UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 2015
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
(State or other jurisdiction of incorporation or organization)
41-1939628
(I.R.S. Employer Identification No.)
5540 Pioneer Creek Drive
Maple Plain, Minnesota
(Address of principal executive offices)
55359
(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
Common Stock, Par Value $0.001 Per Share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the 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 ☒
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Accelerated filer ☐
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, 2015 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value
of voting stock held by non-affiliates of the Registrant was approximately $1.6 billion.
As of February 17, 2016, there were 26,201,818 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2016 Annual Meeting of Shareholders are incorporated by reference to Part III of this
Annual Report on Form 10-K.
Table of Contents
PART I
Page
Item 1.
Business ....................................................................................................................................................... 5
Item 1A. Risk Factors .................................................................................................................................................. 12
Item 1B. Unresolved Staff Comments ........................................................................................................................ 26
Properties ..................................................................................................................................................... 26
Item 2.
Legal Proceedings ........................................................................................................................................ 27
Item 3.
Mine Safety Disclosures ............................................................................................................................... 27
Item 4.
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...................................................................................................................................................... 28
Selected Financial Data ................................................................................................................................ 29
Item 6.
Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 32
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................... 46
Financial Statements and Supplementary Data ............................................................................................ 47
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 75
Item 9A. Controls and Procedures ............................................................................................................................... 75
Item 9B. Other Information ......................................................................................................................................... 75
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance ........................................................................... 76
Executive Compensation .............................................................................................................................. 76
Security Ownership of Certain Beneficial Owners and Management .......................................................... 76
Certain Relationships and Related Transactions, and Director Independence ............................................. 76
Principal Accountant Fees and Services....................................................................................................... 76
PART III
Item 15.
Exhibits and Financial Statement Schedules ................................................................................................ 77
PART IV
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 following words: “may,” “will,” “could,” “would,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative
of these terms or other comparable terminology, although not all forward-looking statements contain these words. These
statements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially
different than those expressed or implied in such statements. In particular, some of the risks associated with our business
include:
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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’ needs and expectations regarding quick turnaround time, price
and specifications for quality;
the adoption rate of e-commerce and 3D CAD software by product developers and engineers;
our ability to process a large volume of designs and identify significant opportunities in our business;
our ability to maintain and enhance our brand;
our ability to successfully identify, complete and integrate acquisitions or other strategic transactions;
the loss of key personnel or failure to attract and retain additional personnel;
system interruptions at our operating facilities;
possible unauthorized access to customers’ confidential information stored in our systems; and
our ability to protect our intellectual property and not infringe on others’ intellectual property.
Certain of these factors and others are described in the discussion on risk factors that appear in Part I, Item 1A. “Risk
Factors” of this Annual Report on Form 10-K and uncertainties detailed in this and other reports and filings with the Securities
and Exchange Commission (SEC). Other unknown or unpredictable factors also could have material adverse effects on our
future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should
not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to
update any forward-looking statements to reflect subsequent events or circumstances.
4
Item 1. Business
Overview
PART I
Proto Labs, Inc. was incorporated in Minnesota in 1999. The terms “Proto Labs,” the “Company,” “we,” “us,” and
“our” as used herein refer to the business and operations of Proto Labs, Inc. and its subsidiaries. We are a leading online and
technology-enabled, quick-turn, on-demand manufacturer of custom parts for prototyping and short-run production. We
manufacture parts for product developers and engineers worldwide, who are under increasing pressure to bring their finished
products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining
and 3D printing to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-
consuming and expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly
all of their business with us over the Internet. We target our products to the millions of product developers and engineers who
use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.
We have established our operations in the United States, Europe and Japan, which we believe are three of the largest
geographic markets where these product developers and engineers are located. We believe our use of advanced technology
enables us to offer significant advantages at competitive prices to many product developers and engineers and is the primary
reason we have become a leading supplier of custom parts.
We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent
in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our customers
typically order low volumes of custom parts for a variety of reasons, including:
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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 for testing of a product;
they need an initial supply of parts to support production while their high-volume production mold is being
prepared;
they need 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 enables us to ship parts as soon as the same day after receipt of a customer’s
design submission.
Our manufacturing product lines currently include injection molding (Protomold), CNC machining (Firstcut) and 3D
printing (Fineline). We continually seek to expand the range of size and geometric complexity of the parts we can make with
these processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes
to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and
engineers.
We have experienced significant growth since our inception in 1999. We have grown our total revenue from $98.9
million in 2011 to $264.1 million in 2015. We have grown our income from operations from $26.9 million in 2011 to $67.1
million in 2015.
Our increases in revenue and income from operations are due to our expansion of product lines offered. Product lines
have expanded over the years by the introduction of:
● plastic injection molding in 1999;
● CNC machining in 2007;
●
liquid silicon rubber (LSR) that expanded the breadth and scope of our injection molding product line in 2014;
● 3D printing, including stereolithography (SL), selective laser sintering (SLS), and direct metal laser sintering
(DMLS), through our acquisition of FineLine Prototyping, Inc. (FineLine) in 2014 and expanded through our
acquisition of certain assets, including shares of select subsidiaries, of Alphaform AG (Alphaform) in 2015;
and
● Lathe-turned parts that expanded the breadth and scope of our CNC product line in 2015.
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 used to create physical parts for concept modeling, prototyping,
functional testing, market evaluation or production. Custom prototype parts play a critical role in the product development
process, as they provide product developers and engineers with the ability to test and confirm their intended performance
requirements and explore design alternatives.
Early in the product development process, 3D printing processes such as stereolithography can be used to quickly
produce an approximate physical representation of a part, but these representations may not meet product developers’ and
engineers’ requirements for dimensional accuracy, cosmetics or material properties. As an alternative, 3D printing processes
such as selective laser sintering and direct metal laser sintering or 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.
Our Solution
We have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor
conventionally required in quoting, production engineering and manufacturing of custom parts. We believe our interactive
web-based interface and highly automated processes address the desires of many product developers and engineers for a fast,
efficient and cost-effective means to obtain custom parts and are the primary reasons we have become a leading supplier of
custom parts.
Key elements of our solution include:
Sophisticated Technology that Reduces Turnaround Time
Our web-based interface and proprietary software automate many of the manual and time-consuming processes
typically required to obtain custom 3D-printed, CNC-machined or injection-molded parts from conventional suppliers. Our
platform automates many aspects of the entire process from design submission through manufacturability analysis and
feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. To utilize our
platform, a prospective customer uploads a 3D CAD file of their required part through our website. Often within minutes of
design submission, our software analyzes the manufacturability of the part, assesses our ability to make the part, and returns
a firm price quotation with any recommendations for design modifications. In the case of CNC machining, this
manufacturability analysis identifies features that may be too fragile to be machined and areas that cannot be machined at all.
For injection molding, problematic features such as undercuts, thin areas, thick areas and areas requiring geometry
adjustments to allow the part to be ejected from the mold are identified. Many of our customers find this analysis particularly
helpful, as it diagnoses and prevents potential problems prior to manufacturing. We can also provide a flow analysis to
identify parts that may be so thin and large that plastic will solidify 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 labor that is normally required to manufacture parts. As a result, in many cases
we are able to quote orders in minutes and ship parts as soon as the same day ordered.
Scale to Process Large Numbers of Unique Part Designs
Our proprietary, highly scalable quoting technology addresses the manual processes conventionally involved in
submitting a design, analyzing its manufacturability, making design revision recommendations and generating price
quotations. This enables us to quickly analyze high volumes of 3D CAD part design submissions and provide feedback to
our prospective product developer and engineer customers. In 2015 alone, we generated quotations for over 550,000 design
submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large
numbers of unique designs and, combined with our manufacturing processes, efficiently and effectively manufacture high
volumes of parts to meet the needs of product developers and engineers.
6
Enhanced Customer Experience
Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our
proprietary manufacturability analysis then quickly analyzes whether a part design falls within our manufacturing
capabilities. In many cases, our software provides suggested design modifications to enhance manufacturability, which
is presented to the product developer or engineer in an interactive quotation containing a color-coded 3D representation of
the part. This allows product developers and engineers to quickly determine the manufacturability of their parts, understand
the cost and when they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an
order’s various parameters such as material, finish, quantity or shipping schedule. As a result, we provide product developers
and engineers with an easy-to-use and consistent means to obtain custom parts.
Attractive Custom Pricing
Based on internal market research, we believe we generally have competitive pricing on custom orders. We believe this
is a direct result of our technology and the efficiency of our operations, both of which were designed specifically for custom
parts production. By limiting these costs, we can typically offer attractive pricing not normally possible in the custom parts
market, and as a result, we can typically offer product developers and engineers 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 worldwide operations in real time using an easy-to-understand management dashboard. This system provides us
with the ability to quickly react to new information across our organization.
Our Product Lines
Our 3D Printing (Fineline), CNC Machining (Firstcut) and Injection Molding (Protomold) product lines offer many
product developers and engineers the ability to quickly and efficiently outsource their quick-turn custom parts manufacturing.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the historical
revenue generated by each of 3D Printing (Fineline), CNC Machining (Firstcut) and Injection Molding (Protomold).
3D Printing (Fineline)
Our 3D Printing (Fineline) product line includes SL, SLS and DMLS processes, which offers customers a wide-variety
of high-quality, precision rapid prototyping and low volume production. These processes create parts with a high level of
accuracy, detail, strength and durability. 3D Printing is well suited to produce small quantities, typically in the range of one
to 50 parts.
CNC Machining (Firstcut)
Our CNC Machining (Firstcut) product line uses commercially available CNC machines to cut plastic or metal blocks
into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. Our efficiencies
derive from the automation of the programming of these machines and a proprietary fixturing process. The CNC Machining
(Firstcut) product line is well suited to produce small quantities, typically in the range of one to 200 parts.
Injection Molding (Protomold)
Our Injection Molding (Protomold) product line uses our 3D CAD-to-CNC machining technology for the automated
design and manufacture of thermoplastic, metal or liquid silicone injection molds, which are then used to produce custom
injection-molded parts on commercially available equipment. Our Injection Molding (Protomold) product line is used for
prototype, on-demand and short-run production. Prototype quantities typically range from 25 to 100 parts. Because we retain
possession of the molds, customers who need short-run production often come back to Proto Labs’ Injection Molding product
line for additional quantities typically ranging up to 10,000 parts or more. They do so to support pilot production for product
testing or while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due
to disruptions in their manufacturing process, because their product will only be released in a limited quantity or because
they need end-of-life production support. These additional part orders typically occur on approximately half of the molds that
we make, typically accounting for approximately half of our total Injection Molding (Protomold) revenue.
7
Our Process
The process for 3D Printing (Fineline), CNC Machining (Firstcut) and Injection Molding (Protomold) begins when the
product developer or engineer uploads one or more 3D CAD models representing the desired part geometry. Our proprietary
software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and support the creation
of an interactive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then
e-mailed to the product developer or engineer, who can access the quotation, change a variety of order parameters and
instantly see the effect on price before finalizing the order. For 3D Printing (Fineline), the quote is reviewed and then
scheduled for production. For CNC Machining (Firstcut), the tool paths are then reviewed and routed to our high-speed CNC
machining centers for execution. In the case of Injection Molding (Protomold), our proprietary software supports the creation
of the mold design and the tool paths required to manufacture the mold components, which are then routed to our CNC
machining centers for execution. Once the mold is assembled, it is placed in one of our injection molding presses to create
the required parts. For our CNC Machining (Firstcut) product line, we ship parts as soon as the same day as the order is
received. For our Injection Molding (Protomold) and 3D Printing (Fineline) product lines, we ship parts in as little as one
business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions.
Our Growth Strategy
The principal elements of our growth strategy are to:
Expand the Customer Base
We plan to expand our customer base to serve more product developers and engineers within the companies that have
already used our product lines. Individual product developers and engineers typically make or influence the choice of vendor
when sourcing custom parts. We believe a significant opportunity exists for us to leverage highly satisfied product developers
and engineers to encourage others within the same organization to utilize our product lines. We have historically generated a
significant number of new customers through word-of-mouth referrals from other product developers and engineers, and
combine these referrals with the efforts of our marketing and sales force to identify and market our product lines to the
colleagues of our existing customers.
We also plan to use our marketing and sales capabilities to continue to pursue product developers and engineers within
companies who have not yet used our products. Our presence in geographic regions that have high populations of 3D CAD
users provides us with a broad universe of potential new customer companies on which to focus our marketing and sales
efforts.
We believe there may be opportunities to grow by identifying and expanding into select additional geographic markets.
We currently operate in the United States, Europe and Japan, where we believe a substantial portion of the world’s product
developers and engineers are located. We entered the European market in 2005 and launched operations in Japan in 2009.
For 2015, revenue earned in these markets represents approximately 21% of our total revenue. While we currently do not
have specific plans to expand into any particular geographic markets, we believe opportunities exist to serve the needs of
product developers and engineers in select new geographic regions and we will continue to evaluate such opportunities if and
when they arise.
We plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our
technology in order to further increase automation and meet the evolving needs of product developers and engineers
worldwide. We believe product developers and engineers have come to expect advanced web-based tools and a fully
integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers and
engineers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive
quotations quickly and efficiently.
8
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 product developers’ and engineers’ needs. Introducing new manufacturing processes can both attract new
customers and provide us with a significant opportunity to cross-sell our existing product lines to our existing customer base.
We regularly evaluate new manufacturing processes to offer product developers and engineers and introduce such new
processes when we are confident that a sufficient market demand exists and that we can offer the same advantages our
customers have come to expect from us. See Item 6. “Selected Financial Data” for disclosure of our historical research and
development expenses.
Examples of new manufacturing processes we have added include CNC Machining (Firstcut), 3D printing through the
acquisitions of FineLine and Alphaform and the launch of liquid silicone rubber injection molding and lathe-turned parts.
Our CNC Machining (Firstcut) product line was first introduced in the United States in 2007 and has grown to represent 28%
of our total revenue in the year ended December 31, 2015. In April 2014, we added 3D-printing technologies through our
acquisition of FineLine and further expanded our 3D printing capabilities in October 2015 through our acquisition of
Alphaform. During 2014, we introduced liquid silicone rubber injection molding and in February 2015, we introduced lathe-
turned products to further 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 research and development efforts to expand the range of parts that we can produce. Since we first
introduced our Injection Molding (Protomold) product line in 1999, we have steadily expanded the size and geometric
complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we
are able to support. Similarly, since first introducing our CNC Machining (Firstcut) product line in 2007, we have expanded
the range of part sizes, design geometries and materials we can support. As we continue to expand the range of our existing
process capabilities, we believe we will meet the needs of a broader set of product developers and engineers and consequently
convert a higher number of quotation requests into orders.
Marketing
Our international marketing effort generates prospects for our sales teams and seeks to strengthen our reputation as an
industry leader in rapid custom prototyping and low-volume manufacturing. Since we are an agile, technology-based
company, much of our marketing activities occur online. We use marketing automation software to enhance the productivity
of our marketing and sales teams and continuously track the results of every campaign to ensure our return on investment.
We maintain top-of-mind brand awareness with product developers and engineers through regular publication of
technical information including design guidelines and helpful tips, engineering white papers, educational webinars, quick
videos, and a quarterly journal focused on important industry topics. We also provide complimentary physical design aids to
designers and engineers — as well as teachers and students — that highlight technical aspects of injection molding to help
create efficient, well-designed parts. We believe these educational materials are key aspects of our lead generation efforts.
In our Cool Idea! Award program, we grant up to $250,000 in manufacturing services annually to entrepreneurs with
innovative ideas. In addition to supporting entrepreneurs and creative product development, we feel this program generates
good will, press coverage and word-of-mouth brand awareness.
Marketing represents the face of Proto Labs, so it is our goal to actively and intelligently engage designers and engineers
across multiple mediums — whether print, online, social media or in person. By doing this, we gain new customers, drive
sales and build brand equity.
Sales and Customer Service
We maintain an internal sales team trained in the basics of part design and the capabilities of our manufacturing product
lines, as well as the key advantages of our product lines over alternate methods of custom parts manufacturing. We organize
our sales team into complementary roles: business development, account management and strategic account management,
with the former focused on selling to new customer companies and the latter two focused on expanding sales within existing
customer companies. We believe our sales staff is adept at researching customer companies and networking to find additional
product developers and engineers who may have a need for our products. We also have a team of customer service engineers
who can support highly technical engineering discussions with product developers and engineers as required during the sales
9
process. Our revenue is generated from a diverse customer base, with no single customer company representing more than
2% of our total revenue in 2015.
Competition
The market for custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant
technological change. Our potential competitors include:
• Captive in-house product manufacturing. 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 product developers and engineers.
• Other custom parts manufacturers. There are thousands of alternative manufacturing machine shops, injection molding
suppliers, 3D printing service bureaus and vendors worldwide. The size and scale of these businesses range from very
small specialty shops to large, high-volume production manufacturers.
We believe that the key competitive factors in our industry include:
• Speed: turnaround time for quotations and parts;
• Price: mold and part pricing;
• Service: overall customer experience, from web interface to post-sales support;
• Capability: range of part sizes and dimensional complexities supported, variety of manufacturing processes offered,
materials supported and post-processing provided;
• Quality: dimensional accuracy, surface finish, material properties, color and cleanliness;
• Scale: ability to support multiple part designs in parallel; and
• Capacity: ability to manage peaks in demand.
