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, 2017
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, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2017 (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 $1.8 billion.
As of February 14, 2018, there were 26,901,193 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2018 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
Business .......................................................................................................................................................
Item 1.
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Item 1A. Risk Factors ................................................................................................................................................. 12
Item 1B. Unresolved Staff Comments ........................................................................................................................ 26
Properties ..................................................................................................................................................... 26
Item 2.
Item 3.
Legal Proceedings ........................................................................................................................................ 27
Item 4. Mine Safety Disclosures .............................................................................................................................. 27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................... 28
Item 6.
Selected Financial Data ............................................................................................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................... 47
Financial Statements and Supplementary Data ............................................................................................ 49
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 80
Item 9A. Controls and Procedures .............................................................................................................................. 80
Item 9B. Other Information ........................................................................................................................................ 80
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................................... 81
Item 11. Executive Compensation ............................................................................................................................. 81
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................................................... 81
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................. 81
Item 14. Principal Accountant Fees and Services ...................................................................................................... 81
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................................... 82
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Special Note Regarding Forward Looking Statements
Statements contained in this Annual Report on Form 10-K regarding matters that are not historical or current facts
are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases,
you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative
of these terms or other comparable terminology, although not all forward-looking statements contain these words. These
statements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially
different than those expressed or implied in such statements. In particular, some of the risks associated with our business
include:
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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 are detailed in this and other reports and filings with the
Securities and Exchange Commission (SEC). Other unknown or unpredictable factors also could have material adverse
effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements.
Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any
intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.
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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 the world’s largest
and fastest digital manufacturer of custom prototypes and on-demand production parts. Our mission is to help companies
accelerate product development, reduce risk, and optimize supply chains by providing quality prototyping and on-demand
manufacturing services at unprecedented speeds. Our automated quoting and manufacturing systems allow us to produce
commercial-grade plastic, metal, and liquid silicone rubber parts within days. We manufacture prototype and low volume
production parts for companies worldwide, who are under increasing pressure to bring their finished products to market faster
than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet
metal fabrication to manufacture custom parts for our customers. 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 customers and is the primary reason we have become
a leading supplier of custom parts.
We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies
inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our
customers typically order short run custom parts for a variety of reasons, including:
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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 to meet their customers' variable demand for custom parts in a competitive timeframe;
their product will only be released in a limited quantity; or
they need to support end-of-life production in a cost-effective manner.
In each of these instances, we believe our solution provides product developers, engineers, and supply chains with
an exceptional combination of speed, quality, competitive pricing, ease of use and reliability that they typically cannot find
among conventional custom parts manufacturers. Our technology enables us to ship parts as soon as the same day after receipt
of a customer’s design submission.
Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and
Sheet Metal. We continually seek to expand the range of size and geometric complexity of the parts we can make with these
processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to
which we can apply our technology in order to better serve the evolving preferences and needs of product developers and
engineers.
We have experienced significant growth since our inception in 1999. We have grown our total revenue from $163.1
million in 2013 to $344.5 million in 2017. We have grown our income from operations from $51.3 million in 2013 to $72.2
million in 2017.
Our increases in revenue and income from operations can be attributed to expanding our customer base, broadening
our parts envelope, and launching new manufacturing technologies. We were founded in 1999 with plastic injection molding,
and have expanded our product lines over the years by the introduction of:
• CNC machining in 2007;
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liquid silicon rubber (LSR) and lathe manufacturing processes that expanded the breadth and scope of our injection
molding and CNC machining product lines 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 of Alphaform AG (Alphaform) in 2015;
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rapid overmolding technology in 2016 and insert molding technology in 2017, both of which expanded the breadth
of our manufacturing capabilities in our Injection Molding product line;
PolyJet and Multi Jet Fusion (MJF) in 2017, which expanded the processes with which we produce 3D printed parts;
injection molding commercial offerings tailored to on-demand manufacturing customers in 2017;
sheet metal fabrication capability through our acquisition of RAPID Manufacturing Group, LLC (RAPID) in 2017;
and
expanded CNC machining capabilities for larger and more complex parts through our acquisition of RAPID in 2017.
Industry Overview
Our Industry
We serve product developers and engineers worldwide who bring new ideas to market in the form of products
containing one or more custom parts. Many of these product developers and engineers use 3D CAD software to create digital
models representing their custom part designs that are then used to create physical parts for concept modeling, prototyping,
functional testing, market evaluation or production. Custom prototype parts play a critical role in the product development
process, as they provide product developers and engineers with the ability to test and confirm their intended performance
requirements and explore design alternatives.
Early in the product development process, 3D printing processes such as SL and PolyJet can be used to quickly
produce an approximate physical representation of a part, but these representations may not meet product developers’ and
engineers’ requirements for material properties. As an alternative, injection molding, CNC machining, sheet metal, and 3D
printing processes such as SLS, DMLS, and MJF 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, CNC machining and sheet metal fabrication.
Our Solution
We have developed proprietary software and advanced manufacturing processes that automate much of the skilled
labor conventionally required in quoting, production engineering and manufacturing of custom parts. We believe our
interactive web-based interface and highly automated processes address the desires of many product developers and engineers
for a fast, efficient and cost-effective means to obtain custom parts, and are the primary reasons we have become a leading
supplier of custom parts.
Key elements of our solution include:
Sophisticated Technology that Reduces Turnaround Time
Our digital model is centered on our web-based interface and proprietary software, which automate many of the
manual and time-consuming processes typically required to obtain custom 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, mold or part manufacture and digital inspection. To utilize
our platform, a prospective customer uploads a 3D CAD file of their required part through our website. Often within minutes
of design submission, our software analyzes the design, assesses the manufacturability of the design and our ability to make
the part, and returns a firm price quotation with any recommendations for design modifications. 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 design flaws that limit the ability to manufacture a quality part.
Our quoting system is highly interactive, enabling our prospective customers to change the material, finish, quantity
or shipping schedule of orders, and to instantly receive an updated quotation. Once an order is received, our software
automates much of the manual engineering and skilled labor that is normally required to manufacture parts. As a result, in
many cases we are able to quote orders in minutes and ship parts as soon as the same day ordered.
