. Suchamounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might bepayable on the foreign earnings. As of December 31, 2014, 2013 and 2012, the Company had accumulated undistributed earnings in non-U.S.subsidiaries of $20.8 million, $11.8 million and $6.4 million, respectively. 71 Proto Labs, Inc.Notes to Consolidated Financial Statements As of December 31, 2014, the Company had estimated net operating loss carry forwards of $7.5 million for tax purposes. The net operating lossesrelate to Japan operations and can be carried forward for nine years but are limited to 80 percent of taxable income. The net operating losses begin toexpire at various dates between 2015 and 2022. The Company's Japan operations are taxed both by local authorities and in the U.S. Accordingly, aportion of Japan’s net operating losses have been recognized as a benefit in the U.S. The Company establishes valuation allowances for deferred tax assets when, after consideration of all positive and negative evidence, it isconsidered more-likely-than-not that a portion of the deferred tax assets will not be realized. The Company's valuation allowances of $3.0 million and$3.6 million at December 31, 2014 and December 31, 2013, respectively, reduce the carrying value of deferred tax assets associated with certain netoperating loss carry forwards and other assets with insufficient positive evidence for recognition. The decrease in the valuation allowance is primarilyattributable to fluctuations in foreign currency and the recognition of net operating losses against Japan 2014 taxable income. The Company files a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With a few exceptions, theCompany is no longer subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2011. The Company has liabilities related to unrecognized tax benefits totaling $1.3 million and $0.7 million at December 31, 2014 and 2013,respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilitiesin the accompanying consolidated balance sheets. The Company does not anticipate that total unrecognized tax benefits will materially change in thenext twelve months. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability incurrent or long-term income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2014, 2013 and2012. During the year ended December 31, 2014, the Company decreased its prior year uncertain tax positions by $0.4 million due to the expiration of thestatutes of limitations on the Company’s 2010 federal income tax return. Also, during the year ended December 31, 2014, the Company increased itsprior year and current year uncertain tax positions by $0.3 million and $0.6 million, respectively. The increase was due to certain tax positions notmeeting the more-like-than-not standard for accounting for uncertain tax positions under the Company’s current facts and circumstances. A reconciliationof the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2014 2013 Balance at beginning of period $695 $392 Additions for tax positions of current year 632 64 Additions for tax positions of prior years 344 239 Decrease related to expiration of statutes of limitation (376) - Balance at period end $1,295 $695 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. Althoughthe 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 and Geographic Information The Company’s CEO, who is the Company’s chief operating decision maker, makes decisions to operate the business and allocate resources basedon review of operating results at the consolidated level. As a result, the Company has determined that it has only one operating segment, and therefore,one reportable segment. 72 Proto Labs, Inc.Notes to Consolidated Financial Statements The Company’s revenue is derived from its Protomold injection molding, Firstcut computer numerical control (CNC) machining and Finelineadditive manufacturing (3D printing) product lines. Total revenue by product lines is as follows: Year Ended December 31, (in thousands) 2014 2013 2012 Revenue: Protomold $140,282 $115,069 $90,371 Firstcut 59,914 48,043 35,620 Fineline 9,387 - - Total revenue $209,583 $163,112 $125,991 Revenue from external customers based on the billing location of the end user customer and long-lived assets by geographic region are as follows: Year Ended December 31, (in thousands) 2014 2013 2012 Revenue: United States $156,033 $119,870 $94,866 International 53,550 43,242 31,125 Total revenue $209,583 $163,112 $125,991 December 31, (in thousands) 2014 2013 Long-lived assets: United States $76,923 $48,381 International 14,703 7,720 Total long-lived assets $91,626 $56,101 73 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 andoperation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective and provided reasonableassurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarizedand reported accurately and within the time frames 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. 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, asdefined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based onthe 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, 2014, the Company’s internal control over financialreporting is effective. The Company’s registered public accounting firm’s attestation report on the Company’s internal control over financial reporting isprovided in Part II, Item 8 of this Annual Report on Form 10-K. Management has excluded certain elements of FineLine Prototyping, Inc. from its assessment of internal control over financial reporting as ofDecember 31, 2014 given its acquisition date of FineLine in April, 2014. Subsequent to the acquisition, FineLine maintained the revenue, inventory andpayroll systems and processing through the year ended December 31, 2014. Those elements of the acquired business’s internal controls over financialreporting that were not fully integrated into the Company’s existing internal control over financial reporting during 2014 have been excluded frommanagement’s assessment of the effectiveness of control over financial reporting. FineLine is a wholly-owned subsidiary of the Company whosecombined total assets and total revenues excluded from our assessment represent approximately 3% and 5%, respectively, of the related consolidatedfinancial statements amounts as of the year ended December 31, 2014. 