We believe that we have competitive strengths that position us favorably and have enabled us to become a leader in our
markets. We also believe that substantially all of our current direct competitors are relatively small in terms of size of
operations, revenue, number of customers and volume of parts sold, and generally lack our technological capabilities.
However, our industry is evolving rapidly and other companies, including potentially larger and more established companies
with developed technological capabilities, may begin to focus on custom parts manufacturing. These companies could more
directly compete with us, along with our existing competitors, and could also launch new products and product lines that we
do not offer that may quickly gain market acceptance. Any of the foregoing could adversely affect our ability to attract
customers.
10
Intellectual Property
We regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other
intellectual property as valuable to our business and rely on patent, trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers, vendors and others to protect our proprietary rights.
We register our patents, trademarks and service marks in the United States and other jurisdictions as we deem appropriate.
As of December 31, 2015, we owned and had applications pending for patents relating to various aspects of our quoting and
manufacturing processes as follows:
Jurisdiction
United States ............................................................................................
United Kindgom .......................................................................................
Germany ...................................................................................................
Issued Patents
16
2
0
Applications Pending
3
0
2
Our patents have expiration dates ranging from 2022 to 2032. We also owned approximately 13 registered and 2
pending United States trademarks or service marks as of December 31, 2015, with corresponding registered protection in
Europe and Japan for the most important of these marks such as PROTO LABS, PROTOMOLD, FIRSTCUT,
PROTOQUOTE, FIRSTQUOTE, PROTOFLOW and FINELINE, corresponding approved protection in Canada for PROTO
LABS, FIRSTCUT and FINELINE, and corresponding registered protection in Australia, Canada and Mexico for
PROTOMOLD. There can be no assurance that the steps we take to protect our proprietary rights will be adequate or that
third parties will not infringe or misappropriate such rights. We have been subject to claims and expect to be subject to legal
proceedings and claims from time to time in the ordinary course of our business. In particular, we may face claims from third
parties that we have infringed their patents, trademarks or other intellectual property rights. Such claims, even if not
meritorious, could result in the expenditure of significant financial and managerial resources. Any unauthorized disclosure
or use of our intellectual property could make it more expensive to do business and harm our operating results.
Employees
As of December 31, 2015, we had 1,549 full-time employees. We consider our current relationship with our employees
to be good. We also regularly use independent contractors and other temporary employees across the organization to augment
our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain
qualified personnel.
Available Information
Our principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359 and our
telephone number is (763) 479-3680. Our website address is www.protolabs.com. Information on our website does not
constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC. We provide free
access to various reports that we file with or furnish to the SEC through our website as soon as reasonably practicable after
they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. Our SEC reports can be accessed
through the investor relations section of our website 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 for the past five years:
Victoria M. Holt .............. 58 President, Chief Executive Officer and Director
Robert Bodor ................... 43 Vice President/General Manager – Americas
John A. Way .................... 43 Chief Financial Officer and Executive Vice President of Development
Donald G. Krantz ............ 60 Executive Vice President and Technology Officer
Jacqueline D. Schneider .. 51 Vice President of Global Sales
John B. Tumelty .............. 45 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 relationships between or among any of the executive officers or directors of the Company.
11
Victoria M. Holt. Ms. Holt has been our President and Chief Executive Officer since February 2014. Prior to joining
Proto Labs, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic
sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in
March 2013. Ms. Holt also is a member of the Board of Directors of Waste Management, Inc.
Robert Bodor. Dr. Bodor has served as our Vice President/General Manager - Americas since January 2015. From July
2013 to January 2015, Dr. Bodor served as our Chief Technology Officer. From December 2012 to June 2013, Dr. Bodor
served as our Director of Business Development. Prior to joining Proto Labs, from January 2011 to December 2012, Dr.
Bodor held several roles at Honeywell, most recently leading SaaS business offerings for Honeywell’s Life Safety Division..
John A. Way. Mr. Way has served as our Chief Financial Officer and Executive Vice President of Development since
December 2014. From October 2013 to September 2014, Mr. Way served as Chief Financial Officer of Univita Health Inc.,
a privately held home healthcare service provider. From September 2012 to July 2013, Mr. Way served as Chief Financial
Officer of Virtual Radiologic, a global telemedicine company. From October 2002 to November 2012, Mr. Way worked in
senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer of Optum
Collaborative Care, SecureHorizons and OptumHealth.
Donald G. Krantz. Dr. Krantz has served as our Executive Vice President and Technology Officer since January 2015.
From January 2007 to January 2015, Dr. Krantz served as our Chief Operating Officer. From November 2005 to January
2007, Dr. Krantz served as our Vice President of Development. Dr. Krantz was an Engineering Fellow at Alliant Techsystems
and Honeywell, Inc., and was named the 2005 Distinguished Alumnus of the Department of Computer Science and
Engineering at the University of Minnesota.
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.
John B. Tumelty. Mr. Tumelty has served as the Vice President/General Manager and Managing Director – Europe,
Middle East and Africa since January 2015. Mr. Tumelty served as the Managing Director of Proto Labs, Limited from its
inception in July 2005 to January 2015. Mr. Tumelty leads our company’s operations in Europe.
Item 1A. Risk Factors
The following are the significant factors that could materially adversely affect our business, financial condition, or
operating results, as well as adversely affect the value of an investment in our common stock.
Risks Relating to Our Business
We face significant competition and expect to face increasing competition in many aspects of our business, which could
cause our operating results to suffer.
The market for custom parts manufacturing is fragmented and highly competitive. We compete for customers with a
wide variety of custom parts manufacturers and methods. Some of our current and potential competitors include captive in-
house product lines, other custom parts manufacturers and alternative manufacturing vendors such as those utilizing 3D
printing processes including stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS).
Moreover, some of our existing and potential competitors are researching, designing, developing and marketing other types
of products and product lines. We also expect that future competition may arise from the development of allied or related
techniques for custom parts manufacturing that are not encompassed by our patents, from the issuance of patents to other
companies that may inhibit our ability to develop certain products and from improvements to existing technologies.
Furthermore, our competitors may attempt to adopt and improve upon key aspects of our business model, such as
development of technology that automates much of the manual labor conventionally required to quote and manufacture
custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or building
scalable operating models specifically designed for efficient custom production. Third-party CAD software companies may
develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business
model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that could
more effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with
other competitors or potential competitors. To the extent companies terminate such relationships and establish alliances and
relationships with our competitors, our business could be harmed.
Existing and potential competitors may have substantially greater financial, technical, marketing and sales,
manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in
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intellectual property rights and operating within certain international locations, any of which may enable them to compete
effectively against us.
Though we plan to continue to expend resources to develop new technologies, processes and product lines, we cannot
assure you that we will be able to maintain our current position or continue to compete successfully against current and future
sources of competition. Our challenge in developing new products is finding product lines for which our automated quotation
and manufacturing processes offer an attractive value proposition, and we may not be able to find any new product lines with
potential economies of scale similar to our molding and machining product lines. If we do not keep pace with technological
change and introduce new technologies, processes and product lines, the demand for our products and product lines may
decline and our operating results may suffer.
Our success depends on our ability to deliver products and product lines that meet the needs of product developers and
engineers and to effectively respond to changes in our industry.
We derive almost all of our revenue from the manufacture and sale to product developers and engineers of quick-turn
low volumes of custom parts for prototyping, support of internal manufacturing and limited quantity product release. Our
business has been, and, we believe, will continue to be, affected by changes in product developer and engineering
requirements and preferences, rapid technological change, new product and product line introductions and the emergence of
new standards and practices, any of which could render our technology, products and product lines less attractive,
uneconomical or obsolete. To the extent that our customers’ need for quick-turn parts decreases significantly for any reason,
it would likely have a material adverse effect on our business and operating results and harm our competitive position. In
addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe
that to remain competitive, we must continually expend resources to enhance and improve our technology, product offerings
and product lines.
In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of
those efforts to further develop our technology in areas such as our interactive user interface and manufacturing processes,
potentially introduce new manufacturing processes within the research and development initiative we refer to as Protoworks,
and broaden the range of parts that we are able to manufacture. We believe successful execution of this part of our business
plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able
to do so in a timely fashion, or at all. Broadening the range of parts we offer is of particular importance since limitations in
manufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the
resources devoted to executing on this aspect of our business plan will improve our business and operating results or result
in increased demand for our products and product lines. Failures in this area could adversely impact our operating results and
harm our reputation and brand. Even if we are successful in executing in these areas, our industry is subject to rapid and
significant technological change, and our competitors may develop new technologies, processes and product lines that are
superior to ours. Our research and development costs were approximately $18.4 million, $16.6 million and $11.9 million for
the years ended December 31, 2015, 2014 and 2013, respectively, and there is no guarantee that these costs will enable us to
maintain or grow our revenue profitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this Annual Report on Form 10-K for additional discussion related to research and development
costs.
Any failure to properly meet the needs of product developers and engineers or respond to changes in our industry on a
cost-effective and timely basis, or at all, would likely have a material adverse effect on our business and operating results
and harm our competitive position.
Our failure to meet our product developers’ and engineers’ expectations regarding quick turnaround time would adversely
affect our business and results of operations.
We believe many product developers and engineers are facing increased pressure from global competitors to be first to
market with their finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability to
quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no guarantees
we will be able to meet product developers’ and engineers’ increasing expectations regarding quick turnaround time,
especially as we increase the scope of our operations. If we fail to meet our customers’ expectations regarding turnaround
time in any given period, our business and results of operations will likely suffer.
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Our failure to meet our product developers’ and engineers’ price expectations would adversely affect our business and
results of operations.
Demand for our product lines is sensitive to price. We believe our competitive pricing has been an important factor in
our results to date. Therefore, changes in our pricing strategies can have a significant impact on our business and ability to
generate revenue. Many factors, including our production and personnel costs and our competitors’ pricing and marketing
strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectations in any given
period, demand for our products and product lines could be negatively impacted and our business and results of operations
could suffer.
Our failure to meet our product developers’ and engineers’ quality specifications would adversely affect our business and
results of operations.
We believe many product developers and engineers have a need for specific quality of quick-turn, on-demand custom
parts. We believe our ability to create parts with the specifications of the product developers and engineers is an important
factor in our results to date. If we fail to meet our customers’ specifications in any given period, demand for our products and
product lines could be negatively impacted and our business and results of operations could suffer.
The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt
our ability to retain and expand our customer base as well as further penetrate existing customers.
Since our products and product lines are sold primarily through our websites, the success of our business depends upon
our ability to attract new and repeat customers to our websites in order to increase business and grow our revenue. Customer
awareness and the perceived value of our brand will depend largely on the success of our marketing efforts, as well as our
ability to consistently provide quality custom parts within the required timeframes and positive customer experiences, which
we may not do successfully. A primary component of our business strategy is the continued promotion and strengthening of
our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing
efforts directed toward enhancing our brand. We have initiated marketing efforts through social media, but this method of
marketing may not be successful and subjects us to a greater risk of inconsistent messaging and bad publicity. We may choose
to increase our branding expense materially, but we cannot be sure that this investment will be profitable. If we are unable to
successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate
revenue.
Our business depends in part on our ability to process a large volume of new part designs from a diverse group of product
developers and engineers and successfully identify significant opportunities for our business based on those submissions.
We believe the volume of new part designs we process and the size and diversity of our customer base give us valuable
insight into the needs of our prospective customers. We utilize this industry knowledge to determine where we should focus
our development resources. If the number of new part designs we process or the size and diversity of our customer base
decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product
developers and engineers could be negatively impacted. In addition, even if we do continue to process a large number of new
part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we
extract from those interactions will be successfully utilized to help us identify significant business opportunities or better
understand the needs of product developers and engineers.
The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain
additional personnel in the future, could harm our business and negatively affect our ability to successfully grow our
business.
We are highly dependent upon the continued service and performance of the key members of our management team
and other personnel. The loss of any of these individuals, each of whom is “at will” and may terminate his or her employment
relationship with us at any time, could disrupt our operations and significantly delay or prevent the achievement of our
business objectives. We believe that our future success will also depend in part on our continued ability to identify, hire, train
and motivate qualified personnel. A possible shortage of qualified individuals in the regions where we operate might require
us to pay increased compensation to attract and retain key employees, thereby increasing our costs. In addition, we face
intense competition for qualified individuals from numerous companies, many of whom have substantially greater financial
and other resources and name recognition than us. We may be unable to attract and retain suitably qualified individuals who
are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased
compensation in order to do so. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability
to achieve our business objectives.
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If we fail to grow our business as anticipated, our net sales, gross margin and operating margin will be adversely affected.
We are attempting to grow our business substantially. To this end, we have made and expect to continue to make
significant investments in our business, including investments in our infrastructure, technology, and marketing and sales
efforts. These investments include dedicated facilities expansion and increased staffing, both domestic and international. If
our business does not generate the level of revenue required to support our investment, our net sales and profitability will be
adversely affected.
If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be
damaged, and our business and results of operations may be harmed.
Over the past several years, we have experienced rapid growth. For example, we have grown from 511 full-time
employees as of January 1, 2012 to 1,549 full-time employees as of December 31, 2015. We have expanded internationally,
including establishing manufacturing operations in Europe in 2005 and through the acquisition of Alphaform in October
2015, as well as Japan in late 2009. In 2014, we expanded our product lines with 3D printing through our acquisition of
FineLine. We expect this growth to continue and the number of countries and facilities from which we operate to increase in
the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do,
among other things, the following:
•
•
•
•
enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting
systems and procedures, in particular as we continue to operate as a global organization;
effectively scale our operations, including accurately predicting the need for floor space, equipment, and
additional staffing;
successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees; and
expand our international resources.
These enhancements and improvements will require significant capital expenditures and allocation of valuable
management and employee resources. Furthermore, our growth, combined with the geographical dispersion of our operations,
has placed, and will continue to place, a strain on our operational, financial and management infrastructure. Our future
financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage
any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all.
Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of
operations, financial condition, prospects, and reputation and brand, including impairing our ability to perform to our
customers’ expectations.
We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs
of our business.
A key element to our continued growth is the ability to quickly and efficiently quote an increasing number of product
developer and engineer submissions across geographic regions and to manufacture the related parts. This will require us to
timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.
With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improve their
performance, especially during periods of heavy usage and as our solutions become more complex and our user traffic
increases across geographic regions. Similarly, our manufacturing automation technology may not enable us to process the
large numbers of unique designs and efficiently manufacture the related parts in a timely fashion to meet the needs of product
developers and engineers as our business continues to grow. Any failure in our ability to timely and effectively scale and
adapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers
and attract new customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our
business and results of operations.
15
Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.
Although our revenue has grown from $98.9 million for the year ended December 31, 2011 to $264.1 million for the
year ended December 31, 2015, we may not be able to maintain our historical rate of revenue growth. We believe that our
continued revenue growth will depend on many factors, a number of which are out of our control, including among others,
our ability to:
•
retain and further penetrate existing customer companies, as well as attract new customer companies;
• consistently execute on custom part orders in a manner that satisfies product developers’ and engineers’ needs and
provides them with a superior experience;
• 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 per day, 7 days per week;
•
•
•
increase the strength and awareness of our brand across geographic regions;
respond to changes in product developer and engineer needs, technology and our industry; and
react to challenges from existing and new competitors.
We cannot assure you that we will be successful in addressing the factors above and continuing to grow our business
and revenue.
Our operating results and financial condition may fluctuate on a quarterly and annual basis.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to
continue to vary due to a number of factors, some of which are outside of our control. In addition, our actual or projected
operating results may fail to match our past performance. These events could in turn cause the market price of our common
stock to fluctuate. If our operating results do not meet the expectations of securities analysts or investors, who may derive
their expectations by extrapolating data from recent historical operating results, the market price of our common stock will
likely decline.
Our operating results and financial condition may fluctuate due to a number of factors, including those listed below and
those identified throughout this “Risk Factors” section:
•
•
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 generally increase 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;
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• 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 processes or other operations;
• changes in accounting rules and tax and other laws; and
• plant shutdowns due to a health pandemic or weather conditions.
Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely on
quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance.
Interruptions to or other problems with our website and interactive user interface, information technology systems,
manufacturing processes or other operations could damage our reputation and brand and substantially harm our business
and results of operations.
The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user
interface, information technology systems, manufacturing processes and other operations are critical to our reputation and
brand, and to our ability to effectively service product developers and engineers. Any interruptions or other problems that
cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, or
negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost
revenue, cause us to incur significant costs seeking to remedy the problem and otherwise substantially harm our business and
results of operations.
A number of factors or events could cause such interruptions or problems, including among others: human and software
errors, design faults, challenges associated with upgrades, changes or new facets of our business, power loss,
telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security
breaches, contract disputes, labor strikes and other workforce-related issues, capacity constraints due to an unusually large
number of product developers and engineers accessing our websites or ordering parts at the same time, and other similar
events. These risks are augmented by the fact that our customers come to us largely for our quick-turn manufacturing
capabilities and that accessibility and turnaround speed are often of critical importance to these product developers and
engineers. We are dependent upon our facilities through which we satisfy all of our production demands and in which we
house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service,
sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fully
redundant systems in multiple locations. However, we have back-up computing systems for each of our United States,
European and Japanese operations. In addition, we are dependent in part on third parties for the implementation and
maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and
rectifying problems with these aspects of our systems is to a large extent outside of our control.
Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially
significant losses, including the potential harm to the future growth of our business that may result from interruptions in our
product lines as a result of system failures.
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We depend on the continued growth of product developers’ and engineers’ e-commerce expectations when working with
their custom parts manufacturers and their migration from 2D to 3D CAD software.
The business of selling custom parts over the Internet via an interactive web-based and automated user interface and
quoting system is not widespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD
software. Concerns about privacy and technological and other problems may discourage some product developers and
engineers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software,
particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or
with product developers and engineers in industries not well suited to utilize our product lines, such as architecture. In order
to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of
commerce and/or 2D CAD drawings to purchase their customer parts. If product developers and engineers are not sufficiently
attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers
and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely
impacted.
Our business depends on the development and maintenance of the Internet infrastructure.
The success of our product lines will depend largely on the development and maintenance of the Internet infrastructure.
This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security, as well as
timely development of complementary products, for providing reliable Internet access and services. The Internet has
experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. The
Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing
bandwidth requirements, or problems caused by “viruses,” “worms,” malware and similar programs may harm the
performance of the Internet. The Internet has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the
level of Internet usage generally as well as the level of usage of our product lines, which could adversely impact our business.
If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to
unauthorized access, our reputation 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, credit card information and other sensitive data. We rely on encryption, authentication and other
technologies licensed from third parties, as well as administrative and physical safeguards, to secure such confidential
information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of
loss, costly litigation and liability that would substantially harm our business and operating results. We may not have
adequately assessed the internal and external risks posed to the security of our company’s systems and information and may
not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security
incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of
data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to
widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the
effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and
brand and could cause the loss of customers.
Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.
The prospects for economic growth in the United States and other countries remain uncertain and could worsen.
Economic concerns and other issues such as reduced access to capital for businesses may cause product developers and
engineers to further delay or reduce the product development projects that our business supports. Given the continued
uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our
suppliers, product developers and engineers and other related risks to our business.
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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 of December 31, 2015, 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 27%, 26% and 27% of our total revenue in the years ended December 31, 2015, 2014 and 2013,
respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties.
Many of the following factors have adversely affected our international operations and sales to customers located outside of
the United States and may again in the future:
• 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 certain areas;
• 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 prospective customers, and companies’ desire or ability to make investments in new products. A deterioration
of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce
demand for our product lines, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our
business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could
impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken
hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively
impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of
political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts
19
receivable in that country or region. In any of these events, our results of operations could be materially and adversely
affected.
If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our
products for a substantial amount of time and our sales will decline.
We manufacture all of our products in 11 manufacturing facilities, two of which are located in each of Maple Plain,
Minnesota and Raleigh, North Carolina, and one of which is located in each of Rosemount, Minnesota; Plymouth, Minnesota;
Telford, United Kingdom; Feldkirchen, Germany; Eschenlohe, Germany; Rusko, Finland 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. Our facilities may be harmed by natural or man-made disasters, including, without limitation,
earthquakes, floods, tornadoes, fires, hurricanes, tsunamis and nuclear disasters.
In the event any of our facilities are affected by a disaster, we may:
• 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 marketing and sales 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
•
lose customers and be unable to regain those customers.
Although we possess insurance for damage to our property and the disruption of our business from casualties, this
insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable
terms, or at all.
If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of
operations and financial condition may be adversely affected.
We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing
operation and future growth of our business from just a few third parties. We do not have long-term supply contracts with
any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and materials for our
products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should
any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable or
inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant
amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on terms
acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from
time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or increases in
pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material,
we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the
loss of a single or limited source supplier could adversely affect our relationship with our customers and our results of
operations and financial condition.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive
position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely
primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to
protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and
processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies
and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or
circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not
be able to obtain foreign patents corresponding to our United States patents. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect
our technology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to
20
develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased
competition and lower revenue or gross margin, which would adversely affect our net income.
We may be subject to infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies who
have acquired or developed patents in the fields of CNC machining, injection molding or part production for purposes of
developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or
processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause
us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our
ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share,
sales and profitability could be adversely impacted.
Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of
operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits.
This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other
intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual
property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws treaties and
regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable
intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable
intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that
intellectual property.
We may be subject to product liability claims, which could result in material expense, diversion of management time and
attention and damage to our business and reputation and brand.
The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or
errors that are not discovered until after the products have been installed and used by customers. This could result in claims
from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error.
We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential
liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be
effective as a result of unfavorable judicial decisions or laws enacted in the future.
The sale and support of our products entails the risk of product liability claims. Any product liability claim brought
against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to
our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply
with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the
Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online
services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy,
data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer
protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality
of products and product lines. It is not clear how existing laws governing issues such as property use and ownership, sales
and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were
adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-
commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are
therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the
regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to
significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may
substantially harm our business and results of operations.
21
Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.
We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic
and abroad. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax
rules and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries
with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue
Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations
to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from
the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final
determination of any examination will not have an adverse effect on our operating results and financial position.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms,
if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond
to business challenges, including the need to complement our growth strategy, increase market share in our current markets
or expand into other markets, or broaden our technology, intellectual property or product line capabilities. Accordingly, we
may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future
issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new
equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and
other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue
business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our
ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and
our business may be harmed.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating
results and financial condition.
Our business and our customer base have been built primarily through organic growth. However, from time to time, we
may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to
complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our
technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us
to offer our customers 3D printing manufacturing processes and in October 2015, we acquired Alphaform to enable us to
expand our 3D printing capabilities in Europe. We cannot forecast the number, timing or size of any future acquisitions or
other similar strategic transactions, or the effect that any such transactions might have on our operating or financial results.
We have limited experience engaging in these types of transactions. Such transactions may be complex, time consuming and
expensive, and may present numerous challenges and risks including:
• 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;
22
• high valuation for a company, asset or technology, or changes in the economic or market conditions or assumptions
underlying our decision to make an acquisition;
•
significant problems or liabilities, including increased intellectual property and employment related litigation exposure,
associated with acquired 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 stock compensation and other items, as well as other charges or expenses.
Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic
relationships, joint ventures or investments after we have expended resources on them, as well as divert our management’s
attention. Any failure to successfully address these challenges or risks could disrupt our business and harm our operating
results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or stakeholders.
In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or
investments that are not ultimately consummated. These negotiations could result in significant diversion of management
time, as well as substantial out-of-pocket costs.
We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our
business is dependent in part on the availability of such licenses on commercially reasonable terms.
We currently, and will continue to, license certain technologies from third parties. While these licenses are not material
to our financial results, their function in our business is integral to our operations. We cannot be certain that these third-party
content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the
technology into our solutions. These third-party licenses may expose us to increased risk, including risks associated with the
assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any
of these licenses could result in delays in solution development until equivalent technology can be identified and integrated.
Any such delays in services could cause our business, operating results and financial condition to suffer.
Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws
and regulations, which can be expensive and restrict how we do business.
Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject
to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and
disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for
handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot
eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or
foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain
hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous
materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed.
If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts
we manufacture, our business, financial condition or operating results could be harmed.
As a manufacturer of CNC-machined and injection-molded custom parts, we are required to meet certain regulatory
standards, including International Organization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in
Minnesota. In North Carolina, we are required to meet ISO 9001:2008 standards for our plastics manufacturing and AS9100
standards for our metals manufacturing. We are also able to meet regulatory standards ISO 9001:2008 at our manufacturing
facilities in Feldkirchen, Germany, Eschenlohe, Germany and Rusko, Finland. We also meet regulatory standard ISO 13485
at our manufacturing facility in Eschenlohe, Germany. If any regulatory inspection reveals that we are not in compliance with
applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring
a recall of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could
harm our reputation as well as our business, financial condition and operating results. In addition, we may need to obtain
additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all.
Moreover, obtaining and maintaining required regulatory certifications can be costly and divert management’s attention.
23
We are subject to payment-related risks.
We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and
payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations,
compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange
and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties
to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could
disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to
payment card association operating rules, certification requirements and rules governing electronic funds transfers, which
could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or
requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card
payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business
and operating results could be adversely affected.
Risks Relating to Ownership of Our Common Stock
Our stock price has been and may continue to be volatile.
In the year ended December 31, 2015, our common stock traded as high as $79.95 and as low as $57.30. The market
for our common stock may become less active, liquid or orderly, which could depress the trading price of our common stock.
Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to
fluctuate include:
•
fluctuations in our financial condition and operating results;
• 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 and Exchange 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;
24
•
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 of equity securities of many companies. In the past, shareholders have instituted securities class
action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur
substantial costs and our resources and the attention of management could be diverted from our business.
If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price
and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry
analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who
covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research
about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to
publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial
markets, which could cause our stock price and trading volume to decline.
Our failure to maintain proper and effective internal controls over financial reporting and otherwise comply with
Section 404 of the Sarbanes-Oxley Act or prevent or detect misstatements in our financial statements in the future could
harm our business and cause a decrease in our stock price.
Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-
Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our
internal control over financial reporting to allow management and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If
we are not able to comply with the requirements of Section 404 in the future, or if we fail to prevent or detect misstatements
in the financial statements we include in our reports filed with the SEC, our business could be harmed and the market price
of our common stock could decline.
Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for
us that you might consider favorable.
Our Third Amended and Restated Articles of Incorporation, as amended, and Amended and Restated By-Laws contain
provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These
provisions:
• permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and
privileges as our board may designate, including the right to approve an acquisition or other change in our control;
25
• 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 vote of 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 at a meeting of shareholders must provide notice in writing in a timely manner, and also specify
requirements as to the form and content of a shareholder’s notice; and
• do not provide for cumulative voting rights.
We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations.
Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries,
with an interested shareholder, which means any shareholder that purchases 10% or more of the corporation’s voting shares
within four years following the date the person became an interested shareholder, unless the business combination is approved
by a committee composed solely of one or more disinterested members of the corporation’s board of directors before the date
the person became an interested shareholder.
These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our
company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make
it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate
actions you desire.
We do not expect to pay any cash dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay
any such cash dividends for the foreseeable future. We anticipate that we will retain all of our future earnings for use in the
business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our
board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions
imposed by applicable law and other factors our board of directors deems relevant.
Item 1B. Unresolved Staff Comments
None.
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 following regions:
United States
Our corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately
95,000 square feet of office space. We also own a nearby facility encompassing approximately 35,000 square feet of
manufacturing space. We lease an additional facility on a property adjacent to our headquarters that encompasses
approximately 40,000 square feet of manufacturing space. The lease for this facility expires in 2017, subject to our option to
renew for up to two additional five-year terms. We own a facility in Rosemount, Minnesota that encompasses approximately
130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses
approximately 170,000 square feet of manufacturing and office space.
In April 2014, we purchased FineLine Prototyping, Inc. (FineLine) and assumed the leases of two facilities in Raleigh,
North Carolina. The two facilities we lease are approximately 10,000 square feet each, with both leases expiring in 2018
and one of the leases having the option to extend the lease for three successive periods of five years each. We also purchased
a facility in Cary, North Carolina in 2015, that encompasses approximately 77,000 square feet of manufacturing and office
space.
26
Europe
Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing
approximately 126,000 square feet of office and manufacturing space.
We also lease office space in Mosbach, Germany, Le Bourget du Lac, France and Novara, Italy, for sales, customer
service and technical support staff. In October 2015, we purchased certain assets, including shares of select subsidiaries, of
Alphaform AG (Alphaform), headquarted in Feldkirchen (Munich), Germany. As a result of the acquisition, we lease
manufacturing and office facilities encompassing approximately 85,000 square feet in Feldkirchen, Germany, approximately
21,000 square feet in Eschenlohe, Germany and approximately 17,000 square feet in Rusko, Finland.
Japan
Our Japan operations are headquartered in Yamato-Shi, Kanagawa, Japan (southwest of Tokyo) in a leased facility
encompassing approximately 30,000 square feet of office and manufacturing space. The lease expires in November 2021 and
has a cancellation clause with six months’ prior notice without penalty. Our operations have grown in Japan and we have
initiated the search for a facility to support our growth in the region.
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 the results of litigation and claims cannot be predicted with certainty, as of the date of this
Annual Report on Form 10-K, we do not believe we are party to any litigation the outcome of which, if determined adversely
to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business.
Item 4. Mine Safety Disclosures
Not applicable.
27
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, there was no public market for our common stock. The following table sets forth, for the periods
indicated, the high and low intraday sales prices for our common stock as reported on the NYSE:
Fiscal 2015
Fiscal 2014
High
Low
High
Low
First Quarter .................................................. $
Second Quarter .............................................. $
Third Quarter ................................................ $
Fourth Quarter ............................................... $
74.82 $
79.00 $
79.95 $
69.48 $
57.30 $
65.84 $
65.82 $
58.84 $
84.00 $
83.06 $
94.23 $
73.46 $
62.09
58.06
68.88
54.97
On February 17, 2016, the last reported sale price of our common stock on the NYSE was $63.56 per share. As of
February 17, 2016, we had 11 holders of record of our common stock. The actual number of shareholders is greater than this
number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by
brokers and other nominees.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available
funds and any future earnings to support our operations and finance the growth and development of our business. We do not
intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend
policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our
financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our
board of directors may deem relevant.
Outstanding Equity Awards
The following table summarizes, as of December 31, 2015, information about shares of our common stock that may be
issued under equity compensation plans approved by shareholders and plans not approved by shareholders:
Number of
shares to
be issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of
shares
remaining
available
for future
issuance
under equity
compensation
plans
(excluding
shares in
first column)
Plan Category
Equity compensation plans approved by shareholders(1) ....................
Equity compensation plans not approved by shareholders .................
890,435
None
$
31.41
N/A
6,981,372(2)
None
(1)
(2)
Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan
Includes 1,325,792 shares remaining available for issuance as of December 31, 2015 under our Employee Stock
Purchase Plan.
28
Performance Graph
The following graph shows a comparison from February 24, 2012 (the date our common stock commenced trading on
the NYSE) through December 31, 2015 of the cumulative total return for our common stock, the S&P 500 Index and the
Russell 2000 Index. We have selected the Russell 2000 Index because the Russell 2000 Index measures the performance of
the small market capitalization segment of U.S. equity instruments and we are a member company included in the Russell
2000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P
500 Index and the Russell 2000 Index assume reinvestment of dividends.
Period Ending
Index
02/23/12 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15
Proto Labs, Inc. 100.00 179.75 246.38 406.06 444.88 512.00 419.75 421.75 398.06
99.90 104.60 117.81 135.56 143.77 151.01 151.31 149.91
S&P 500 ........... 100.00
96.29 102.43 117.88 140.33 143.86 145.28 151.22 136.98
Russell 2000 ..... 100.00
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,
2015.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial data for the periods and at the dates indicated. The selected
consolidated statements of comprehensive income data for the years ended December 31, 2015, 2014 and 2013 and selected
consolidated balance sheets data as of December 31, 2015 and 2014 are derived from our audited consolidated financial
statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The
selected consolidated statements of comprehensive income data for the years ended December 31, 2012 and 2011 and selected
consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our audited consolidated financial
statements not included in this report.
29
The historical results presented below are not necessarily indicative of the results to be expected for any future period.
You should read this selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes appearing in
Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(in thousands, except share and per share amounts)
2015
Year Ended December 31,
2013
2012
2014
Consolidated Statements of Comprehensive
Income Data
Revenue ................................................................ $
Cost of revenue ....................................................
Gross profit ..........................................................
Operating expenses:
Marketing and sales ..........................................
Research and development ...............................
General and administrative ...............................
Total operating expenses ...............................
Income from operations .......................................
Other income (expense), net .................................
Income before income taxes .................................
Provision for income taxes ...................................
Net income ...........................................................
Less: dividends on redeemable preferred stock ....
Less: undistributed earnings allocated to
preferred shareholders ..........................................
Net income attributable to common
shareholders(1) ...................................................... $
Net income per share(1)
2011
98,939
39,324
59,615
15,752
5,222
11,772
32,746
26,869
(114)
26,755
8,783
17,972
(4,179)
264,106 $
109,703
154,403
209,583 $
81,182
128,401
163,112 $
61,410
101,702
125,991 $
49,853
76,138
39,188
18,350
29,716
87,254
67,149
712
67,861
21,347
46,514
-
29,144
16,607
22,122
67,873
60,528
3
60,531
18,896
41,635
-
22,386
11,863
16,154
50,403
51,299
279
51,578
16,301
35,277
-
18,098
9,137
13,957
41,192
34,946
23
34,969
10,944
24,025
-
-
-
-
-
(4,507)
46,514 $
41,635 $
35,277 $
24,025 $
9,286
Basic ................................................................. $
Diluted .............................................................. $
1.79 $
1.77 $
1.62 $
1.60 $
1.40 $
1.36 $
1.03 $
0.98 $
0.75
0.67
Weighted average shares outstanding(1)
Basic ................................................................. 26,005,858 25,692,699 25,198,556 23,373,593 12,352,004
Diluted .............................................................. 26,320,284 26,100,320 25,859,741 24,443,665 13,939,072
Other Comprehensive Loss, net of tax
Foreign currency translation adjustments ............. $
Comprehensive income ........................................ $
(2,283) $
44,231 $
(1,838) $
39,797 $
(163) $
35,114 $
(190) $
23,835 $
(280)
17,692
30
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
(in thousands)
2015
Year Ended December 31,
2013
2012
2014
2011
Stock options and grants ...................................... $
Employee stock purchase plan .............................