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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 2017 alone, we generated quotations for over 800,000 design
submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large
numbers of unique designs and, combined with our manufacturing processes, efficiently and effectively manufacture high
volumes of parts to meet the needs of product developers and engineers.
Enhanced Customer Experience
Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our
proprietary manufacturability analysis then quickly analyzes whether a part design falls within our manufacturing
capabilities. In many cases, our software provides suggested design modifications to enhance manufacturability, which is
presented to the product developer or engineer in an interactive quotation containing a color-coded 3D representation of the
part. This allows product developers and engineers to quickly determine the manufacturability of their parts, understand the
cost and when they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an order’s
various parameters such as material, finish, quantity or shipping schedule. As a result, we provide product developers and
engineers with an easy-to-use and consistent means to obtain custom parts.
Attractive Custom Pricing
Based on internal market research, we believe we generally have competitive pricing on custom orders. We believe
this, combined with speed, is a direct result of our technology and the efficiency of our operations, both of which were
designed specifically for lower volume runs of custom parts production. By limiting these costs, we can typically offer
attractive pricing not normally possible in the low volume, high mix custom parts market, and as a result, we can typically
offer product developers and engineers competitive prices on custom manufactured parts.
Our Product Lines
Our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines offer many product developers
and engineers the ability to quickly and efficiently outsource their quick-turn custom parts manufacturing. See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the historical revenue
generated by each of Injection Molding, CNC Machining, 3D Printing and Sheet Metal.
Injection Molding
Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and
manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts
and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding
product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable
aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers
and engineers. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds,
customers who need short-run production often come back to Proto Labs’ Injection Molding product line for additional
quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being
prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their
product requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-
demand manufacturing injection molding service. This service utilizes our existing processes, but is designed to fulfill the
needs of customers with on-going production needs, typically in annual volumes of less than 10,000 parts.
CNC Machining
Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC
milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD
model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities
to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the
programming of these machines and a proprietary fixturing process. Quick-turn CNC machining works best for prototyping,
form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line
is well suited to produce small quantities, typically in the range of one to 200 parts.
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3D Printing
Our 3D Printing product line includes SL, SLS, DMLS, MJF and PolyJet processes, which offers customers a wide-
variety of high-quality, precision rapid prototyping and low volume production. These processes create parts with a high
level of accuracy, detail, strength and durability. Industrial 3D Printing is best suited for functional prototypes, complex
designs and end-use applications. 3D Printing is well suited to produce small quantities, typically in the range of one to 50
parts.
Sheet Metal
Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, providing
customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when
form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the product
developer or engineer to fabricate quick turn prototype sheet metal or short run production parts. The Sheet Metal product
line is well suited to produce quantities in the range of one to 500 parts.
Our Process
The process for Injection Molding begins when the product developer or engineer uploads one or more 3D CAD
models representing the desired part geometry through our website. Our proprietary software uses complex algorithms to
analyze the 3D CAD geometry, analyze its manufacturability and support the creation of an interactive, web-based quotation
containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer or
engineer, who can access the quotation, change a variety of order parameters and instantly see the effect on price before
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finalizing the order. 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. Parts are shipped in as little as one
business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions.
Our other services have similar processes, but differ mainly due to the nature of the manufacturing processes on which each
service is based.
Our Growth Strategy
The principal elements of our growth strategy are to:
Expand the Customer Base
We plan to 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
gained 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 2017, revenue earned in these markets represents approximately 24% 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.
Launch New Manufacturing Technology
We seek to identify additional manufacturing processes to which we can apply our digital technology and expertise
to meet a greater range of product developers’ 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.
We were founded with Injection Molding which represents 56.4% of our total revenue for the year ended December
31, 2017. Examples of new manufacturing services we have added include CNC Machining, 3D Printing and Sheet Metal.
Our CNC Machining product line was first introduced in the United States in 2007, expanded to Japan in 2009 and Europe
in 2012, and further expanded in the United States through our acquisition of RAPID in November 2017. CNC Machining
represents 30.1% of our total revenue for the year ended December 31, 2017. 3D printing technologies were introduced
through our acquisition of FineLine in April 2014. We further expanded our 3D printing capabilities in October 2015 through
our acquisition of Alphaform. Our 3D product line represents 12.6% of our total revenue for the year ended December 31,
2017. Our Sheet Metal product line was introduced through our acquisition of RAPID in November 2017 and represents $1.8
million of total revenue for the year ended December 31, 2017.
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We continue to expand our core product lines through product launches including liquid silicone rubber injection
molding, lathe-turned parts, rapid overmolding, insert molding, PolyJet and MJF. We introduced liquid silicone rubber
injection molding during 2014 and in 2015, we introduced lathe-turned products. In 2016, we expanded the breadth of our
manufacturing capabilities by adding rapid overmolding technology. In 2017, we added insert molding to our Injection
Molding product line and PolyJet and MJF to our 3D Printing product line. In addition, we launched on-demand
manufacturing to address the needs of the low-volume, high-mix product segment. We also opened our first metrology lab
in 2017 for enhanced inspection reporting on end-use production parts, including First Article Inspection Reports and digital
inspection reports.
Broaden the Parts Envelope
We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and
focus a portion of our research and development efforts to expand the range of parts that we can produce. Since we first
introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the
injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support.
Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design
geometries and materials we can support. In 2017, we launched two new 3D Printing processes, which strengthened our
capability to manufacture complex part geometries quickly and accurately. Through our acquisition of RAPID in November
2017, we added quick-turn and e-commerce-enabled Sheet Metal services to our portfolio and expanded our CNC Machining
capabilities to support larger and more complex projects. As we continue to expand the range of our existing process
capabilities, we believe we will meet the needs of a broader set of product developers and engineers and consequently convert
a higher number of quotation requests into orders.
Marketing
Our global marketing effort generates prospects for our sales teams and seeks to strengthen our reputation as an
industry leader in digital manufacturing services for custom prototyping and low-volume manufacturing. Since we are an
agile, technology-based company, much of our marketing activities occur online. We use marketing automation software to
enhance the productivity of our marketing and sales teams and continuously track the results of every campaign to ensure
our return on investment.