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 financialreporting. Item 9B. Other Information None. 74 PART III 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 Form10-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 2015Proxy 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 coveredby this Annual Report on Form 10-K, and is incorporated herein by reference. The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to the section titled “CorporateGovernance — Section 16(a) Beneficial Ownership Reporting Compliance” of our 2015 Proxy Statement, which will be filed no later than 120 days afterthe 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) ofRegulation S-K is incorporated herein by reference to the section titled “Corporate Governance” of our 2015 Proxy Statement, which will be filed no laterthan 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our principalexecutive officer and principal financial officer. The Code of Ethics and Business Conduct is available on our website at www.protolabs.com under theInvestors Relations section. We plan to post to our website at the address described above any future amendments or waivers of our Code of Ethics andBusiness Conduct. Item 11. Executive Compensation Information related to this item is incorporated herein by reference to the sections titled “Compensation Discussion and Analysis,” “CorporateGovernance — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” 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. 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 ofCertain Beneficial Owners and Management” of our 2015 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K. Information related to our equity compensation plans required by this item is incorporated herein byreference to the section titled “Compensation Discussion and Analysis – Information Regarding Equity-Based Compensation Plans” of our 2015 ProxyStatement, 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. Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated herein by reference to the sections titled “Corporate Governance — Certain Relationships andRelated Party Transactions,” and “Corporate Governance — Director Independence” of our 2015 Proxy Statement, which will be filed no later than 120days after the end of the fiscal year covered by this Annual Report on Form 10-K. 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 AccountingFirm” 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. 75 PART IV Item 15. Exhibits and Financial Statement Schedules (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 inthe financial statement or notes herein. 3. Exhibits See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. 76 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 onits behalf by the undersigned thereunto duly authorized. Proto Labs, Inc. Date: February 27, 2015 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer(Principal Executive Officer) Date: February 27, 2015 /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 theRegistrant in the capacities and on the dates indicated. Date: February 27, 2015 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer and Director(Principal Executive Officer) Date: February 27, 2015 /s/ John A. Way John A Way Chief Financial Officer(Principal Financial and Accounting Officer) Chairman of the Board of Directors:Lawrence J. Lukis* Directors:Rainer Gawlick*John Goodman*Douglas W. Kohrs*Brian K. Smith*Sven A. Wehrwein* *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 theregistrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto. Date: February 27, 2015 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer(Principal Executive Officer) 77 EXHIBIT INDEX ExhibitNumber Description of Exhibit3.1 Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.3.2 Amended and Restated By-Laws of Proto Labs, Inc.4.1 Form of certificate representing common shares of Proto Labs, Inc.10.1 2012 Long-Term Incentive Plan, as amended as of November 12, 201410.2 Form of Incentive Stock Option Agreement under 2012 Long-Term Incentive Plan10.3 Form of Non-Statutory Stock Option Agreement (Directors) under 2012 Long-Term Incentive Plan10.4 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2012 Long-Term Incentive Plan10.5 Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2012 Long-Term Incentive Plan10.6 Employee Stock Purchase Plan10.7 Stock Subscription Warrant issued to John B. Tumelty10.8 2000 Stock Option Plan, as amended10.9 Form of Incentive Stock Option Agreement under 2000 Stock Option Plan10.10 Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan10.11 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.12 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.13 Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan10.14 Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and Wells Fargo Bank, N.A.10.15 Letter Agreement, dated as of September 9, 2010, between Proto Labs, Inc., and Thomas Pang10.16 Form of U.S. Severance Agreement10.17 Form of UK Severance Agreement 10.18 Executive Employment Agreement, dated February 6, 2014, by and between Proto Labs, Inc. and Victoria M. Holt 10.19 Form of Restricted Stock Agreement under 2012 Long-Term Incentive Plan for the initial grant to Victoria M. Holt 10.20 Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.S. Employees) 10.21 Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.K. Employees) 10.22 Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (Directors) 10.23 Severance Agreement, dated December 18, 2014, by and between Proto Labs, Inc. and John A. Way21.1 Subsidiaries of Proto Labs, Inc.23.1 Consent of Ernst & Young LLP24.1 Powers of Attorney31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1* Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act101.INS** XBRL Instance Document101.SCH** XBRL Taxonomy Extension Schema Document101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document101.DEF** XBRL Taxonomy Extension Definition Linkbase Document101.LAB** XBRL Taxonomy Extension Label Linkbase Document101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document 78(1)(2)(3)(4)#(5)#(6)#(7)#(8)#(9)#(10)(11)#(12)#(13)#(14)#(15)#(16)#(17)#(18)#(19)#(20)#(21)#(22)#(23)#(24)#(25)#(26)# 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 Commissionon February 13, 2012. Incorporated by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. 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 Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on November 13, 2014. Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. Incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 (File No. 333-179651), filed with the Commissionon February 23, 2012. Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commissionon July 25, 2011. Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on October 26, 2011. Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with theCommission on February 13, 2012. 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 Commissionon 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. 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” forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by referenceinto any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that theregistrant 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 registrationstatement 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 andotherwise are not subject to liability under these sections. 79(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19)(20)(21)(22)(23)(24)(25)(26)# Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT All of the Company’s subsidiaries listed below are wholly owned. Name Jurisdiction of Incorporation or Organization Proto Labs, Ltd.PL Euro Services, Ltd.Proto Labs, G.K. United KingdomUnited KingdomJapan Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-179651 and 333-194272) pertaining to the 2012 Long-Term Incentive Plan, Employee Stock Purchase Plan, 2000 Stock Option Plan, and Stock Subscription Warrant of Proto Labs, Inc. of our reports datedFebruary 27, 2015, with respect to the consolidated financial statements of Proto Labs, Inc., and the effectiveness of internal control over financialreporting of Proto labs, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2014. /s/ Ernst & Young, LLP Minneapolis, MinnesotaFebruary 27, 2015 Exhibit 24.1PROTO LABS, INC.POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER Each of the undersigned directors and/or officers of Proto Labs, Inc., a Minnesota corporation (the “Company”), does hereby make, constitute andappoint Victoria M. Holt and John A. Way, and each of them, either of whom may act without the joinder of the other, the undersigned’s true and lawfulattorney-in-fact and agent, with full power of substitution, for the undersigned and in the undersigned’s name, place and stead, to sign on his or her behalf,individually and in the capacities stated below, the Annual Report on Form 10-K for the year ended December 31, 2014 under the Securities Exchange Act of1934, as amended, with any amendment or amendments thereto, with all exhibits thereto and other supporting documents, with the U.S. Securities andExchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary orincidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, each of the undersigned directors and/or officers of Proto Labs, Inc. has hereunto set his or her hand this 26th day of February,2015. /s/ Lawrence J. Lukis ChairmanLawrence J. Lukis /s/ Victoria M. Holt President, Chief Executive Officer and DirectorVictoria M. Holt /s/ John A. Way Chief Financial OfficerJohn A. Way /s/ Rainer Gawlick DirectorRainer Gawlick /s/ John B. Goodman DirectorJohn B. Goodman /s/ Douglas W. Kohrs DirectorDouglas W. Kohrs /s/ Brian K. Smith DirectorBrian K. Smith /s/ Sven A. Wehrwein DirectorSven A. Wehrwein Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002 I, Victoria M. Holt, certify that: 1. I have reviewed this Annual Report on Form 10-K of Proto Labs, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: February 27, 2015 By: /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002 I, John A. Way, certify that: 1. I have reviewed this Annual Report on Form 10-K of Proto Labs, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: February 27, 2015 By: /s/ John A. Way John A. Way Chief Financial Officer (Principal Financial Officer) By: /s/ Victoria M. HoltName: Victoria M. HoltTitle: President and Chief Executive Officer By: /s/ John A. WayName: John A. WayTitle: Chief Financial OfficerExhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Victoria M. Holt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Proto Labs, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financialcondition and results of operations of Proto Labs, Inc. Date: February 27, 2015 I, John A. Way, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report ofProto Labs, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition andresults of operations of Proto Labs, Inc. Date: February 27, 2015
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