Total stock-based compensation expense ............. $
5,580 $
502
6,082 $
4,386 $
423
4,809 $
3,084 $
377
3,461 $
2,539 $
500
3,039 $
1,130
-
1,130
Cost of revenue .................................................... $
Operating expenses:
Marketing and sales ..........................................
Research and development ...............................
General and administrative ...............................
Total stock-based compensation expense ............. $
513 $
386 $
316 $
335 $
78
1,074
1,285
3,210
6,082 $
927
1,048
2,448
4,809 $
610
754
1,781
3,461 $
418
486
1,800
3,039 $
215
274
563
1,130
(in thousands)
Consolidated Balance Sheets Data
Cash and cash equivalents .................................... $
Working capital ....................................................
Total assets ...........................................................
Total liabilities .....................................................
Redeemable convertible preferred stock and
2015
Year Ended December 31,
2013
2012
2014
2011
47,653 $
111,740
361,036
33,391
43,329 $
89,102
287,031
21,492
43,039 $
96,132
230,175
18,532
36,759 $
78,617
172,722
16,023
8,135
18,138
62,326
15,675
redeemable common stock .................................
Total shareholders' equity (deficit) ....................... $
-
-
327,645 $ 265,539 $
-
211,643 $
-
156,699 $
66,894
(20,243)
(1) See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income
per basic and diluted share attributable to common shareholders and weighted average shares outstanding for the years
ended December 31, 2015, 2014 and 2013, respectively.
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This
discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward- looking statements as a result of various factors, including those
set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a leading online and technology-enabled manufacturer of quick-turn, on-demand 3D printed, CNC-machined
and injection-molded custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast” to product
developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than
their competition. We believe custom parts manufacturing has historically been an underserved market due to the
inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce
custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally
required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over
the Internet. We target our product lines to the millions of product developers and engineers who use 3D CAD software to
design products across a diverse range of end-markets. Our primary manufacturing product lines currently include Injection
Molding (Protomold), CNC Machining (Firstcut) and 3D Printing (Fineline).
We have experienced significant growth since our inception. Since we first introduced our Injection Molding
(Protomold) product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts
we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first
introducing our CNC Machining (Firstcut) product line in 2007, we have expanded the range of part sizes, design geometries
and materials we can support. In 2014, we acquired FineLine to expand the number of process types we offer to include
stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS). We also continually seek to
enhance other aspects of our technology and manufacturing processes, including our interactive web-based and automated
user interface and quoting system. We intend to continue to invest significantly to enhance our technology and manufacturing
processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set of product
developers and engineers. As a result of the factors described above, many of our customers tend to return to Proto Labs to
meet their ongoing needs, with approximately 85%, 87% and 86% of our revenue in 2015, 2014 and 2013, respectively,
derived from existing customers.
We have established our operations in the United States, Europe and Japan, which we believe are three of the largest
geographic markets where product developers and engineers are located. We entered the European market in 2005, launched
operations in Japan in late 2009 and further expanded into Europe through our acquisition of Alphaform in 2015. As of
December 31, 2015, we had sold products into approximately 60 countries. Our revenue outside of the United States
accounted for approximately 27%, 26% and 27% of our consolidated revenue in the years ended December 31, 2015, 2014
and 2013, respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve
the needs of product developers and engineers in select new geographic regions.
We have grown our total revenue from $98.9 million in 2011 to $264.1 million in 2015. During this period, our
operating expenses increased from $32.7 million in 2011 to $87.3 million in 2015. We have grown our income from
operations from $26.9 million in 2011 to $67.1 million in 2015. Our recent growth in revenue and income from operations
has been accompanied by increased cost of revenues and operating expenses. We expect to increasingly invest in our
operations to support anticipated future growth as discussed more fully below.
In addition, we believe that a number of trends affecting our industry have affected our results of operations and may
continue to do so. For example, we believe that many of our target product developer and engineer customers have increasing
e-commerce expectations, are facing increased pressure to accelerate the time to market for their products and continue to
migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned to benefit
from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities
involved in procuring custom parts, starting with our elegant web interface through which a product developer or engineer
submits a 3D CAD part design. While our business may be positively affected by these trends, our results may also be
favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts in low
volumes, including, among others, changes in product developer and engineer preferences or needs, developments in our
industry and among our competitors, and factors impacting new product development volume such as economic conditions.
For a more complete discussion of the risks facing our business, see Part 1 Item 1A. “Risk Factors.”
32
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 Injection Molding (Protomold), CNC Machining (Firstcut) and 3D Printing (Fineline) product lines.
Injection Molding (Protomold) revenue consists of sales of custom injection molds and injection-molded parts. CNC
Machining (Firstcut) revenue consists of sales of CNC-machined custom parts. 3D Printing (Fineline) revenue consists of
sales of 3D-printed parts. Our revenue is generated from a diverse customer base, with no single customer company
representing more than 2% of our total revenue in 2015. Our historical and current efforts to increase revenue have been
directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities,
offering additional product lines such as the introduction of our CNC Machining (Firstcut) product line in 2007 and 3D
Printing (Fineline) through our acquisition of FineLine Prototyping, Inc. (FineLine) in 2014, expanding internationally such
as the opening of our Japanese office in 2009 and through our acquisition of Alphaform in October 2015, improving the
usability of our product lines such as our web-centric applications, and expanding the breadth and scope of our products such
as by adding more sizes and materials to our offerings.
During 2015, we served 27,235 unique product developers and engineers, an increase of 26% over the same period in
2014. Of those product developers and engineers served in 2015, 13,504 were existing product developers and engineers who
had ordered from us in the past, an increase of 37% over the comparable period in 2014, and 13,731 were new product
developers and engineers who ordered from us for the first time in 2015, an increase of 17% over the comparable period in
2014.
During 2014, we served 21,552 unique product developers and engineers, an increase of 34% over the same period in
2013. Of those product developers and engineers served in 2014, 9,839 were existing product developers and engineers who
had ordered from us in the past, an increase of 26% over the comparable period in 2013, and 11,713 were new product
developers and engineers who ordered from us for the first time in 2014, an increase of 41% over the comparable period in
2013. We experienced strong growth in the number of unique product developers and engineers served in 2014, partially as
a result of our acquisition of FineLine in April, 2014.
During 2013, we served 16,128 unique product developers and engineers, an increase of 20% over the same period in
2012. Of those product developers and engineers served in 2013, 7,826 were existing product developers and engineers who
had ordered from us in the past, an increase of 30% over the comparable period in 2012, and 8,302 new product developers
and engineers who ordered from us for the first time in 2013, an increase of 12% over the comparable period in 2012.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-
based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and
custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total
revenue.
Our business model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the
expectations for quick delivery of our products to our customers. Therefore, during each of 2015 and 2014 we made
significant investments in additional factory space and infrastructure in the United States. We expect to continue to grow in
future periods, which will result in the need for additional investments in factory space and equipment. We expect that these
additional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins to remain
relatively consistent over time.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as
a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our pricing, sales volume
and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign
revenue sources and foreign exchange rates.
Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories,
available capacity and our operating maturity in these markets. We believe that over time and with growth and maturity of
our international business, gross margins will be generally consistent through all our markets.
Operating Expenses
Operating expenses consist of marketing and sales, research and development and general and administrative expenses.
Personnel-related costs are the most significant component in each of these categories.
33
Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and
we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled
manufacturer of quick-turn, on-demand 3D printing, CNC-machined and injection-molded custom parts for prototyping and
short-run production. For us to achieve our goals, we anticipate 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 marketing expense to increase in the future as we increase the number
of marketing and sales professionals and marketing programs targeted to increase our customer base.
Research and development. Research and development expense consists primarily of employee compensation, benefits,
stock-based compensation, depreciation on equipment and other related overhead. All of our research and development costs
have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance
and expand our product line offerings.
General and administrative. General and administrative expense consists primarily of employee compensation,
benefits, stock-based compensation, professional service fees related to accounting, tax and legal, and other related overhead.
We expect general and administrative expense to increase in the future as we continue to grow and expand as a global
organization.
Other Income (Expense), Net
Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash
balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary
depending upon movements in underlying exchange rates. Our interest income will vary depending on our average cash
balances during the period, composition of our marketable security portfolio 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 our taxable income increases and our effective tax rate to remain relatively constant.
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 not necessarily indicative of the results for future periods.
(dollars in thousands)
2015
2014
Year Ended
December 31,
Change
$
%
Year Ended
December 31,
2014
2013
Change
$
%
Revenue ................................ $ 264,106 100.0% $ 209,583 100.0% $ 54,523 26.0% $ 209,583 100.0% $ 163,112 100.0% $ 46,471 28.5%
Cost of revenue ..................... 109,703 41.5 81,182 38.7 28,521 35.1 81,182 38.7 61,410 37.6 19,772 32.2
Gross profit ........................... 154,403 58.5 128,401 61.3 26,002 20.3 128,401 61.3 101,702 62.4 26,699 26.3
Operating expenses:
Marketing and sales ......... 39,188 14.8 29,144 13.9 10,044 34.5 29,144 13.9 22,386 13.7 6,758 30.2
Research and
development .................. 18,350
6.9 16,607
7.9 1,743 10.5 16,607
7.9 11,863
7.3 4,744 40.0
General and
administrative ................ 29,716 11.3 22,122 10.6 7,594 34.3 22,122 10.6 16,154
Total operating
9.9 5,968 36.9
expenses .................... 87,254 33.0 67,873 32.4 19,381 28.6 67,873 32.4 50,403 30.9 17,470 34.7
Income from operations ....... 67,149 25.5 60,528 28.9 6,621 10.9 60,528 28.9 51,299 31.5 9,229 18.0
Other income, net .................
*
Income before income taxes . 67,861 25.7 60,531 28.9 7,330 12.1 60,531 28.9 51,578 31.6 8,953 17.4
9.0 16,301 10.0 2,595 15.9
Provision for income taxes ... 21,347
Net income ............................ $ 46,514 17.6% $ 41,635 19.9% $ 4,879 11.7% $ 41,635 19.9% $ 35,277 21.6% $ 6,358 18.0%
9.0 2,451 13.0 18,896
8.1 18,896
0.1
(276)
0.0
0.0
0.2
279
712
709
*
3
3
*
Percentage change not meaningful
34
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
(dollars in thousands)
Stock options and grants ............................................ $
Employee stock purchase plan ...................................
Total stock-based compensation expense .................. $
Cost of revenue .......................................................... $
Operating expenses:
Marketing and sales ................................................
Research and development .....................................
General and administrative .....................................
Total stock-based compensation expense .................. $
2015
Year Ended December 31,
2014
2013
5,580 $
502
6,082 $
513 $
1,074
1,285
3,210
6,082 $
4,386 $
423
4,809 $
386 $
927
1,048
2,448
4,809 $
3,084
377
3,461
316
610
754
1,781
3,461
Comparison of Years Ended December 31, 2015 and 2014
Revenue
Revenue and the related changes for 2015 and 2014 were as follows:
Year Ended December 31,
2015
2014
Change
$
% of Total
Revenue
$
% of Total
Revenue
$
%
(dollars in thousands)
Revenue
Injection Molding (Protomold) .. $
CNC Machining (Firstcut) .........
3D Printing (Fineline) ................
Other .........................................
Total revenue ................................. $
163,387
74,368
25,132
1,219
264,106
61.8 % $
28.2
9.5
0.5
100.0 % $
140,282
59,914
9,387
-
209,583
66.9% $
28.6
4.5
-
100.0% $
23,105
14,454
15,745
1,219
54,523
16.5 %
24.1
167.7
100.0
26.0 %
Revenue by geographic region, based on the billing location of the end user customer, is summarized as follows:
Year Ended December 31,
2015
2014
Change
$
% of Total
Revenue
$
% of Total
Revenue
$
%
(dollars in thousands)
Revenue
United States .............................. $ 194,065
70,041
International ...............................
Total revenue ................................. $ 264,106
73.5% $ 156,033
26.5
53,550
100.0% $ 209,583
74.4% $
25.6
100.0% $
38,032
16,491
54,523
24.4%
30.8
26.0%
35
Our revenue increased $54.5 million, or 26.0%, for 2015 compared with 2014. By geographic region, this revenue
growth was driven by a 24.4% increase in United States revenue and a 30.8% increase in international revenue. By product
line, this revenue growth was driven by a 16.5% increase in Injection Molding (Protomold) revenue and a 24.1% increase in
CNC Machining (Firstcut) revenue, in each case for 2015 compared with 2014, as well as a $15.7 million increase in revenue
from 3D Printing (Fineline) and $1.2 million in Other revenue through our acquisition of Alphaform.
Our revenue growth in 2015 was the result of increased volume of the product developers and engineers we served.
During 2015, we served 27,235 unique product developers and engineers, an increase of 26% over 2014. Average revenue
per product developer or engineer remained consistent during 2015 as compared to 2014.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales
personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts.
Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to
support sales activity. International revenue was negatively impacted by $7.5 million in 2015 compared to 2014 due to
strengthening of the United States dollar relative to the British Pound and Japanese Yen, as well as the strengthening of the
British Pound relative to the Euro. The effect of pricing changes on revenue was immaterial for 2015 compared to 2014.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $28.5 million, or 35.1%, for 2015 compared to 2014, which was greater
than the rate of revenue increase of 26.0% for 2015 compared to 2014. The increase in cost of revenue was due to raw material
and production cost increases of $10.8 million to support increased sales volumes, equipment and facility-related cost
increases of $3.1 million and an increase in direct labor headcount resulting in personnel and related cost increases of $14.6
million.
Gross Profit and Gross Margin. Gross profit increased from $128.4 million, or 61.3% of revenues, in 2014 to $154.4
million, or 58.5% of revenues, in 2015 primarily due to increasing revenue growth as noted above. Gross margin decreased
primarily as a result of our 3D Printing (Fineline) product line having a lower gross margin than our CNC Machining
(Firstcut) and Injection Molding (Protomold) product lines, revenue earned through our acquistion of Alphaform having
lower gross margins than our legacy operations, the cost of increased capacity, which has not been fully leveraged, and the
impact of fluctuations in foreign currency exchange rates.
Operating Expenses, Other Income (Expense), Net and Provision for Income Taxes
Marketing and Sales. Marketing and sales expense increased $10.0 million, or 34.5%, for 2015 compared to 2014 due
to an increase in headcount resulting in personnel and related cost increases of $8.2 million and marketing program cost
increases of $1.8 million. The increase in marketing program costs is the result of our focus and concentration on funding
those programs which have proven to be the most effective in growing our business.
Research and Development. Our research and development expense increased $1.7 million, or 10.5%, for 2015
compared to 2014 due to an increase in headcount resulting in personnel and related cost increases of $3.4 million and other
operating cost increases of $0.2 million, which were partially offset by decreases in professional service costs of $1.9 million.
General and Administrative. Our general and administrative expense increased $7.6 million, or 34.3%, for 2015
compared to 2014 due to an increase in headcount resulting in personnel and related cost increases of $4.4 million, facility
and administrative cost increases of $1.5 million, professional service cost increases of $0.7 million for outside legal and
accounting services, stock-based compensation cost increases of $0.8 and intangible amortization expense of $0.2 million.
Other Income (Expense), Net. Other income, net increased $0.7 million for 2015 compared with 2014 due to $0.3
million gain on the bargain purchase of Alphaform, $0.2 million increase in interest income and $0.2 million in other non-
operating activity.
Provision for Income Taxes. Our income tax provision increased $2.4 million for 2015 compared to 2014 due an
increase of taxable income. Our effective tax rate increased marginally to 31.5% in 2015 from 31.2% in 2014 due primarily
to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current
year.
36
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
$
% of Total
Revenue
$
% of Total
Revenue
$
%
(dollars in thousands)
Revenue
Injection Molding (Protomold) .. $
CNC Machining (Firstcut) .........
3D Printing (Fineline) ................
Total revenue ................................. $
140,282
59,914
9,387
209,583
66.9 % $
28.6
4.5
100.0 % $
115,069
48,043
-
163,112
70.5% $
29.5
-
100.0% $
25,213
11,871
9,387
46,471
21.9 %
24.7
100.0
28.5 %
Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:
Year Ended December 31,
2014
2013
Change
$
% of Total
Revenue
$
% of Total
Revenue
$
%
(dollars in thousands)
Revenue
United States .............................. $ 156,033
53,550
International ...............................
Total revenue ................................. $ 209,583
74.4% $ 119,870
43,242
25.6
100.0% $ 163,112
73.5% $
26.5
100.0% $
36,163
10,308
46,471
30.2%
23.8
28.5%
Our revenue increased $46.5 million, or 28.5%, for 2014 compared with 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 in Injection Molding (Protomold) revenue and a 24.7% increase in
CNC Machining (Firstcut) revenue, in each case for 2014 compared with 2013, as well as $9.4 million in revenue from the
FineLine acquisition.