We maintain top-of-mind brand awareness with product developers and engineers through regular publication of
technical information including design guidelines and helpful tips, engineering white papers, educational webinars, quick
videos, and a quarterly journal focused on important industry topics. We also provide complimentary physical design aids to
designers and engineers — as well as teachers and students — that highlight technical aspects of injection molding to help
create efficient, well-designed parts. We believe these educational materials are key aspects of our lead generation efforts.
Marketing represents the face of Proto Labs, so it is our goal to actively and intelligently engage designers and
engineers across multiple mediums — whether print, online, social media or in person. By doing this, we gain new customers,
drive sales and build brand equity.
Sales and Customer Service
We maintain an internal sales team trained in the basics of part design and the capabilities of our manufacturing
product lines, as well as the key advantages of our processes 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
process. Our revenue is generated from a diverse customer base, with no single customer company representing more than
2% of our total revenue in 2017.
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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 (3D printing), 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:
• Quality: dimensional accuracy, surface finish, material properties, color and cleanliness;
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Speed: turnaround time for quotations and parts;
• Reliability: greater than 97% on-time delivery;
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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;
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Scale: ability to support thousands of part designs in parallel;
• Capacity: ability to manage peaks in demand with very short lead times and no minimum order quantities; and
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Price: mold and part pricing.
We believe that our digital end-to-end manufacturing capability positions us favorably and has enabled us to become
a leader in our markets. We also believe that substantially all of our current direct competitors are relatively small in terms
of size of operations, revenue, number of customers and volume of parts sold, and generally lack our technological
capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and more established
companies with developed technological capabilities, may begin to focus on low volume, high mix custom parts
manufacturing. These companies could more directly compete with us, along with our existing competitors, and could also
launch new products and product lines that we do not offer that may quickly gain market acceptance. Any of the foregoing
could adversely affect our ability to attract customers.
Intellectual Property
We regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other
intellectual property as valuable to our business and rely on patent, trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers, vendors and others to protect our proprietary rights.
We register our patents, trademarks and service marks in the United States and other jurisdictions as we deem appropriate.
As of December 31, 2017, we owned and had applications pending for patents relating to various aspects of our quoting and
manufacturing processes as follows:
Jurisdiction
United States ....................................................................................................
United Kingdom ...............................................................................................
Germany ...........................................................................................................
Issued
Patents
17
2
0
Applications
Pending
6
0
2
Our patents have expiration dates ranging from 2022 to 2032. We also owned approximately 17 registered and 6
pending United States trademarks or service marks as of December 31, 2017, with corresponding registered protection in
Europe and Japan for the most important of these marks such as PROTO LABS, PROTOMOLD, FIRSTCUT,
PROTOQUOTE, FIRSTQUOTE, PROTOFLOW and FINELINE, corresponding approved protection in Canada for PROTO
LABS, FIRSTCUT and FINELINE, and corresponding registered protection in Australia, Canada and Mexico for
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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, 2017 we had 2,266 full-time employees. We also regularly use independent contractors and
other temporary employees across the organization to augment our regular staff. We believe that our future success will
depend in part on our continued ability to attract, hire and retain qualified personnel.
Information About Segment and Geographic Revenue
Information about segment and geographic revenue is set forth in Note 17 – Segment Reporting of the Notes to our
consolidated financial statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
Available Information
Our principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359 and our
telephone number is (763) 479-3680. Our website address is www.protolabs.com. Information on our website does not
constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC. We provide free
access to various reports that we file with or furnish to the SEC through our website as soon as reasonably practicable after
they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. Our SEC reports can be accessed
through the investor relations section of our website.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements,
and other information regarding issuers that file information electronically with the SEC. The SEC’s website is www.sec.gov.
Executive Officers of the Registrant
Set forth below are the names of our current executive officers, their ages, titles, the year first appointed as an
executive officer, and employment for the past five years:
Victoria M. Holt ............ 60 President, Chief Executive Officer and Director
Robert Bodor ................. 45 Vice President/General Manager – Americas
John A. Way .................. 45 Chief Financial Officer and Executive Vice President of Development
Arthur R. Baker III ........ 50 Chief Technology Officer
David M. Fein ............... 49 Chief Revenue Officer
Bjoern Klaas .................. 48 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.
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Victoria M. Holt. Ms. Holt has been our President and Chief Executive Officer since February 2014. Prior to joining
Proto Labs, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic
sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in
March 2013. Ms. Holt also is a member of the Board of Directors of Waste Management, Inc.
Robert Bodor. Dr. Bodor has served as our Vice President/General Manager - Americas since January 2015. From
July 2013 to January 2015, Dr. Bodor served as our Chief Technology Officer. From December 2012 to June 2013, Dr. Bodor
served as our Director of Business Development. Prior to joining Proto Labs, from January 2011 to December 2012, Dr.
Bodor held several roles at Honeywell, most recently leading SaaS business offerings for Honeywell’s Life Safety Division.
John A. Way. Mr. Way has served as our Chief Financial Officer and Executive Vice President of Development
since December 2014. From October 2013 to September 2014, Mr. Way served as Chief Financial Officer of Univita Health
Inc., a privately held home healthcare service provider. From September 2012 to July 2013, Mr. Way served as Chief
Financial Officer of Virtual Radiologic, a global telemedicine company. From October 2002 to November 2012, Mr. Way
worked in senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer of
Optum Collaborative Care, SecureHorizons and OptumHealth.
Arthur R. Baker III. Dr. Baker has been our Chief Technology Officer since May 2016. Prior to joining Proto Labs,
Dr. Baker served as Chief Technology Officer of PaR Systems, a robotics and specialty machine tool builder. From 2005 to
2014, Dr. Baker held multiple positions at MTS Systems, including General Manager of the Test Division, Chief Technology
Officer, and Vice President of Engineering and Operations. MTS Systems was a leader in mechanical testing and simulation
systems for automotive, aerospace, medical, civil-seismic and general research.
David M. Fein. Mr. Fein has been our Chief Revenue Officer since December 2016. Prior to joining Proto Labs,
Mr. Fein spent 16 years at PMC-Sierra, Inc., a semiconductor and software solutions provider for big data storage, optical
transport networks and wireless infrastructure markets. Most recently, Mr. Fein served as Executive Vice President,
Worldwide Sales from December 2014 until PMC-Sierra, Inc. was acquired by Microsemi Corporation in January 2016.
From November 2008 to November 2014, Mr. Fein served as Vice President, Sales for the Americas at PMC-Sierra.