Our revenue growth in 2014 was the result of increased volume of the product developers and engineers we served.
During 2014, we served 21,552 unique product developers and engineers, an increase of 34% over 2013. Average revenue
per product developer or engineer 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 and marketing activities. Our sales personnel focus on gaining new customer accounts and
expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that
have proven to result in the greatest number of customer leads to support sales activity. International revenue was negatively
impacted by $0.1 million in 2014 compared to 2013 due to strengthening of the United States dollar relative to certain 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 increase of 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 support increased sales volumes, equipment and facility-related cost increases
of $3.5 million and an increase in direct labor headcount resulting in personnel and related cost increases of $10.5 million.
37
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 3D Printing (Fineline) product line having a lower gross margin than our legacy CNC Machining
(Firstcut) and Injection Molding (Protomold) product lines and the cost of increased capacity, which has not been fully
leveraged.
Operating Expenses, Other Expense, 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 headcount resulting in personnel and related cost increases of $4.9 million and marketing program cost
increases of $1.9 million. The increase in marketing program costs is the result of our focus and concentration on funding
those programs which have proven to be the most effective in growing our business.
Research and Development. Our research and development expense increased $4.7 million, or 40.0%, for 2014
compared to 2013 due to an increase in 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 an increase 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 and intangible amortization expenses of $0.5
million.
Other Income, Net. Other income, net decreased $0.3 million for 2014 compared with 2013 due to $0.4 million in
unfavorable changes in foreign currency 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 to an
increase of taxable income. Our effective 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 tax jurisdictions and deductions for which we qualify in the current
year.
38
Selected Quarterly Results of Operations Data
The following tables set forth selected unaudited quarterly results of operations data for 2015 and 2014. This unaudited
quarterly information has been prepared on the same basis as our annual audited consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary to present fairly the financial information for the fiscal quarters presented. The quarterly data
should be read in conjunction with our selected financial data and consolidated financial statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K. Operating results for any quarter are not necessarily indicative of
results for a full-year period, and the historical results presented below are not necessarily indicative of the results to be
expected in any future period.
(in thousands, except
share and per share
amounts)
Dec. 31, 2015
Sep. 30, 2015
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
(unaudited)
Three Months Ended
Consolidated
Statements of
Comprehensive
Income Data:
Revenue ....................... $
Cost of revenue ............
Gross profit ..................
Operating expenses:
Marketing and sales
Research and
development ........
General and
administrative ......
Total operating
expenses ............
Income from
73,759 $
32,485
41,274
67,842 $
27,517
40,325
63,969 $
26,419
37,550
58,536 $
23,282
35,254
56,069 $
22,457
33,612
54,574 $
21,492
33,082
52,866 $
20,183
32,683
10,805
10,027
9,502
8,854
8,115
7,351
7,261
4,879
4,760
4,397
4,314
4,682
4,555
3,914
9,033
8,134
6,304
6,245
6,152
5,733
5,534
46,074
17,050
29,024
6,417
3,456
4,703
24,717
22,921
20,203
19,413
18,949
17,639
16,709
14,576
operations .................
16,557
17,404
17,347
15,841
14,663
15,443
15,974
14,448
Other income
(expense), net ...........
Income before income
taxes..........................
Provision for income
taxes..........................
Net income ................... $
Net income per share:
Basic ....................... $
Diluted .................... $
Shares used to
compute net income
per share:
Basic .......................
Diluted ....................
612
593
(36)
(457 )
22
(56)
(66)
103
17,169
17,997
17,311
15,384
14,685
15,387
15,908
14,551
5,176
11,993 $
5,615
12,382 $
5,625
11,686 $
4,931
10,453 $
4,492
10,193 $
5,003
10,384 $
4,952
10,956 $
4,449
10,102
0.46 $
0.45 $
0.47 $
0.47 $
0.45 $
0.44 $
0.40 $
0.40 $
0.39 $
0.39 $
0.40 $
0.40 $
0.43 $
0.42 $
0.40
0.39
26,164,340
26,465,043
26,083,405
26,381,313
25,921,111
26,277,503
25,850,274
26,214,204
25,815,973
26,152,891
25,757,593
26,200,741
25,620,005
26,146,848
25,573,851
26,091,069
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2015, 2014 and 2013:
(dollars in thousands)
Year Ended December 31,
2014
2013
2015
Net cash provided by operating activities .......................................... $
Net cash used in investing activities...................................................
Net cash provided by financing activities ..........................................
Effect of exchange rates on cash and cash equivalents ......................
Net increase in cash and cash equivalents .......................................... $
58,557 $
(63,594)
10,238
(877)
4,324 $
57,210 $
(63,499 )
7,036
(457 )
290 $
48,441
(58,481)
16,111
209
6,280
39
Sources of Liquidity
Historically, we have financed our operations and capital expenditures primarily through cash flow from operations
and, to a lesser extent, lease financing.
We had cash and cash equivalents of $47.7 million as of December 31, 2015, an increase of $4.3 million from December
31, 2014. The increase in our cash was due primarily to cash generated through operations and exercises of stock options,
which were partially reduced by investment activity. We had cash and cash equivalents of $43.3 million as of December 31,
2014, an increase of $0.3 million from December 31, 2013. The increase in our cash was due primarily to cash generated
through operations and exercises of stock options, which were partially reduced by investment activity. We had 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 cash was due primarily to cash generated through operations and exercises of stock options, which were partially
reduced by investment activity.
As of December 31, 2015, the amount of cash and cash equivalents held by foreign subsidiaries was $16.8 million. If
these funds are needed for our domestic operations, we would be required to accrue and pay U.S. taxes to repatriate these
funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate
a need to repatriate them to fund our domestic operations. We believe that our existing cash and cash equivalents together
with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the
next 12 months.
Cash Flows from Operating Activities
Cash flow from operating activities during 2015 primarily consisted of net income of $46.5 million, adjusted for certain
non-cash items, including depreciation and amortization of $14.1 million and stock-based compensation expense of $6.1
million, partially offset by excess tax benefit from stock-based compensation expense of $5.5 million. The cash flow from
operating activities during 2015 compared to 2014 increased $1.3 million due to increases in net income of $4.9 million,
depreciation and amortization of $3.0 million, deferred taxes of $4.7 million and stock-based compensation expense of $1.3
million, which were partially offset by a gain on acquisition of $0.3 million, an increase in excess tax benefit from stock-
based compensation of $1.1 million, and decreases in amortization of held-to-maturity securities of $0.3 million and changes
in operating assets and liabilities of $10.9 million.
Cash flow from operating activities during 2014 primarily consisted of net income of $41.6 million, adjusted for certain
non-cash items, including depreciation and amortization of $11.1 million and stock-based compensation expense of $4.8
million, partially offset by excess tax benefit from stock-based compensation expense of $4.5 million. The cash flow from
operating activities during 2014 compared to 2013 increased $8.8 million due to increases in net income of $6.4 million,
depreciation and amortization of $3.5 million, stock-based compensation expense of $1.3 million and a decrease in excess
tax benefit from stock-based compensation of $5.4 million, which were partially offset by decreases in deferred taxes of $2.3
million and changes in operating assets and liabilities of $5.5 million.
Cash flow from operating activities during 2013 primarily consisted of net income of $35.3 million, adjusted for certain
non-cash items, including depreciation 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.
Cash Flows from Investing Activities
Cash used in investing activities was $63.6 million for the year ended December 31, 2015, consisting of $44.4 million
for the purchase of property and equipment primarily to expand our production capacity, $5.0 million for the payments on
business acquisitions and $66.4 million for the purchase of marketable securities, which were partially offset by $52.2 million
in proceeds from maturities and call redemption of marketable securities.
Cash used in investing activities was $63.5 million for the year ended December 31, 2014, consisting of $43.5 million
for the purchase of property and equipment primarily to expand our production capacity, $33.9 million for payments on
business acquisitions and $60.2 million for the purchases of marketable securities, which were partially offset by $74.1
million in proceeds from maturities and call redemption of marketable securities.
Cash used in investing activities was $58.5 million for the year ended December 31, 2013, consisting of $18.8 million
for the purchase of property and equipment primarily to expand our production capacity and $106.3 million for the purchases
of marketable securities, which were partially offset by $66.6 million in proceeds from maturities and call redemption of
marketable securities.
40
Cash Flows from Financing Activities
Cash provided by financing activities was $10.2 million for the year ended December 31, 2015, consisting of excess
tax benefit on stock-based compensation of $5.5 million and $6.3 million in proceeds from exercises of stock options, partially
offset by $0.2 million for payments of debt and $1.4 million for payments of acquisition-related contingent consideration.
Cash provided by financing activities was $7.0 million for the year ended December 31, 2014, consisting of excess tax
benefit on stock-based compensation of $4.5 million and $4.8 million in proceeds from exercises of stock options, partially
offset by $1.1 million for payments of debt and $1.2 million for payments of acquisition-related contingent consideration.
Cash provided by financing activities was $16.1 million for the year ended December 31, 2013, consisting of excess
tax benefit on stock-based compensation 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.
Operating and Capital Expenditure Requirements
We believe, based on our current operating plan, that our cash balances and cash generated through operations and
interest income will be sufficient to meet our anticipated cash requirements through at least the next 12 months. From time
to time we may seek to sell equity or convertible debt securities or enter into credit facilities. The sale of equity and convertible
debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt
securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common
stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our
currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all.
Our future capital requirements will depend on many factors, including the following:
•
the revenue growth in Injection Molding (Protomold), CNC Machining (Firstcut) and 3D Printing (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 in litigation-related activities; and
the acquisition of businesses, products and technologies, although we currently have no commitments or agreements
relating to any of these types of transactions.
Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We
believe future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might
purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue.
Contractual Obligations
As of December 31, 2015, our contractual obligations and the effect such obligations are expected to have on our
liquidity and cash flows in future periods were as follows:
(in thousands)
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Payment Due by Period
Operating leases ................................ $
Total .................................................. $
5,717 $
5,717 $
2,041 $
2,041 $
2,021 $
2,511 $
952 $
462 $
703
703
41
The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating
leases relate to three of our United States manufacturing facilities, our European sales, customer service and technical support
offices, three Alphaform manufacturing and office facilities located in Germany and Finland and our Japan facility.
Subsequent to the acquisition of Alphaform, we entered into lease agreements for facilities located in Germany and Finland
as referenced above. These obligations are included in the table above.
Financing Arrangements
The following table summarizes our financing arrangements as of December 31, 2015 and 2014:
(in thousands)
December 31,
2015
2014
Various obligations under capital leases, with interest rates from 6.8% to 7.4%, due in
various monthly installments, including interest, through various dates through
January 2016, secured by equipment ............................................................................ $
Less current portion ..........................................................................................................
Long-term obligation ....................................................................................................... $
- $
-
- $
149
139
10
Inflation
We believe that inflation and changing prices have not had a material effect on our financial condition during the three
most recent fiscal years.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance,
special purpose entities or variable interest entities.
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported
amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, goodwill, other intangible assets, stock-based compensation, and income
taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used
different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur
from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit
committee of our board of directors. Our actual results may differ significantly from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments used in the preparation of
our consolidated financial statements. See the Notes to Consolidated Financial Statements included in Item 8. “Financial
Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about these critical
accounting policies, as well as a description of our other accounting policies.
42
Revenue Recognition
We recognize revenue in accordance with ASC 605, Revenue Recognition, which states that revenue is realized or
realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery
has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is
reasonably assured.
Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our
Injection Molding (Protomold), CNC Machining (Firstcut), 3D Printing (Fineline) and Other product 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 the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill
is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment
between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired.
An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill,
is less than its carrying amount. As of December 31, 2015 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 internally developed software, customer relationships and other intangible assets acquired from an independent
party. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line
basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the
carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying
amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. As of
December 31, 2015 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 the measurement and recognition of compensation expense for all share-based payment awards made
to employees and non-employee directors based on the grant date fair value of the award.
Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of
subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based
compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which
involve inherent uncertainties and the application of management’s judgment. Significant estimates include our expected
term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our common stock
valuations could be significantly different and related stock-based compensation expense may be materially impacted.
The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected
volatility and expected dividend yield. We base the risk-free interest rate that we use in the Black-Scholes option pricing
model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The
expected term represents the weighted average period that our stock options are expected to be outstanding. The expected
term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors
and considers the impact of post-vesting award forfeitures. As we operated as a private company with a limited market for
our stock from our inception to the completion of our initial public offering on February 29, 2012, we have estimated the
volatility of stock price using outside valuation services and an estimate of the volatility of our common stock based on
volatility of a peer group of comparable publicly traded companies for which historical information is available. We have
never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected
dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to
estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense
only for those awards that are expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-
based compensation expense could be significantly different from what has been recorded.
43
The fair value of each new employee and non-employee director option awarded was estimated on the date of grant for
the periods below using the Black-Scholes option pricing model with the following assumptions:
Year Ended December 31,
2014
2013
2015
Risk-free interest rate ............................................................... 1.69
Expected life (years) ................................................................ 5.50
Expected volatility ................................................................... 46.80
Expected dividend yield ...........................................................
Weighted average grant date fair value ....................................
2.00 - 6.50
- 1.77% 0.43 - 2.14% 1.03 - 1.98%
- 6.50
- 47.23% 47.29 - 49.30% 49.36 - 53.54%
0%
$ 32.42
5.50 - 6.50
0%
$32.65
0%
$25.86
Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase shares of our common stock at
a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The
ESPP provides for 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 market value of our common stock on the first trading day of the offering period or on
the last trading day of the offering period.
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
2015
2013
Risk-free interest rate .................................................................. 0.08 - 0.39% 0.01 - 0.11% 0.11 - 0.13%
Expected life (months) ................................................................
Expected volatility ...................................................................... 29.41 - 37.64% 37.64 - 39.80% 39.80 - 53.32%
Expected dividend yield ..............................................................
0%
0%
0%
6.00
6.00
6.00
There are significant differences among option valuation models, and this may result in a lack of comparability with
other companies that use different models, methods and assumptions. If factors change and we employ different assumptions
in the application of ASC 718 in future periods, or if we decide to use a different valuation model, such as a lattice model,
the stock-based compensation expense that we record in the future under ASC 718 may differ significantly from what we
have recorded using the Black-Scholes option pricing model and could materially affect our operating results.
We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded
stock-based compensation expense of $6.1 million, $4.8 million and $3.5 million during the years ended December 31, 2015,
2014 and 2013, respectively. As of December 31, 2015, we had $7.0 million of unrecognized stock-based compensation costs
related to unvested stock options, net of estimated forfeitures, that are expected to be recognized over a weighted average
period of 3.1 years. We issued options to purchase 110,335, 116,050 and 187,615 shares of our common stock in 2015, 2014
and 2013, respectively.
In future periods, our stock-based compensation expense is expected to increase due to our existing unrecognized stock-
based compensation and the issuance of additional stock-based awards to continue to attract and retain employees and non-
employee directors.
44
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method, we determine
tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable
income. The tax consequences of most events recognized in the current year’s financial statements are included in
determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their
recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between
the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their
reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be
recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the
balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the
reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. We establish a valuation allowance
for any portion of our deferred tax assets that we believe will not be recognized.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized
in an enterprise’s financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. Including interest and penalties,
we have established a liability for uncertain tax positions of $2.9 million as of December 31, 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-
09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a
company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration
that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new
pronouncement using one of two retrospective application methods.
On July 9, 2015, the (FASB) voted to approve a deferral of the effective date of ASU 2014-09 by one year to December
15, 2017 for annual reporting periods beginning after that date. The Company is evaluating the application method and the
impact of this new standard on our financial statements, but does not expect the impact to be material.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic
350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. Under this standard, if a cloud computing
arrangement includes a software license, the software license element of the arrangement should be accounted for consistent
with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the
arrangement should be accounted for as a service contract. The Company is required to adopt the new standard on January
1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results
of operations.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.
The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail
inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the
scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The Company is required to adopt the new standard on January 1, 2017. The adoption of this standard is not
expected to have an impact on the Company’s financial position or results of operations.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement to restate prior period
financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a
measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the
adjustment is identified. In addition, separate presentation on the face of the income statement or disclosure in the notes is
required regarding the portion of the adjustment recorded in the current period earnings, by line item, that would have been
recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition
date. ASU 2015-16 is to be applied prospectively for measurement period adjustments that occur after the effective date.
ASU 2015-16 is effective for annual reporting periods, including interim reporting periods within those periods, beginning
after December 15, 2015, and early adoption is permitted. The Company elected to early adopt this standard as of December
45
31, 2105. Since it is prospective, the impact of ASU 2015-16 on the Company's financial condition and earnings will depend
upon the nature of any measurement period adjustments identified in future periods.
On November 20, 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The
standard amends the current requirement for organizations to present deferred tax assets and liabilities as current and
noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and
liabilities as noncurrent. The ASU is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2016, with early adoption permitted. The Company early adopted this standard during fourth quarter 2015,
utilizing retrospective application as permitted. As such, certain prior period amounts have been reclassified to conform to
the current presentation. In the Consolidated Balance Sheet as of December 31, 2014, the Company reclassified $0.5 million
from current deferred income tax assets to reduce deferred income taxes within non-current liabilities.