Bjoern Klaas. Mr. Klaas has led our company’s business in Europe, Middle East and Africa as the Vice President
and Managing Director since December 2017. Prior to joining Proto Labs, Mr. Klaas held key positions with global polymer
supplier PolyOne from 2012 to 2017, most recently as its Vice President and General Manager for its ColorMatrix Group
headquartered in the United States. From 2008 to 2012, Mr. Klaas worked at Colorant-Chromatics, a global leader for high
temperature polymer formulations, as the General Manager for the global business.
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), direct metal laser sintering (DMLS),
PolyJet and Multi Jet Fusion (MJF). Moreover, some of our existing and potential competitors are researching, designing,
developing and marketing other types of products and product lines. We also expect that future competition may arise from
the development of allied or related techniques for custom parts manufacturing that are not encompassed by our patents, from
the issuance of patents to other companies that may inhibit our ability to develop certain products and from improvements to
existing technologies. Furthermore, our competitors may attempt to adopt and improve upon key aspects of our business
model, such as development of technology that automates much of the manual labor conventionally required to quote and
manufacture custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or
building scalable operating models specifically designed for efficient custom production. Third-party CAD software
companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with
our business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other
improvements that could more effectively compete with us on part quality. We may also, from time to time, establish alliances
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or relationships with other competitors or potential competitors. To the extent companies terminate such relationships and
establish alliances and relationships with our competitors, our business could be harmed.
Existing and potential competitors may have substantially greater financial, technical, marketing and sales,
manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in
intellectual property rights and operating within certain international locations, any of which may enable them to compete
effectively against us.
Though we plan to continue to expend resources to develop new technologies, processes and product lines, we
cannot assure you that we will be able to maintain our current position or continue to compete successfully against current
and future sources of competition. Our challenge in developing new products is finding product lines for which our automated
quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any new product
lines with potential economies of scale similar to our existing 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 $23.6 million, $22.4 million and $18.4 million for
the years ended December 31, 2017, 2016 and 2015, respectively, and there is no guarantee that these costs will enable us to
maintain or grow our revenue profitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this Annual Report on Form 10-K for additional discussion related to research and development
costs.
Any failure to properly meet the needs of product developers and engineers or respond to changes in our industry
on a cost-effective and timely basis, or at all, would likely have a material adverse effect on our business and operating results
and harm our competitive position.
Our failure to meet our product developers’ and engineers’ expectations regarding quick turnaround time would adversely
affect our business and results of operations.
We believe many product developers and engineers are facing increased pressure from global competitors to be first
to market with their finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability
to quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no
guarantees we will be able to meet product developers’ 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 749 full-time
employees as of January 1, 2014 to 2,266 full-time employees as of December 31, 2017. We have expanded internationally,
including establishing manufacturing operations in Europe in 2005 and Japan in 2009. In 2014, we expanded our product
lines with 3D Printing through our acquisition of FineLine. In 2015, we expanded our manufacturing operations and our 3D
Printing product lines in Europe through our acquisition of Alphaform. In 2017, we expanded our product lines to include
Sheet Metal through our acquisition of RAPID. We expect this growth to continue and the number of countries and facilities
from which we operate to increase in the future. Our ability to effectively manage our anticipated growth and expansion of
our operations will require us to do, among other things, the following:
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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.
Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.
Although our revenue has grown over the past five years from $163.1 million for the year ended December 31, 2013
to $344.5 million for the year ended December 31, 2017, we may not be able to maintain our historical rate of revenue growth.
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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:
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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:
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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;
our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth;
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limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or
annual revenue;
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.
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Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the
potentially significant losses, including the potential harm to the future growth of our business that may result from
interruptions in our product lines as a result of system failures.
We depend on the continued growth of product developers’ and engineers’ e-commerce expectations when working with
their custom parts manufacturers and their migration from 2D to 3D CAD software.
The business of selling custom parts over the Internet via an interactive web-based and automated user interface and
quoting system is not widespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD
software. Concerns about privacy and technological and other problems may discourage some product developers and
engineers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software,
particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or
with product developers and engineers in industries not well suited to utilize our product lines, such as architecture. In order
to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of
commerce and/or 2D CAD drawings to purchase their customer parts. If product developers and engineers are not sufficiently
attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers
and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely
impacted.
We store confidential customer information in our systems that, if breached or otherwise subjected to unauthorized
access, may harm our reputation or brand or expose us to liability.
Our system stores, processes and transmits our customers’ confidential information, including the intellectual
property in their part designs and other sensitive data. We rely on encryption, authentication and other technologies licensed
from third parties, as well as administrative and physical safeguards, to secure such confidential information. Any
compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly
litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed
the internal and external risks posed to the security of our company’s systems and information and may not have implemented
adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most
states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches
involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative
publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security
measures. Any security breach, whether successful or not, would harm our reputation and brand and could cause the loss of
customers.
Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.
The prospects for economic growth in the United States and other countries remain uncertain and could worsen.
Economic concerns and other issues such as reduced access to capital for businesses may cause product developers and
engineers to further delay or reduce the product development projects that our business supports. Given the continued
uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our
suppliers, product developers and engineers and other related risks to our business.
Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in
the European Union could adversely affect our business and results of operations.
On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the
European Union (EU), commonly referred to as “Brexit.” The outcome of the Brexit vote triggered short-term financial
volatility, including a decline in the value of the British Pound in comparison to both the United States dollar and the Euro.
The impact of the Brexit referendum and the ongoing uncertainty associated with the outcome thereof may result in various
long-term financial consequences for businesses operating in the UK, the EU and beyond. As a result of the referendum, the
British government is negotiating the terms of the UK’s relationship with the EU going forward, including the terms of trade
between the UK and the EU. Although the specific terms and the timeframe of the negotiations are unknown, it is possible
that these changes could adversely affect our business and results of operations.
We operate a global business that exposes us to additional risks.
We have established our operations in the United States, Europe and Japan and are seeking to further expand our
international operations. As of December 31, 2017, we had sold products into approximately 60 countries. In addition to
English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our international revenue
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accounted for approximately 24%, 25% and 27% of our total revenue in the years ended December 31, 2017, 2016 and 2015,
respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties.