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 are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash
equivalent balances. We also seek to maximize income from our investments without assuming significant risk. To achieve
our goals, we maintain a portfolio of debt securities with various maturities ranging from one to three years. Due to the nature
of our investment portfolio, we are subject to interest rate risks, which we mitigate by holding our investments to maturity.
In future periods, we will continue to evaluate our investment policy in order to continue our overall goals.
Foreign Currency Risk
As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign
currencies. We generate revenue and incur production costs and operating expenses in British Pound, Euro and Japanese
Yen.
Our operating results and cash flows are adversely impacted when the United States dollar appreciates relative to other
foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound
appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become
increasingly subject to changes in foreign exchange rates.
We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign
currency risk can be quantified by estimating the change in results of operations or financial position resulting from a
hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on
our financial position, but could have a material impact on our results of operations. We recognized foreign currency losses
for the three years ended December 31, 2015, 2014 and 2013 of $0.5 million, $0.4 million and 0.1 million, respectively.
46
Item 8. Financial Statements and Supplementary Data
Proto Labs, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements ......................
Report of Independent Registered Public Accounting Firm ....................................................................................
Consolidated Balance Sheets at December 31, 2015 and 2014 ...............................................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 .....
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013 ..........
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 ........................
Notes to Consolidated Financial Statements ...........................................................................................................
Page
48
49
50
51
52
53
54
47
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Proto Labs, Inc.
We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. as of December 31, 2015 and 2014, and
the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Proto Labs, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2015, 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 internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 26, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 26, 2016
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Proto Labs, Inc.
We have audited Proto Labs, Inc.’s internal control over financial reporting as of December 31, 2015, 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). Proto Labs, Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the 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 require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as 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 reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include
the internal controls of Alphaform AG., the results of which are included in the 2015 consolidated financial statements of
Proto Labs, Inc. and constituted approximately 6% of total assets as of December 31, 2015, and 2% 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 Alphaform AG.
In our opinion, Proto Labs, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Proto Labs, Inc. as of December 31, 2015 and 2014, and the related consolidated statements
of comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2015, and our report dated February 26, 2016, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 26, 2016
49
Proto Labs, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets
Cash and cash equivalents ............................................................................................ $
Short-term marketable securities ..................................................................................
Accounts receivable, net of allowance for doubtful accounts of $330 and $198 as of
December 31, 2015 and December 31, 2014, respectively .......................................
Inventory .......................................................................................................................
Prepaid expenses and other current assets ....................................................................
Income taxes receivable ................................................................................................
Total current assets ....................................................................................................
Property and equipment, net .............................................................................................
Goodwill ...........................................................................................................................
Other intangible assets, net ...............................................................................................
Long-term marketable securities ......................................................................................
Other long-term assets ......................................................................................................
Total assets ................................................................................................................ $
Liabilities and shareholders' equity
Current liabilities
Accounts payable .......................................................................................................... $
Accrued compensation..................................................................................................
Accrued liabilities and other .........................................................................................
Income taxes payable ....................................................................................................
Current portion of long-term debt obligations ..............................................................
Total current liabilities ..............................................................................................
Long-term deferred tax liabilities .....................................................................................
Long-term debt obligations ..............................................................................................
Other long-term liabilities ................................................................................................
Total liabilities ..........................................................................................................
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and
outstanding 0 shares as of December 31, 2015 and December 31, 2014,
respectively ..............................................................................................................
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and
outstanding 26,200,718 and 25,838,110 shares as of December 31, 2015 and
December 31, 2014, respectively .............................................................................
Additional paid-in capital .............................................................................................
Retained earnings .........................................................................................................
Accumulated other comprehensive loss .......................................................................
Total shareholders' equity .........................................................................................
Total liabilities and shareholders' equity ................................................................... $
December 31,
2015
2014
47,653 $
33,201
36,125
9,771
5,224
6,028
138,002
125,475
28,916
3,337
64,789
517
361,036 $
13,643 $
9,993
2,626
-
-
26,262
4,240
-
2,889
33,391
43,329
30,706
24,226
6,194
3,406
-
107,861
91,626
28,916
4,083
54,318
227
287,031
7,882
6,067
2,718
1,953
139
18,759
1,363
10
1,360
21,492
-
-
26
198,835
133,996
(5,212 )
327,645
361,036 $
26
180,960
87,482
(2,929)
265,539
287,031
The accompanying notes are an integral part of these consolidated financial statements.
50
Proto Labs, Inc.
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
Year Ended December 31,
2014
2015
2013
Statements of Operations:
Revenue .............................................................................................. $
Cost of revenue ..................................................................................
Gross profit ........................................................................................
Operating expenses ............................................................................
Marketing and sales ........................................................................
Research and development .............................................................
General and administrative .............................................................
Total operating expenses .............................................................
Income from operations .....................................................................
Other income, net ...............................................................................
Income before income taxes ...............................................................
Provision for income taxes .................................................................
Net income ......................................................................................... $
264,106 $
109,703
154,403
209,583 $
81,182
128,401
163,112
61,410
101,702
39,188
18,350
29,716
87,254
67,149
712
67,861
21,347
46,514 $
29,144
16,607
22,122
67,873
60,528
3
60,531
18,896
41,635 $
22,386
11,863
16,154
50,403
51,299
279
51,578
16,301
35,277
Net income per share:
Basic ............................................................................................... $
Diluted ............................................................................................ $
1.79 $
1.77 $
1.62 $
1.60 $
1.40
1.36
Shares used to compute net income per share:
Basic ...............................................................................................
Diluted ............................................................................................
26,005,858
26,320,284
25,692,699
26,100,320
25,198,556
25,859,741
Other Comprehensive Loss, net of tax
Foreign currency translation adjustments ........................................... $
Comprehensive income ...................................................................... $
(2,283) $
44,231 $
(1,838 ) $
39,797 $
(163 )
35,114
The accompanying notes are an integral part of these consolidated financial statements.
51
Proto Labs, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands, except share and per share amounts)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Balance at January 1, 2013 ........ 24,803,640
25
147,032
10,570
(928)
156,699
Common shares issued on
exercise of options and other .
742,467
1
6,495
-
-
-
9,873
-
-
3,461
-
-
35,277
-
-
-
-
)
(163
-
6,496
-
9,873
-
-
3,461
35,277
)
(163
35,114
211,643
4,809
41,635
)
(1,838
39,797
265,539
6,082
46,514
)
(2,283
44,231
327,645
Excess tax benefit from stock
option exercises .....................
Stock-based compensation
expense ..................................
Net income ................................
Other comprehensive income
Foreign currency translation
adjustment .........................
Comprehensive income ............
Excess tax benefit from stock
option exercises .....................
Stock-based compensation
expense ..................................
Net income ................................
Other comprehensive income
Foreign currency translation
adjustment .........................
Comprehensive income ............
Excess tax benefit from stock
option exercises .....................
Stock-based compensation
expense ..................................
Net income ................................
Other comprehensive income
Foreign currency translation
adjustment .........................
Comprehensive income ............
-
-
-
-
-
-
-
-
-
Balance at December 31, 2013 ... 25,546,107
26
166,861
45,847
(1,091)
Common shares issued on
exercise of options and other .
292,003
-
4,820
-
4,470
-
-
-
4,820
-
4,470
-
-
4,809
-
-
41,635
-
-
)
-
-
-
-
(1,838
Balance at December 31, 2014 ... 25,838,110 $
26 $ 180,960 $
87,482 $
(2,929) $
Common shares issued on
exercise of options and other .
362,608
-
6,254
-
5,539
-
-
-
6,254
-
5,539
-
-
6,082
-
-
46,514
-
-
)
-
-
-
-
(2,283
Balance at December 31, 2015 ... 26,200,718 $
26 $ 198,835 $ 133,996 $
(5,212) $
The accompanying notes are an integral part of these consolidated financial statements.
52
Proto Labs, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net income ...................................................................................... $
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................................
Stock-based compensation expense ............................................
Deferred taxes .............................................................................
Excess tax benefit from stock-based compensation ....................
Loss on disposal of property and equipment ...............................
Gain on acquisition .....................................................................
Amortization of held-to-maturity securities ................................
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable .................................................................
Inventories ...............................................................................
Prepaid expenses and other......................................................
Income taxes ............................................................................
Accounts payable ....................................................................
Accrued liabilities and other ....................................................
Net cash provided by operating activities .......................................
Investing activities
Purchases of property and equipment .............................................
Cash used for acquisitions, net of cash acquired ............................
Purchases of marketable securities .................................................
Proceeds from maturities of marketable securities .........................
Net cash used in investing activities ...............................................
Financing activities
Payments on debt ............................................................................
Acquisition-related contingent consideration .................................
Proceeds from exercises of stock options and other .......................
Excess tax benefit from stock-based compensation ........................
Net cash provided by financing activities .......................................
Effect of exchange rate changes on cash and cash equivalents ..........
Net increase in cash and cash equivalents ......................................
Cash and cash equivalents, beginning of period ............................
Cash and cash equivalents, end of period ...................................... $
Year Ended December 31,
2014
2015
2013
46,514 $
41,635 $
35,277
14,126
6,082
2,837
(5,539)
-
(344)
1,234
(11,371)
(2,097)
(2,047)
(2,310)
5,781
5,691
58,557
(44,362)
(5,032)
(66,393)
52,193
(63,594)
(152)
(1,400)
6,251
5,539
10,238
(877)
4,324
43,329
47,653 $
11,138
4,809
(1,875 )
(4,470 )
-
-
1,517
(5,304 )
(896 )
107
9,373
1,435
(259 )
57,210
7,569
3,461
467
(9,873 )
110
-
1,468
(2,470 )
(579 )
1,630
8,845
1,651
885
48,441
(43,507 )
(33,864 )
(60,186 )
74,058
(63,499 )
(18,753 )
-
(106,298 )
66,570
(58,481 )
(1,054 )
(1,200 )
4,820
4,470
7,036
(457 )
290
43,039
43,329 $
(258 )
-
6,496
9,873
16,111
209
6,280
36,759
43,039
Supplemental cash flow disclosure
Cash paid for interest ...................................................................... $
Cash paid for taxes ......................................................................... $
5 $
20,330 $
19 $
11,549 $
35
6,593
The accompanying notes are an integral part of these consolidated financial statements.
53
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 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 to obtain low volumes of parts. The Company’s proprietary
technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and
manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet.
The Company targets its product lines to the millions of product developers and engineers who use three-dimensional
(3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has
established operations in the United States, Europe and Japan, which the Company believes are among the largest geographic
markets where these product developers and engineers are located. The Company’s primary manufacturing product lines
currently include 3D Printing (Fineline), CNC Machining (Firstcut) and Injection Molding (Protomold). Proto Labs, Inc. is
located in Maple Plain, Minnesota. The Company’s subsidiaries are:
Name
PL-US International LLC ..................................................................................................................
Proto Labs Ltd. ..................................................................................................................................
PL Euro Services Ltd. .......................................................................................................................
PL International UK LLP ..................................................................................................................
PL International Holding UK Ltd. ....................................................................................................
PLJ Ltd. .............................................................................................................................................
Alphaform Ltd. .................................................................................................................................
PL DE Holding GmbH ......................................................................................................................
Proto Labs GmbH .............................................................................................................................
Proto Labs Eschenlohe GmbH ..........................................................................................................
Alphaform RPI Oy ............................................................................................................................
Alphaform Sweden AB .....................................................................................................................
Proto Labs, G.K. ...............................................................................................................................
Location
United States
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Germany
Germany
Germany
Finland
Sweden
Japan
Note 2 — Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as listed
within organization and business above. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Comprehensive income
Components of comprehensive income include net income and foreign currency translation adjustments.
Comprehensive income is disclosed in the accompanying consolidated statements of comprehensive income and consolidated
statements of shareholders’ equity.
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
54
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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 of purchase. The Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses on such accounts.
Marketable securities
Marketable securities include held-to-maturity debt securities recorded at amortized cost. Management determines the
appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and
accretion of discounts to maturity computed under the effective interest method. Such amortization is included in other
income, net. Interest on securities classified as held to maturity is included in other income, net. The classification of
marketable securities as current or non-current is dependent upon the security’s maturity date. Securities with maturities of
three months or less at the time of purchase are categorized as cash equivalents as described above. The Company reviews
impairments associated with its marketable securities in accordance with the measurement guidance provided by Accounting
Standards Codification (ASC) 320, Investments – Debt and Equity Securities, when determining the classification of
impairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-
temporary include assessment of the quality of the security, credit ratings actions and management’s intent to hold the security
to maturity as well as other factors.
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 its accounts receivable and establishes an allowance for doubtful accounts based on a combination
of specific customer circumstances and credit conditions taking into account the history of write-offs and collections. A
receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts
receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written
off are recorded when received.
Inventory
Inventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average-cost
method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving,
damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.
Property, equipment and leasehold improvements
Property, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an
asset’s useful life are capitalized. Repairs, maintenance and minor improvements are charged to operations as incurred.
Depreciation, including amortization of leasehold improvements and assets recorded under capital leases, is calculated using
the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturing
equipment is depreciated over 3 to 15 years, office furniture and equipment are depreciated over 3 to 7 years, computer
hardware and software are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold improvements
are depreciated over the estimated lives of the related assets or the life of the lease, whichever is shorter, and building and
land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the related asset is put
into use.
In August 2015, the Company adjusted the useful lives of its primary production equipment based on experience and
condition of current equipment. This change in accounting estimate is accounted for prospectively, and therefore had no
effect on property and equipment, net as previously reported. This change was not material.
Goodwill
The Company recognizes goodwill in accordance with ASC 350, Intangibles—Goodwill and Other. Goodwill is the
excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business
55
Proto Labs, Inc.
Notes to Consolidated Financial Statements
combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and
is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying
amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting
unit, including goodwill, is less than its carrying amount.
Other Intangible Assets
Other intangible assets include internally developed software, customer relationships and other intangible assets
acquired from an independent party. Other intangible assets with a definite life are amortized over a period ranging from two
to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or
circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is
recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair
value of the asset. The amount 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 exist indicating an impairment or if depreciation periods should be modified. If facts or
circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash
flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an
adjustment will be made to reduce the carrying amount of the specific assets to fair value.
Revenue recognition
The Company recognizes revenue when it is realized or realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is
fixed or determinable and collectability is reasonably assured. Revenue is recognized upon transfer of title and risk of loss,
which is generally upon the shipment of parts in our 3D Printing (Fineline), CNC Machining (Firstcut) and Injection Molding
(Protomold) product lines. Freight billed to customers is included in revenues, and all freight expenses paid by the Company
are included in cost of revenue.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method,
the Company determines tax assets and liabilities based upon the differences between the financial statement carrying
amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements
are included in determining income taxes currently payable. However, because tax laws and financial accounting standards
differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences
arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or
liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of
assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and
its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related
liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. The
Company establishes a valuation allowance for any portion of its deferred tax assets that the Company believes will not be
recognized.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
by requiring that individual tax positions are recorded only when they meet a more-likely-than-not criterion. Additionally,
ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
56
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 fair value recognition provisions of ASC 718, the Company measures stock-based
compensation cost at the grant date fair value and recognizes the compensation expense over the requisite service period,
which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense
recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates
pre-vesting award forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods
if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will only be
for those awards that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the
awards vest early in the event of a change in control.
In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the
date of grant using the Black-Scholes option-pricing model.
Advertising costs
Advertising is expensed as incurred and was approximately $10.0 million, $8.5 million and $6.8 million for the years
ended December 31, 2015, 2014 and 2013, respectively.
Research and development
Research and development expenses consist primarily of personnel and outside service costs related to the development
of new processes and product lines, enhancement of existing product lines, quality assurance and testing. The Company
follows ASC 350-40, Internal-Use Software, in accounting for internally developed software. As of December 31, 2015,
2014 and 2013, 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 $18.4 million, $16.6 million and
$11.9 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Foreign currency translation/transactions
The Company translated the balance sheets of its foreign subsidiaries at period-end exchange rates and the income
statement at the average exchange rates in effect throughout the period. The Company has recorded the translation adjustment
as a separate component of consolidated shareholders’ equity. Foreign currency transaction gains and losses are recognized
in the consolidated statements of comprehensive income.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-
09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a
company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration
that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new
pronouncement using one of two retrospective application methods.
On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December
15, 2017 for annual reporting periods beginning after that date. The Company is evaluating the application method and the
impact of this new standard on our financial statements, but does not expect the impact to be material.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic
350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. Under this standard, if a cloud computing
arrangement includes a software license, the software license element of the arrangement should be accounted for consistent
with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the
arrangement should be accounted for as a service contract. The Company is required to adopt the new standard on January
1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results
of operations.
57
Proto Labs, Inc.
Notes to Consolidated Financial Statements
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.
The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail
inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the
scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The Company is required to adopt the new standard on January 1, 2017. The adoption of this standard is not
expected to have an impact on the Company’s financial position or results of operations.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement to restate prior
period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a
measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the
adjustment is identified. In addition, separate presentation on the face of the income statement or disclosure in the notes is
required regarding the portion of the adjustment recorded in the current period earnings, by line item, that would have been
recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition
date. ASU 2015-16 is to be applied prospectively for measurement period adjustments that occur after the effective date.