Many of the following factors have adversely affected our international operations and sales to customers located outside of
the United States and may again in the future:
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difficulties in staffing and managing foreign operations, particularly in new geographic locations;
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 and holiday season;
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
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collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and
adversely affected.
If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our
products for a substantial amount of time and our sales will decline.
We manufacture all of our products in 12 manufacturing facilities, located in Maple Plain, Minnesota; Rosemount,
Minnesota; Plymouth, Minnesota; Cary, North Carolina; Nashua, New Hampshire (3 facilities); Telford, United Kingdom;
Feldkirchen, Germany; Eschenlohe, Germany; Rusko, Finland and Zama, Kanagawa, Japan. These facilities and the
manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. Our
facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes,
fires, hurricanes, tsunamis and nuclear disasters.
In the event any of our facilities are affected by a disaster, we may:
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
20
our technology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to
develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased
competition and lower revenue or gross margin, which would adversely affect our net income.
We may be subject to infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies who
have acquired or developed patents in the fields of injection molding, CNC machining, 3D printing, sheet metal or part
production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims
that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such
claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or
otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes,
our market share, sales and profitability could be adversely impacted.
Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of
operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our
profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other
intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual
property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws, treaties and
regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable
intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable
intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that
intellectual property.
We may be subject to product liability claims, which could result in material expense, diversion of management time and
attention and damage to our business and reputation and brand.
The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects
or errors that are not discovered until after the products have been installed and used by customers. This could result in claims
from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error.
We attempt to include provisions in our agreements with customers that are designed to limit our exposure to
potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations
may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.
The sale and support of our products entails the risk of product liability claims. Any product liability claim brought
against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to
our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply
with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the
Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online
services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy,
data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer
protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality
of products and product lines. It is not clear how existing laws governing issues such as property use and ownership, sales
and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were
adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-
commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are
therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the
regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to
significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may
substantially harm our business and results of operations.
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, including those set forth in the Tax Cuts and Jobs Act enacted in 2017, and regulations in
jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory
tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue
Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations
to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from
the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final
determination of any examination will not have an adverse effect on our operating results and financial position.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms,
if at all.
We intend to continue to make investments to support our business growth and may require additional funds to
respond to business challenges, including the need to complement our growth strategy, increase market share in our current
markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities.
Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds
through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our
common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and
to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms
favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require
it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired,
and our business may be harmed.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating
results and financial condition.
Our business and our customer base have been built primarily through organic growth. However, from time to time,
we may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to
complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our
technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us
to offer our customers 3D printing manufacturing processes; in October 2015, we acquired Alphaform to enable us to expand
our 3D printing capabilities in Europe, and in November 2017, we acquired RAPID to enable us to offer our customers Sheet
Metal processes. We cannot forecast the number, timing or size of any future acquisitions or other similar strategic
transactions, or the effect that any such transactions might have on our operating or financial results. We have limited
experience engaging in these types of transactions. Such transactions may be complex, time consuming and expensive, and
may present numerous challenges and risks including:
•
•
•
•
•
•
an acquired company, asset or technology not furthering our business strategy as anticipated;
difficulties entering and competing in new product or geographic markets and increased competition, including
price competition;
integration challenges;
challenges in working with strategic partners and resolving any related disagreements or disputes;
high valuation for a company, asset or technology, or changes in the economic or market conditions or
assumptions underlying our 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;
22
•
•
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. In New Hampshire, we are required to meet ISO 9001:2015 for our CNC-machined
and sheet metal fabrication, as well as AS9100C standards. We are also able to meet regulatory standards ISO 9001:2008 at
our manufacturing facilities in Feldkirchen, Germany, Eschenlohe, Germany and Rusko, Finland. We also meet regulatory
standard ISO 13485 at our manufacturing facility in Eschenlohe, Germany. We are also able to meet regulatory standards
ISO 9001 and ISO 14001 in Japan. If any regulatory inspection reveals that we are not in compliance with applicable
standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall
of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our
reputation as well as our business, financial condition and operating results. In addition, we may need to obtain additional
certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover,
obtaining and maintaining required regulatory certifications can be costly and divert management’s attention.
We are subject to payment-related risks.
We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and
payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations,
23
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, 2017, our common stock traded as high as $109.10 and as low as $48.00. The
market for our common stock may become less active, liquid or orderly, which could depress the trading price of our common
stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock
to fluctuate include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 and announcements relating to litigation;
the projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
the issuance of new or updated research or reports by any securities or industry analysts who follow our common
stock, changes in analysts’ financial estimates or ratings, and failure of securities analysts to initiate or maintain
coverage of our common stock;
changes in the market valuations of similar companies;
significant lawsuits, including patent or shareholder litigation;
changes in laws or regulations applicable to us;
changes in accounting principles;
the sustainability of an active trading market for our common stock;
24
•
•
•
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; 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;
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.
25
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 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.
We own a facility in Cary, North Carolina that encompasses approximately 77,000 square feet of manufacturing and
office space.
In November 2017, we purchased RAPID and assumed the leases of three facilities in Nashua, New Hampshire.
The three facilities we lease total approximately 146,000 square feet of manufacturing and office space. The leases expire at
various times from 2018 to 2022.
Europe
Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing
approximately 126,000 square feet of office and manufacturing space.
We also lease office space in the United Kingdom; Mosbach, Germany; Le Bourget du Lac, France; and Novara,
Italy, for sales, customer service and technical support staff. The leases expire at various times from 2018 to 2023. In October
2015, we purchased Alphaform, headquartered in Feldkirchen (Munich), Germany. As a result of the acquisition, we lease
manufacturing and office facilities encompassing approximately 60,000 square feet in Feldkirchen, Germany, approximately
22,000 square feet in Eschenlohe, Germany and approximately 24,000 square feet in Rusko, Finland. The leases expire at
various times from 2018 to 2019.
26
Japan
Our Japan operations are headquartered in Zama, Kanagawa, Japan (southwest of Tokyo). In 2016, we moved into
a new leased facility encompassing approximately 96,000 square feet of office and manufacturing space. The lease expires
in April 2023.