ASU 2015-16 is effective for annual reporting periods, including interim reporting periods within those periods, beginning
after December 15, 2015, and early adoption is permitted. The Company elected to early adopt this standard as of December
31, 2015. Since it is prospective, the impact of ASU 2015-16 on the Company's financial condition and earnings will depend
upon the nature of any measurement period adjustments identified in future periods.
On November 20, 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The
standard amends the current requirement for organizations to present deferred tax assets and liabilities as current and
noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and
liabilities as noncurrent. The ASU is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2016, with early adoption permitted. The Company early adopted this standard during fourth quarter 2015,
utilizing retrospective application as permitted. As such, certain prior period amounts have been reclassified to conform to
the current presentation. In the Consolidated Balance Sheet as of December 31, 2014, the Company reclassified $0.5 million
from current deferred income tax assets to reduce deferred income taxes within non-current liabilities.
Note 3 – Net Income Per Common Share
Basic net income per share is computed based on the weighted average number of common shares outstanding. Diluted
net income per share is computed based on the weighted average number of common shares outstanding, increased by the
number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and
reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially
dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under
stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.
The following table presents the calculation of net income per basic and diluted share attributable to common
shareholders:
(in thousands, except share and per share amounts)
Year Ended December 31,
2014
2013
2015
Net Income ......................................................................................... $
46,514 $
41,635 $
35,277
Basic - weighted-average shares outstanding: ....................................
Effect of dilutive securities:
Employee stock options and other ..................................................
Diluted - weighted-average shares outstanding: .................................
Net income per share attributable to common shareholders:
Basic ............................................................................................... $
Diluted ............................................................................................ $
26,005,858
25,692,699
25,198,556
314,426
26,320,284
407,621
26,100,320
661,185
25,859,741
1.79 $
1.77 $
1.62 $
1.60 $
1.40
1.36
58
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 4 – Business Combinations
On October 1, 2015, the Company acquired certain assets, including shares of select subsidiaries, of Alphaform AG
(Alphaform) through insolvency proceedings administered through the Insolvency Court of Munich, Germany. Included in
the acquisition were select assets of Alphaform AG and Alphaform Claho GmbH and shares of Alphaform RPI Oy and
Alphaform Ltd., for $5.0 million net cash consideration, which was funded with cash available in the United States and
Europe. The operations of Alphaform will be integrated into the operations of the Company.
Alphaform is a leading service bureau headquartered in Feldkirchen (Munich), Germany and also has locations in
Eschenlohe, Germany; Rusko, Finland and Reading, UK. Alphaform produces high-quality parts using stereolithography
(SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies as well as injection molding
capabilities and other production processes. The revenue associated with these processes will be reported under the 3D
Printing, Injection Molding and Other product lines.
The results of Alphaform since the date of acquisition and pro forma disclosures of the consolidated results of the
Company with the full year effects of Alphaform 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.
Because Alphaform was insolvent, the fair value of the assets purchased and liabilities assumed exceeded the fair value of
consideration paid, which resulted in a bargain purchase gain of $0.3 million. The bargain purchase gain has been recorded
in Other Income, Net in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2015. As of
December 31, 2015, this allocation for Alphaform is final as it relates to the valuation of certain working capital accounts,
intangible assets and taxes. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(in thousands)
Assets acquired:
Current assets ................................................................................................................................................ $
Other long-term assets ...................................................................................................................................
Total assets acquired ..................................................................................................................................
Liabilities assumed:
Current liabilities ...........................................................................................................................................
Total liabilities assumed ............................................................................................................................
Net assets acquired .................................................................................................................................... $
Cash paid ....................................................................................................................................................... $
Cash acquired ................................................................................................................................................
Total purchase consideration ..................................................................................................................... $
Gain recognized on bargain purchase ........................................................................................................... $
2,766
3,876
6,642
1,266
1,266
5,376
5,570
(538)
5,032
344
On April 23, 2014, the Company acquired 100% of the outstanding shares of FineLine Prototyping, Inc. (FineLine) for
$33.9 million net cash consideration, which was funded with cash available in the United States and the sale of $15.5 million
of held-to-maturity securities. The shares of FineLine acquired through the Stock Purchase Agreement (the Agreement) were
purchased in a private transaction exempt from registration under the Securities Act of 1933 and the operations of FineLine
will be integrated into the operations of the Company. Under the terms of the Agreement, the Company is obligated to make
additional cash payments totaling up to $3.0 million, contingent upon both the achievement of 2014 revenue goals and certain
milestones relating to the integration of FineLine’s operations with the Company. As of December 31, 2015, the Company
had made payments of $2.6 million related to the attainment of milestones and as of December 31, 2015, the contingent
consideration balance totaled $0.4 million, which is classified under Accrued Liabilities and Other on the Consolidated
Balance Sheet.
59
Proto Labs, Inc.
Notes to Consolidated Financial Statements
FineLine is based in Raleigh, North Carolina and is a leading producer of parts using additive manufacturing
technologies, often times referred to as 3D 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 industrial machinery, among others.
Consistent with the provisions of ASC 805, Business Combinations (ASC 805), the Company accrued the contingent
payment on the date of acquisition after determining its fair value of $3.0 million in arriving at $36.9 million of total
consideration, net of cash acquired. The fair value of the contingent consideration was determined by using Level 3 inputs
based on the present value of various payout scenarios, weighted on the basis of probability. The contingent payment
continues to be remeasured to fair value at each reporting period with changes in fair value reflected in the Consolidated
Statements of Comprehensive Income.
The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed
based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill. The goodwill associated
with the acquisition is deductible for tax purposes and represents the strategic and growth opportunities from strengthening
the Company’s portfolio of rapid prototyping product offerings. The addition of additive manufacturing expands Proto Labs’
products to address a wider spectrum of needs for the product developer and engineer. From concept models, to form and fit
testing, to functional testing and short-run production, the acquisition of FineLine allows the Company to offer a broader
range of quick-turn, on-demand custom parts with speed, reliability and consistency.
The results of FineLine since the date of acquisition and pro forma disclosures of the consolidated results of the
Company with the full year effects of FineLine have not been separately presented since the impact to the Company's results
of operations was not material.
60
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The FineLine acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805.
The final allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(in thousands)
Assets acquired:
Current assets ................................................................................................................................................ $
Intangible assets ............................................................................................................................................
Goodwill .......................................................................................................................................................
Other long-term assets ...................................................................................................................................
Total assets acquired ..................................................................................................................................
Liabilities assumed:
Current liabilities ...........................................................................................................................................
Total liabilities assumed ............................................................................................................................
Net assets acquired ....................................................................................................................................
Cash paid .......................................................................................................................................................
Cash acquired ................................................................................................................................................
Net cash consideration ...............................................................................................................................
Contingent consideration ..............................................................................................................................
Total purchase consideration ..................................................................................................................... $
1,248
4,580
28,916
3,849
38,593
1,729
1,729
36,864
34,468
(604)
33,864
3,000
36,864
Note 5 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2015 and 2014 were as follows:
(in thousands)
December 31,
2015
2014
Balance as of the beginning of the period .................................................................... $
Goodwill acquired during the period ...........................................................................
Balance as of the end of the period .............................................................................. $
28,916 $
-
28,916 $
-
28,916
28,916
Intangible assets other than goodwill for the years ended December 31, 2015 and 2014 were as follows:
Year Ended December 31, 2015
Year Ended December 31, 2014
(in thousands)
Intangible Assets with
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Useful Life
(in years)
Weighted
Average Useful
Life Remaining
(in years)
finite lives:
Marketing assets ..... $
Non-compete
agreement .............
Trade secrets ...........
Internally developed
930
$
(155) $
775
$
930
$
(62) $
868
10.0
8.3
190
250
(158)
(83)
32
167
190
250
680
(63) $
(33) $
127
217
(151) $
529
software ................
680
(378)
302
Customer
relationships .........
2,530
Total intangible assets . $ 4,580
$
(469)
2,061
(1,243) $ 3,337
2,530
$ 4,580
$
(188) $ 2,342
(497) $ 4,083
2.0
5.0
3.0
9.0
0.3
3.3
1.3
7.3
Amortization expense for intangible assets was $0.7 million and $0.5 million for the years ended December 31, 2015
and 2014, respectively.
61
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is
as follows:
(in thousands)
2016 ............................................................................................................................................................... $
2017 ...............................................................................................................................................................
2018 ...............................................................................................................................................................
2019 ...............................................................................................................................................................
2020 ...............................................................................................................................................................
Thereafter ......................................................................................................................................................
Total estimated amortization expense ........................................................................................................... $
Estimated
Amortization
Expense
682
500
424
391
374
966
3,337
62
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 a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels
of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
The Company’s cash equivalents measured at fair value as of December 31, 2015 and 2014, 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:
(in thousands)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
December 31, 2015
December 31, 2014
Financial Assets:
Cash and cash equivalents
Money market mutual fund ....... $
Total ........................................... $
11,896 $
11,896 $
- $
- $
- $
- $
6,129 $
6,129 $
- $
- $
-
-
Note 7 – Marketable Securities
The Company invests in short-term and long-term agency, municipal, corporate, commercial paper and other debt
securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-
maturity is based on the Company’s ability and intent to hold these securities to maturity. Information regarding the
Company’s short-term and long-term marketable securities as of December 31, 2015 and 2014 is as follows:
(in thousands)
December 31, 2015
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. government agency securities .............................................. $
Corporate debt securities ..............................................................
Commercial paper ........................................................................
U.S. municipal securities ..............................................................
Certificates of deposit/time deposits ............................................
Total marketable securities ........................................................... $
26,784 $
28,133
1,497
35,667
5,909
97,990 $
2 $
-
-
8
2
12 $
(99) $
(114)
(2)
(56)
(11)
(282) $
26,687
28,019
1,495
35,619
5,900
97,720
63
Proto Labs, Inc.
Notes to Consolidated Financial Statements
(in thousands)
December 31, 2014
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. government agency securities .............................................. $
Corporate debt securities ..............................................................
U.S. municipal securities ..............................................................
Certificates of deposit/time deposits ............................................
Total marketable securities ........................................................... $
20,048 $
29,316
30,004
5,656
85,024 $
- $
7
32
5
44 $
(71) $
(79)
(18)
(15)
(183) $
19,977
29,244
30,018
5,646
84,885
Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair
values for the U.S. municipal securities, U.S. government agency securities and certificates of deposit are primarily
determined using dealer quotes or quoted market prices for similar securities (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 in nature. The investment policy adopted by the Company dictates that only investments in
quality, highly rated debt securities are permitted. Those unrealized losses displayed above are the result of macroeconomic
factors and are indicative of neither the quality of the underlying security nor the issuer’s ability 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 financial statements.
The December 31, 2015 balance of held-to-maturity debt securities by contractual maturity is shown in the following
table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
(in thousands)
December 31,
2015
Due in one year or less ................................................................................................................................ $
Due after one year through five years .........................................................................................................
Total marketable securities .......................................................................................................................... $
33,201
64,789
97,990
64
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 8 – Property and Equipment
Property and equipment consists of the following:
(in thousands)
December 31,
2015
2014
Land ............................................................................................................................. $
Buildings and improvements ........................................................................................
Machinery and equipment ............................................................................................
Computer hardware and software .................................................................................
Leasehold improvements ..............................................................................................
Construction in progress...............................................................................................
Capital leases - machinery and equipment ...................................................................
Total .............................................................................................................................
Accumulated depreciation and amortization ................................................................
Property and equipment, net ......................................................................................... $
8,301 $
37,297
103,205
13,273
3,404
6,712
-
172,192
(46,717)
125,475 $
6,825
29,995
72,891
10,738
3,501
4,004
1,167
129,121
(37,495)
91,626
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $13.4 million, $10.6 million and
$7.6 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 approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving,
damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.
The Company’s inventory consists of the following:
(in thousands)
December 31,
2015
2014
Raw materials ................................................................................................................... $
Work in process ...............................................................................................................
Total inventory .................................................................................................................
Allowance for obsolescence .............................................................................................
Inventory, net of allowance .............................................................................................. $
8,589 $
1,529
10,118
(347)
9,771 $
5,728
653
6,381
(187)
6,194
Note 10 – Financing Obligations
The Company’s debt consists of the following:
(in thousands)
December 31,
2015
2014
Various obligations under capital leases, with interest rates from 6.8% to 7.4%, due in
various monthly installments, including interest, through various dates through
January 2016, secured by equipment ............................................................................ $
Less current portion ..........................................................................................................
Long-term obligation ....................................................................................................... $
- $
-
- $
149
139
10
The Company paid the remaining debt balance to be due in January 2016, in December 2015.
65
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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 20 hours/week) employee becomes a participant after completing three months of employment.
Employees may elect to contribute up to 50 percent of regular gross pay, subject to federal law limits on the dollar amount
that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions
and may make a discretionary contribution to the plan. Total employer contributions were approximately $1.2 million, $0.8
million and $0.6 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company also sponsors a defined contribution retirement plan that covers the employees of Proto Labs Limited.
Total employer contributions were approximately $0.2 million for the year ended December 31, 2015, and immaterial for
each of the years ended December 31, 2014 and 2013.
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). Upon the 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. No additional shares will be issued under the 2000 Plan. Under
the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, stock
units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years
from the date of grant. The compensation committee of the board of directors may provide that the vesting or payment of any
award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued
service requirements, and the compensation committee will determine whether such measures have been achieved. The per
share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market
value of a share of our common stock on the date of the grant.
The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase shares of the
Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject
to plan limitations. The ESPP provides for 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 market value of the Company’s common stock on the first trading
day of the offering period or on the last trading day of the offering period.
Employees purchased 31,905 and 25,393 shares of common stock at an average exercise price of $53.64 and $52.22
during 2015 and 2014, respectively. As of December 31, 2015, 1,325,792 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 of compensation expense for all share-based payment awards made to employees and non-employee directors
based on fair value.
Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of
subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-
based compensation expense is calculated using the Company’s best estimates, which involve inherent uncertainties and the
application of management’s judgment. Significant estimates include its expected term, fair value of Company common
stock, stock price volatility and forfeiture rates.
The expected term represents the weighted average period that the Company’s stock options are expected to be
outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees
and non-employee directors and considers the impact of post-vesting award forfeitures. Prior to its IPO, the Company
estimated the fair value of its common stock using the assistance of an independent third-party valuation specialist using the
income and market approach. As the Company operated as a private company with a limited market for its stock from the
Company’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 peer group of comparable publicly traded companies for which historical information is available.
The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury
instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does
not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend
yield of zero in the option pricing model. In order to properly attribute compensation expense, the Company is required to
66
Proto Labs, Inc.
Notes to Consolidated Financial Statements
estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based
compensation expense for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different
from its estimate, stock-based compensation expense could be significantly different from what has been recorded. 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, 2015, 2014 and
2013, respectively:
(in thousands)
Year Ended December 31,
2014
2015
2013
Stock options and other ...................................................................... $
Employee stock purchase plan ...........................................................
Total stock-based compensation expense ........................................... $
5,580 $
502
6,082 $
4,386 $
423
4,809 $
3,084
377
3,461
Cost of revenue .................................................................................. $
Operating expenses:
Marketing and sales ........................................................................
Research and development .............................................................
General and administrative .............................................................
Total stock-based compensation expense ........................................... $
Income tax benefits ............................................................................
Total stock-based compensation expense, net of tax .......................... $
513 $
386 $
316
1,074
1,285
3,210
6,082 $
(1,859)
4,223 $
927
1,048
2,448
4,809 $
(1,524)
3,285 $
610
754
1,781
3,461
(847)
2,614
Stock Options
The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended
December 31, 2015, 2014 and 2013:
2015
Year Ended December 31,
2014
2013
Risk-free interest rate ............................................................ 1.69 - 1.77% 0.43 - 2.14% 1.03 - 1.98%
Expected life (years) ............................................................. 5.50 - 6.50
Expected volatility ................................................................ 46.80 - 47.23% 47.29 - 49.30% 49.36 - 53.54%
Expected dividend yield ........................................................
Weighted average grant date fair value .................................
5.50 - 6.50
2.00 - 6.50
0%
$32.42
0%
$32.65
0%
$25.86
67
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The following table summarizes stock option activity and the weighted average exercise price for the years ended
December 31, 2015, 2014 and 2013:
Weighted-
Average
Stock Options Exercise Price
Options outstanding at January 1, 2013 ...........................................................................
Granted .........................................................................................................................
Exercised ......................................................................................................................
Cancelled ......................................................................................................................
Options outstanding at December 31, 2013 .....................................................................
Granted .........................................................................................................................
Exercised ......................................................................................................................
Cancelled ......................................................................................................................
Options outstanding at December 31, 2014 .....................................................................
Granted .........................................................................................................................
Exercised ......................................................................................................................
Cancelled ......................................................................................................................
Options outstanding at December 31, 2015 .....................................................................
1,691,357 $
187,615
(695,777)
(39,945)
1,143,250
116,050
(253,544)
(6,769)
998,987
110,335
(316,761)
(26,519)
766,042 $
11.11
49.69
7.79
23.48
19.03
72.17
13.77
26.23
26.49
67.36
14.36
51.72
36.52
Exercisable at December 31, 2015 ...................................................................................