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 2017
Fiscal 2016
High
Low
High
Low
First Quarter .................................................. $
Second Quarter .............................................. $
Third Quarter ................................................ $
Fourth Quarter ............................................... $
60.25 $
70.10 $
80.40 $
109.10 $
48.00 $
48.70 $
66.85 $
79.06 $
79.65 $
82.06 $
61.62 $
59.65 $
51.61
55.07
50.50
43.10
On February 14, 2018, the last reported sale price of our common stock on the NYSE was $108.80 per share. As of
February 14, 2018, we had 20 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 and 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, 2017, information about shares of our common stock that may
be issued under equity compensation plans approved by shareholders and plans not approved by shareholders:
Number of
shares to
be issued upon
exercise of
outstanding
options and
rights
Weighted-
average
exercise price of
outstanding
options and
rights
Number of
shares
remaining
available
for future
issuance
under equity
compensation
plans
(excluding shares
in first column)
Plan Category
Equity compensation plans approved by shareholders(1) .....
Equity compensation plans not approved by shareholders ..
759,593
None
$51.13
N/A
6,515,301(2)
None
(1)
(2)
Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan.
Includes 1,244,007 shares remaining available for issuance as of December 31, 2017 under our Employee Stock
Purchase Plan.
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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, 2017 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
02/24/12 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15 06/30/16 12/31/16 06/30/17 12/31/17
Proto Labs, Inc. .. 100.00 115.04 157.68 259.88 284.72 327.68 268.64 269.92 254.76 230.24 205.40 269.00 412.00
S&P 500 .............. 100.00 99.90 104.60 117.81 135.56 143.77 151.01 151.31 149.91 153.94 164.20 177.74 196.09
Russell 2000 ....... 100.00 96.29 102.43 117.88 140.33 143.86 145.28 151.22 136.98 138.91 163.66 170.68 185.17
Unregistered Sales of Equity Securities and Issuer Purchases of Equity Securities
On February 9, 2017, we announced that our board of directors had authorized the repurchase of shares of our
common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of
up to $50 million. The timing and amount of any share repurchases will be determined by our management based on market
conditions and other factors. The term of the program runs through December 31, 2021.
During the three months ended December 31, 2017, we did not repurchase shares of our common stock. During the
year ended December 31, 2017, we repurchased 77,806 shares at an average price of $56.66 per share for an aggregate
purchase price of $4.4 million. We have $45.6 million remaining under this authorization.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial data for the periods and at the dates indicated. The
selected consolidated statements of comprehensive income data for the years ended December 31, 2017, 2016 and 2015 and
selected consolidated balance sheets data as of December 31, 2017 and 2016 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, 2014 and 2013 and
selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013 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)
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, net ...............................................
Income before income taxes ...............................
Provision for income taxes .................................
Net income ......................................................... $
Net income per share(1)
Year Ended December 31,
2017
2016
2015
2014
2013
344,490 $
150,648
193,842
298,055 $
131,118
166,937
264,106 $
109,703
154,403
209,583 $
81,182
128,401
163,112
61,410
101,702
56,856
23,560
41,200
121,616
72,226
2,209
74,435
22,657
51,778 $
46,131
22,388
36,651
105,170
61,767
2,454
64,221
21,514
42,707 $
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
Basic ............................................................ $
Diluted ........................................................ $
1.94 $
1.93 $
1.62 $
1.61 $
1.79 $
1.77 $
1.62 $
1.60 $
1.40
1.36
Weighted average shares outstanding(1)
Basic ............................................................ 26,647,610 26,365,173 26,005,858 25,692,699 25,198,556
Diluted ........................................................ 26,845,071 26,564,639 26,320,284 26,100,320 25,859,741
Other comprehensive income (loss) (net of
tax)
Foreign currency translation adjustments ........... $
Comprehensive income ...................................... $
5,519 $
57,297 $
(5,541) $
37,166 $
(2,283) $
44,231 $
(1,838) $
39,797 $
(163)
35,114
(1) See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net
income per basic and diluted share and weighted average shares outstanding for the years ended December 31,
2017, 2016, and 2015, respectively.
30
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
(in thousands)
2017
Year Ended December 31,
2015
2016
2014
2013
Stock options and grants ...................................... $
Employee stock purchase plan .............................
Total stock-based compensation expense ............. $
7,954 $
604
8,558 $
6,177 $
598
6,775 $
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 ............. $
970 $
691 $
513 $
386 $
316
1,429
1,091
5,068
8,558 $
977
1,396
3,711
6,775 $
1,074
1,285
3,210
6,082 $
927
1,048
2,448
4,809 $
610
754
1,781
3,461
(in thousands)
2017
Year Ended December 31,
2015
2016
2014
2013
Consolidated Balance Sheets Data
Cash and cash equivalents .................................... $
Working capital ....................................................
Total assets ...........................................................
Total liabilities .....................................................
Total shareholders' equity .................................... $
68,795 $
36,707 $
134,357
121,249
414,241
518,738
57,523
34,408
461,215 $ 379,833 $
47,653 $
111,740
361,036
33,391
327,645 $
43,329 $
89,102
287,031
21,492
265,539 $
43,039
96,132
230,175
18,532
211,643
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 an e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded, CNC-machined,
3D-printed and sheet metal-fabricated custom parts for prototyping and short-run production. We provide custom parts to
product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market
faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the
inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce
custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally
required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over
the Internet. We target our product lines to the millions of product developers and engineers who use 3D CAD software to
design products across a diverse range of end markets. Our primary manufacturing product lines currently include Injection
Molding, CNC Machining, 3D Printing and Sheet Metal.
We have experienced significant growth since our inception. Since we first introduced our Injection Molding product
line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to
manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing
our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can
support. In 2014, we acquired FineLine Prototyping, Inc. (FineLine) to expand the number of process types we offer to
include stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS). In 2017, we acquired
RAPID to expand the number of process types we offer to include sheet metal fabrication and expand our CNC machining
capability. We also continually seek to enhance other aspects of our technology and manufacturing processes, including our
interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly to
enhance our technology and manufacturing processes and expand the range of our existing capabilities with the aim of
meeting the needs of a broader set of customers. As a result of the factors described above, many of our customers tend to
return to Proto Labs to meet their ongoing needs, with approximately 89%, 86% and 88% of our revenue in 2017, 2016 and
2015, respectively, derived from existing customers.