409,301 $
19.28
The outstanding options generally have a term of 10 years. For employees, options that have been granted become
exercisable ratably over the vesting period, which is generally a five-year period, beginning on the first anniversary of the
grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable
in full on the first anniversary of the grant date.
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013, was $18.6
million, $16.3 million and $33.2 million, respectively. The aggregate intrinsic value represents the cumulative difference
between the fair market value of the underlying common stock and the option exercise prices.
For options outstanding at December 31, 2015, the weighted-average remaining contractual term was 6.5 years and the
aggregate intrinsic value was $22.2 million. For options exercisable at December 31, 2015, the weighted-average remaining
contractual term was 5.3 years and the aggregate intrinsic value was $18.4 million. Refer to the table below for additional
information.
The following table summarizes information about stock options outstanding at December 31, 2015:
Range of Exercise
Prices
Options Outstanding, Vested and
Expected to Vest
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price ($)
Number
Outstanding
Options Exercisable
Weighted
Average
Exercise
Price ($)
Number
Exercisable
$0.00 to $7.85
$7.86
$7.87 to $31.43
$31.44 to $47.15
$47.16 to $66.87
$66.88 to $78.59
....................................
....................................
....................................
....................................
....................................
....................................
59,441
206,955
138,831
88,146
96,474
176,195
2.76 $
4.98
6.15
7.10
7.87
8.75
5.03
7.86
28.19
45.14
57.52
71.54
59,441 $
206,955
72,495
19,504
36,934
13,972
5.03
7.86
27.22
42.70
55.87
78.53
68
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive
income. As of December 31, 2015, there was $7.0 million of total unrecognized compensation cost related to unvested stock
options, which is expected to be recognized over a weighted average period of 3.1 years. The total fair value of options vested
was $2.8 million, $3.2 million and $2.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Restricted Stock
The 2012 Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share
settled and restrictions lapse ratably over the vesting period, which is generally a five-year period, beginning on the first
anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, restrictions
generally lapse in full on the first anniversary of the grant date.
The following table summarizes restricted stock activity for the years ended December 31, 2015 and 2014:
Weighted-
Average
Grant Date
Restricted
Fair Value
Stock Awards Per Share
Restricted stock at January 1, 2014 ..................................................................................
Granted .........................................................................................................................
Restrictions lapsed ........................................................................................................
Forfeited .......................................................................................................................
Restricted stock at December 31, 2014 ............................................................................
Granted .........................................................................................................................
Restrictions lapsed ........................................................................................................
Forfeited .......................................................................................................................
Restricted stock at December 31, 2015 ............................................................................
- $
77,647
(798)
(275)
76,574
68,580
(16,863)
(3,898)
124,393 $
-
69.18
62.68
62.68
69.27
68.89
69.25
72.14
68.97
As of December 31, 2015, there was $6.6 million of unrecognized compensation expense related to non-vested restricted
stock, which is expected to be recognized over a weighted-average period of 3.7 years.
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, 2015, 2014 and 2013:
2015
Year ended December 31,
2014
2013
Risk-free interest rate .................................................................. 0.08 - 0.39% 0.01 - 0.11% 0.11 - 0.13%
Expected life (months) ................................................................
Expected volatility ...................................................................... 29.41 - 37.64% 37.64 - 39.80% 39.80 - 53.32%
Expected dividend yield ..............................................................
0%
0%
0%
6.00
6.00
6.00
69
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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 2017 and May 2018. The Company also leases office space in France, Germany and Italy with terms
expiring at various times from 2015 to 2023. The Company leases an office and manufacturing space in Japan, and the initial
term expires in November 2021. The Company has the ability to terminate this lease, with no penalty, upon six months’
notice. The Company also leases office and manufacturing space for Alphaform in Germany and Finland with terms expiring
at various times from 2016 to 2018.
Future minimum commitments under non-cancelable leases at December 31, 2015, are as follows:
Operating
Leases
(in thousands)
Years Ending December 31,
2016............................................................................................................................................................... $
2017...............................................................................................................................................................
2018...............................................................................................................................................................
2019...............................................................................................................................................................
2020...............................................................................................................................................................
After 2020 .....................................................................................................................................................
Total future minimum lease payments .......................................................................................................... $
2,041
1,196
825
490
462
703
5,717
Rental expense was approximately $1.4 million, $1.0 million and $1.2 million for the years ended December 31, 2015,
2014 and 2013, respectively.
Note 14 – Accumulated Other Comprehensive Income
Other comprehensive income is comprised entirely of foreign currency translation adjustments. The following table
presents the changes in accumulated other comprehensive income balances for the years ending December 31, 2015, 2014
and 2013, respectively:
(in thousands)
Foreign currency translation adjustments
Year Ended December 31,
2014
2013
2015
Balance at beginning of period ....................................................... $
Other comprehensive loss before reclassifications .....................
Amounts reclassified from accumulated other comprehensive
income (loss).............................................................................
Net current-period other comprehensive loss .................................
Balance at end of period ................................................................. $
(2,929) $
(2,283)
-
(2,283)
(5,212) $
(1,091 ) $
(1,838 )
-
(1,838 )
(2,929 ) $
(928)
(163)
-
(163)
(1,091)
70
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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. For the years ended December 31, 2015, 2014 and 2013, the Company recorded an income tax
provision of $21.3 million, $18.9 million and $16.3 million, respectively. The effective income tax rate for the years ended
December 31, 2015, 2014 and 2013 was 31.5 percent, 31.2 percent and 31.6 percent, respectively.
The provision for income taxes is based on income before income taxes reported for financial statement purposes. The
components of income before income taxes are as follows:
(in thousands)
Year Ended December 31,
2014
2013
2015
Domestic ............................................................................................ $
Foreign ...............................................................................................
Total ................................................................................................... $
59,421 $
8,440
67,861 $
51,052 $
9,479
60,531 $
45,659
5,919
51,578
Significant components of the provision for income taxes for the following periods are as follows:
(in thousands)
Current:
Year Ended December 31,
2014
2013
2015
Federal ............................................................................................ $
State ................................................................................................
Foreign ............................................................................................
Deferred
Federal ............................................................................................
State ................................................................................................
Foreign ............................................................................................
Valuation Allowance ..........................................................................
Total ................................................................................................... $
15,845 $
1,074
1,591
2,798
(38)
294
(217)
21,347 $
17,413 $
1,185
2,149
(1,821 )
(17 )
130
(143 )
18,896 $
13,934
379
1,762
168
(39)
(335)
432
16,301
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
Year Ended December 31,
2014
2013
2015
Federal tax statutory rate ...................................................................
State tax (net of federal benefit) ........................................................
Qualified subsidiary election .............................................................
Valuation allowance against deferred tax assets ...............................
Research and development credit ......................................................
Foreign rate differential .....................................................................
Tax reserves ......................................................................................
Domestic manufacturing deduction...................................................
Miscellaneous ....................................................................................
Total ..................................................................................................
35.0%
0.5
0.6
(0.3)
(2.9)
(1.8)
1.5
(1.4)
0.3
31.5%
35.0%
0.5
0.2
(0.2)
(0.8)
(2.1)
0.4
(2.1)
0.3
31.2%
35.0%
0.6
(0.8)
0.8
(1.8)
(1.6)
0.6
(1.1)
(0.1)
31.6%
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 research and development credit for years 2012 and 2013. As the Act was enacted during 2013, the
71
Proto Labs, Inc.
Notes to Consolidated Financial Statements
federal portion of the 2012 research and development credit was 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 an effective 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:
(in thousands)
Deferred tax assets:
December 31,
2015
2014
Accrued expenses ......................................................................................................... $
Warrants and stock options ...........................................................................................
Intangibles ....................................................................................................................
Inventories ....................................................................................................................
Other assets ...................................................................................................................
Net operating loss .........................................................................................................
Less valuation allowance ..........................................................................................
Total deferred tax assets ...................................................................................................
Deferred tax liabilities:
Depreciation .................................................................................................................
Goodwill .......................................................................................................................
Total deferred tax liabilities .............................................................................................
Net deferred tax liability .................................................................................................. $
628 $
2,828
499
177
856
2,409
(2,625)
4,772
(7,945)
(1,067)
(9,012)
(4,240) $
378
2,152
319
172
527
2,842
(3,048)
3,342
(4,246)
(430)
(4,676)
(1,334)
The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as
of December 31, 2015. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not
practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2015,
the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $25.8 million.
As of December 31, 2015, the Company had estimated net operating loss carry forwards of $2.4 million for tax purposes.
The net operating losses primarily relate to Japan operations and can be carried forward for ten years but are limited to 65
percent of taxable income. The net operating losses begin to expire at various dates between 2018 and 2023. The Company’s
Japan operations are taxed both by local authorities and in the U.S. Accordingly, a portion of Japan’s net operating losses has
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 is considered more-likely-than-not that a portion of the deferred tax assets will not be realized. The
Company's valuation allowances of $2.6 million and $3.0 million at December 31, 2015 and December 31, 2014, respectively,
reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with
insufficient positive evidence for recognition. The decrease in the valuation allowance is primarily attributable to fluctuations
in foreign currency and the recognition of net operating losses against Japan’s 2015 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, the Company 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 $2.8 million and $1.3 million at December 31,
2015 and 2014, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities
are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company does not
anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Company recognizes
interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term
income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2015,
2014 and 2013.
72
Proto Labs, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
December 31,
2015
2014
Balance at beginning of period......................................................................................... $
Additions for tax positions of current year .......................................................................
Additions for tax positions of prior years .........................................................................
Decrease related to expiration of statutes of limitations...................................................
Balance at period end ....................................................................................................... $
1,295 $
919
555
-
2,769 $
695
632
344
(376)
1,295
Note 16 – Litigation
From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course
of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe
it is a party to any litigation the outcome of which, if determined adversely, would individually or in the aggregate be
reasonably expected to have a material adverse effect on its business.
Note 17 – Segment 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 based on 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.
The Company’s revenue is derived from its Injection Molding (Protomold), CNC Machining (Firstcut) and 3D Printing
(Fineline) product lines. Total revenue by product lines is as follows:
(in thousands)
Revenue:
Year Ended December 31,
2014
2015
2013
Injection Molding (Protomold) ....................................................... $
CNC Machining (Firstcut) ..............................................................
3D Printing (Fineline) .....................................................................
Other ...............................................................................................
Total revenue .................................................................................. $
163,387 $
74,368
25,132
1,219
264,106 $
140,282 $
59,914
9,387
-
209,583 $
115,069
48,043
-
-
163,112
73
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Revenue from external customers based on the billing location of the end user customer and long-lived assets by
geographic region are as follows:
(in thousands)
Revenue:
Year Ended December 31,
2014
2015
2013
United States ................................................................................... $
International ....................................................................................
Total revenue .................................................................................. $
194,065 $
70,041
264,106 $
156,033 $
53,550
209,583 $
119,870
43,242
163,112
(in thousands)
Long-lived assets:
December 31,
2015
2014
United States ................................................................................................................. $
International ..................................................................................................................
Total long-lived assets .................................................................................................. $
98,633 $
26,842
125,475 $
76,923
14,703
91,626
74
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered
by this Annual Report on Form 10-K, our disclosure controls and procedures were effective and provided reasonable
assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported accurately and within the 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, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the
Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on the
assessment, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting
is effective. The Company’s registered public accounting firm’s attestation report on the Company’s internal control over
financial reporting is provided in Part II, Item 8 of this Annual Report on Form 10-K.
Management excluded the internal controls of Alphaform from its assessment of internal control over financial reporting
as of December 31, 2015 given its acquisition date of Alphaform in October 2015. The operations acquired from Alphaform
reside in wholly-owned subsidiaries of the Company whose combined total assets and total revenues excluded from
management's assessment represent approximately 6% and 2%, respectively, of the related consolidated financial statements
amounts as of the year ended December 31, 2015.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
75
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item with respect to Item 401 relating to executive officers is contained in Item 1 of
this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant” and with respect to other
information relating to our directors will be set forth in our 2016 Proxy Statement under the caption “Proposal 1 — Election
of Directors,” which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K, and is incorporated herein by reference.
The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to the
section titled “Corporate Governance — Section 16(a) Beneficial Ownership Reporting Compliance” of our 2016 Proxy
Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form
10-K. The information required by this item under Items 407 (c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated herein
by reference to the section titled “Corporate Governance” of our 2015 Proxy Statement, which will be filed no later than 120
days after the end of the fiscal year covered by this Annual Report on Form 10-K.
We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees,
including our principal executive officer and principal financial officer. The Code of Ethics and Business Conduct is available
on our website at www.protolabs.com under the Investors Relations section. We plan to post to our website at the address
described above any future amendments or waivers of our Code of Ethics and Business Conduct.
Item 11. Executive Compensation
Information related to this item is incorporated herein by reference to the sections titled “Compensation Discussion and
Analysis,” “Corporate Governance — Compensation Committee Interlocks and Insider Participation,” and “Compensation
Committee Report” of our 2016 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 of Certain Beneficial Owners and Management” of our 2016 Proxy Statement, which will be filed no
later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Information related to our
equity compensation plans required by this item is incorporated herein by reference to the section titled “Compensation
Discussion and Analysis – Information Regarding Equity-Based Compensation Plans” of our 2016 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 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 and Related Party Transactions,” and “Corporate Governance — Director Independence” of our 2016
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 14. Principal Accountant Fees and Services
Information required by this item is incorporated herein by reference to the section titled “Fees Paid to Independent
Registered Public Accounting Firm” of our 2016 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.
76
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 in the financial statement or notes herein.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
77
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 26, 2016
Date: February 26, 2016
Proto Labs, Inc.
/s/ Victoria M. Holt
Victoria M. Holt
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John A. Way
John A. Way
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the dates indicated.
Date: February 26, 2016
Date: February 26, 2016
/s/ Victoria M. Holt
Victoria M. Holt
President and Chief Executive Officer and Director
(Principal Executive Officer)
/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 B. 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 the registrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit
hereto.
Date: February 26, 2016
/s/ Victoria M. Holt
Victoria M. Holt
President and Chief Executive Officer
(Principal Executive Officer)
78
EXHIBIT INDEX
Exhibit
Number
3.1(1)
3.2(27)
Description of Exhibit
Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.
Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May
20, 2015
Amended and Restated By-Laws of Proto Labs, Inc.
Form of certificate representing common shares of Proto Labs, Inc.
2012 Long-Term Incentive Plan, as amended as of August 5, 2015
Form of Incentive Stock Option Agreement under 2012 Long-Term Incentive Plan
Form of Non-Statutory Stock Option Agreement (Directors) under 2012 Long-Term Incentive Plan
Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2012 Long-Term Incentive Plan
Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2012 Long-Term Incentive Plan
Employee Stock Purchase Plan
Stock Subscription Warrant issued to John B. Tumelty
2000 Stock Option Plan, as amended
Form of Incentive Stock Option Agreement under 2000 Stock Option Plan
3.3(2)
4.1(3)
10.1(4)#
10.2(5)#
10.3(6)#
10.4(7)#
10.5(8)#
10.6(9)#
10.7(10)
10.8(11)#
10.9(12)#
10.10(13)# Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan
10.11(14)# Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan
10.12(15)# Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan
10.13(16)# Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan
10.14(17)#
Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and Wells
Fargo Bank, N.A.
10.15(18)# Letter Agreement, dated as of September 9, 2010, between Proto Labs, Inc., and Thomas Pang
10.16(19)# Form of U.S. Severance Agreement
10.17(20)# Form of UK Severance Agreement
10.18(21)#
10.19(22)#
Executive Employment Agreement, dated February 6, 2014, by and between Proto Labs, Inc. and Victoria M.
Holt
Form of Restricted Stock Agreement under 2012 Long-Term Incentive Plan for the initial grant to Victoria M.
Holt
10.20(23)# Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.S. Employees)
10.21(24)# Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.K. Employees)
10.22(25)# Form of Restricted Stock United Agreement under 2012 Long-Term Incentive Plan (Directors)
10.23(26)# Severance Agreement, dated December 18, 2014, by and between Proto Labs, Inc. and John A. Way
10.24(28)# Form of Severance Agreement with Executive Officers
21.1
23.1
24.1
31.1
31.2
32.1*
Subsidiaries of Proto Labs, Inc.
Consent of Ernst & Young LLP
Powers of Attorney
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
79
(1)
(2)
(3)
Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745),
filed with the Commission on February 13, 2012.
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 Commission on 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 Commission on February 13, 2012.
(10)
(9)
(7)
(8)
(6)
(4) Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the Commission on November 3, 2015.
(5)
Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
Incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 (File No. 333-179651),
filed with the Commission on February 23, 2012.
Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on October 26, 2011.
Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(13)
(14)
(15)
(11)
(12)
(16)
(17)
(18)
(19) Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K, filed with the Commission on March 1, 2013.
(20) Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the Commission on May 8, 2013.
(21) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on February 6, 2014.
(22) Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the Commission on February 6, 2014.
(23) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on February 12, 2014.
(24) Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the Commission on February 12, 2014.
Incorporated by reference to Exhibit 99.6 to the Company's Registration Statement on Form S-8 (file No. 333-194272),
filed with the Commission on March 3, 2014.
(25)
(26) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on December 19, 2014.
(27) Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed with the Commission on May 21, 2015.
(28) Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed with the Commission on April 6, 2015.
# Indicates management contract or compensatory plan or arrangement.
*
The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will
not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications
will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by
reference.
80