We have established our operations in the United States, Europe and Japan, which we believe are three of the largest
geographic markets where product developers and engineers are located. We entered the European market in 2005, launched
operations in Japan in late 2009 and further expanded into Europe through our acquisition of Alphaform in 2015 and the
United States through our acquisition of RAPID in November 2017. As of December 31, 2017, we had sold products into
approximately 60 countries. Our revenue outside of the United States accounted for approximately 24%, 25% and 27% of
our consolidated revenue in the years ended December 31, 2017, 2016 and 2015, respectively. We intend to continue to
expand our international sales efforts and believe opportunities exist to serve the needs of product developers and engineers
in select new geographic regions.
We have grown our total revenue from $163.1 million in 2013 to $344.5 million in 2017. During this period, our
operating expenses increased from $50.4 million in 2013 to $121.6 million in 2017. We have grown our income from
operations from $51.3 million in 2013 to $72.2 million in 2017. Our recent growth in revenue and income from operations
has been accompanied by increased cost of revenues and operating expenses. We expect to increase investment in our
operations to support anticipated future growth as discussed more fully below.
In addition, we believe that a number of trends affecting our industry have affected our results of operations and
may continue to do so. For example, we believe that many of our target product developer and engineer customers have
increasing e-commerce expectations, are facing increased pressure to accelerate the time to market for their products and
continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well
positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate the majority
of activities involved in procuring custom parts, starting with our elegant web interface through which a product developer
or engineer submits a 3D CAD part design. While our business may be positively affected by these trends, our results may
also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts
in low volumes, including, among others, changes in product developer and engineer preferences or needs, developments in
our industry and among our competitors, and factors impacting new product development volume such as economic
32
conditions. For a more complete discussion of the risks facing our business, see Part I, Item 1A. “Risk Factors” of this Annual
Report on Form 10-K.
Key Financial Measures and Trends
Revenue
Our operations are comprised of three geographic operating segments in the United States, Europe and Japan.
Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection
Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists
of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue
consists of sales of fabricated sheet metal custom parts. Our revenue is generated from a diverse customer base, with no
single customer company representing more than 2% of our total revenue in 2017. Our historical and current efforts to
increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing
marketing and selling activities, including:
•
•
•
•
•
the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;
expanding internationally through our acquisition of Alphaform in October 2015;
the introduction of our Sheet Metal product line through our acquisition of RAPID in 2017;
continuously improving the usability of our product lines such as our web-centric applications; and
expanding the breadth and scope of our products by adding more sizes and materials to our offerings.
During 2017, we served 37,267 unique product developers and engineers who purchased our products through our
web-based customer interface, an increase of 18.5% over the same period in 2016. The information does not include 3D
Printing, Injection Molding and Sheet Metal customers, principally related to our recent acquisitions, who do not utilize our
web-based interface.
During 2016, we served 31,457 unique product developers and engineers who purchased our products through our
web-based customer interface, an increase of 15.5% over the same period in 2015. The information does not include 3D
Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based
interface.
During 2015, we served 27,235 unique product developers and engineers who purchased our products through our
web-based customer interface, an increase of 26.0% over the same period in 2014. The information does not include 3D
Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based
interface.
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 2017, 2016 and 2015 we made
significant investments in additional factory space, equipment, and infrastructure in the United States. We also made
significant investments in infrastructure in Europe in 2017 and significant investments in additional factory space in Japan in
2016. We expect to continue to grow in future periods, which will result in the need for additional investments in factory
space and equipment. We expect that these additional costs for factory and equipment expansion can be absorbed by revenue
growth, and allow gross margins to remain relatively consistent over time.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed
as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our mix of revenue by
product line, pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the
mix between domestic and foreign revenue sources and foreign exchange rates.
33
Operating Expenses
Operating expenses consist of marketing and sales, research and development and general and administrative
expenses. Personnel-related costs are the most significant component in each of these categories.
Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion,
and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled
manufacturer of quick-turn, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and sheet metal custom
parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial
investments in technology and personnel, resulting in increased operating expenses.
Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits,
commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade
shows and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number
of marketing and sales professionals and marketing programs targeted to increase our customer base and grow revenue.
Research and development. Research and development expense consists primarily of personnel and outside service
costs related to the development of new processes and product lines, enhancement of existing product lines, software
developed for internal use, maintenance of internally developed software, quality assurance and testing. All of our internal
research and development costs have been expensed as incurred. We expect research and development expense to increase
in the future as we seek to enhance and expand our product line offerings and supporting business systems.
General and administrative. General and administrative expense consists primarily of employee compensation,
benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead.
We expect general and administrative expense to increase in the future as we continue to grow and expand as a global
organization.
Other Income, Net
Other income, net primarily consists of foreign currency-related gains and losses and interest income on cash
balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying
exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the
period, composition of our marketable security portfolio and the current level of interest rates.
Provision for Income Taxes
Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. On
December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. As a result, many provisions will
affect our tax rate in future years. Some provisions, such as the reduction to the U.S. corporate tax rate from 35% to 21%,
beginning in 2018, will likely reduce our effective tax rate in future years. Other provisions taken in isolation, such as the
elimination of the Domestic Production Activities Deduction, will likely result in an increase to our tax rate. Overall, we
anticipate our effective tax rate will be lower in 2018 and beyond than in recent periods based on the current tax laws.
34
Results of Operations
The following table summarizes our results of operations and the related changes for the periods indicated. The
results below are not necessarily indicative of the results for future periods.
(dollars in thousands)
2017
2016
Year Ended
December 31,
Change
$
%
Year Ended
December 31,
2016
2015
Change
$
%
Revenue .......................................... $ 344,490 100.0% $ 298,055 100.0% $ 46,435 15.6% $ 298,055 100.0% $ 264,106 100.0% $ 33,949 12.9%
Cost of revenue ............................... 150,648 43.7 131,118 44.0 19,530 14.9 131,118 44.0 109,703 41.5 21,415 19.5
Gross profit ..................................... 193,842 56.3 166,937 56.0 26,905 16.1 166,937 56.0 154,403 58.5 12,534 8.1
Operating expenses:
Marketing and sales ............... 56,856 16.5 46,131 15.5 10,725 23.2 46,131 15.5 39,188 14.8 6,943 17.7
Research and development .... 23,560 6.8 22,388 7.5 1,172 5.2 22,388 7.5 18,350 6.9 4,038 22.0
General and administrative ... 41,200 12.0 36,651 12.3 4,549 12.4 36,651 12.3 29,716 11.3 6,935 23.3
Total operating
expenses ................... 121,616 35.3 105,170 35.3 16,446 15.6 105,170 35.3 87,254 33.0 17,916 20.5
Income from operations ................. 72,226 21.0 61,767 20.7 10,459 16.9 61,767 20.7 67,149 25.5 (5,382 ) (8.0)
Other income, net ...........................
*
Income before income taxes ........... 74,435 21.6 64,221 21.5 10,214 15.9 64,221 21.5 67,861 25.7 (3,640 ) (5.4)
Provision for income taxes ............. 22,657 6.6 21,514 7.2 1,143 5.3 21,514 7.2 21,347 8.1
167 0.8
Net income ...................................... $ 51,778 15.0% $ 42,707 14.3% $ 9,071 21.2% $ 42,707 14.3% $ 46,514 17.6% $ (3,807 ) (8.2)%
712 0.2 1,742
2,454 0.8
2,454 0.8
2,209 0.6
(245) (10.0)
*
Percentage change not meaningful
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 .................................................. $
2017
Year Ended December 31,
2016
2015
7,954 $
604
8,558 $
970 $
1,429
1,091
5,068
8,558 $
6,177 $
598
6,775 $
691 $
977
1,396
3,711
6,775 $
5,580
502
6,082
513
1,074
1,285
3,210
6,082
Comparison of Years Ended December 31, 2017 and 2016
Revenue
Revenue by reportable segment and the related changes for 2017 and 2016 is summarized as follows:
(dollars in thousands)
Revenue
Year Ended December 31,
2017
$
% of Total
Revenue
2016
$
% of Total
Revenue
Change
$
%
United States................................. $
Europe...........................................
Japan .............................................
Total revenue ......................................... $
263,086
70,154
11,250
344,490
76.4% $
20.4
3.2
100.0% $
223,930
63,365
10,760
298,055
75.1% $
21.3
3.6
100.0% $
39,156
6,789
490
46,435
17.5%
10.7
4.6
15.6%
35
Our revenue increased $46.4 million, or 15.6%, for 2017 compared with 2016. By reportable segment, revenue in
the United States increased $39.2 million, or 17.5%, for 2017 compared with 2016. Revenue growth in the United States was
partially attributable to the acquisition of RAPID in November 2017, which contributed $3.6 million in revenue. Excluding
RAPID, revenue in the United States increased $35.6 million, or 15.9%, for 2017 compared with 2016.
Revenue in Europe increased $6.8 million, or 10.7%, for 2017 compared with 2016. Revenue in Japan increased
$0.5 million, or 4.6%, for 2017 compared with 2016.
Our revenue growth in 2017 was the result of increased volume of the product developers and engineers we served.
During 2017, we served 37,267 unique product developers and engineers, an increase of 18.5% over 2016. Average revenue
per product developer or engineer remained relatively consistent during 2017 as compared to 2016.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales
personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our
marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to
support sales activity. The impact on international revenue in 2017 compared to 2016 as a result of foreign currency
movements was not material.
Revenue by product line and the related changes for 2017 and 2016 is summarized as follows:
Year Ended December 31,
2017
2016
Change
$
% of Total
Revenue
$
% of Total
Revenue
$
%
(dollars in thousands)
Revenue
Injection Molding ................. $
CNC Machining ...................
3D Printing ...........................
Sheet Metal ..........................
Other Product .......................
Total revenue ............................... $
194,432
103,739
43,329
1,767
1,223
344,490
56.4% $
30.1
12.6
0.5
0.4
100.0% $
175,974
81,407
37,847
-
2,827
298,055
59.0% $
27.3
12.7
-
1.0
100.0% $
18,458
22,332
5,482
1,767
(1,604)
46,435
10.5%
27.4
14.5
100.0
(56.7)
15.6%
By product line, our revenue growth was driven by a 10.5% increase in Injection Molding revenue, a 27.4% increase
in CNC Machining revenue and a 14.5% increase in 3D Printing revenue, in each case for 2017 compared with 2016, which
was partially offset by a $1.6 million decrease in Other Product revenue. As a result of our acquisition of RAPID in November
2017, we experienced a $1.8 million increase in Sheet Metal revenue, a $1.7 million increase in CNC Machining revenue
and a $0.2 million increase in Other Product revenue.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $19.5 million, or 14.9%, for 2017 compared to 2016, which was slower
than the rate of revenue increase of 15.6% for 2017 compared to 2016 reflecting the realization of productivity improvements.
The increase in cost of revenue resulted from the growth of the business, including via the RAPID acquisition, and was due
to raw material and production cost increases of $5.6 million to support increased sales volumes, an increase in direct labor
headcount resulting in personnel and related cost increases of $12.7 million and equipment and facility-related cost increases
of $1.2 million.
Gross Profit and Gross Margin. Gross profit increased from $166.9 million in 2016 to $193.8 million in 2017
primarily due to an increase in revenue growth. Gross margin increased from 56.0% of revenue in 2016 to 56.3% of revenue
in 2017 primarily due to increases in revenue and realization of manufacturing productivity improvements.
36
Income from Operations
Income from operations increased $10.5 million, or 16.9%, for 2017 compared with 2016. By reportable segment,
income from operations for the United States and Europe increased 15.5% and 10.2%, respectively, as a percentage of revenue
for 2017 compared with 2016. Income from operations for Corporate Unallocated and Japan decreased 11.6% as a percentage
of revenue for 2017 compared with 2016.
Operating Expenses
Marketing and Sales. Marketing and sales expense increased $10.7 million, or 23.2%, for 2017 compared to 2016
due to an increase in headcount resulting in personnel and related cost increases of $10.3 million and marketing program cost
increases of $0.4 million. The increase in marketing program costs is the result of our focus on funding those programs that
have proven to be the most effective in growing our business.
Research and Development. Our research and development expense increased $1.2 million, or 5.2%, for 2017
compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $0.9 million and other
operating cost increases of $0.3 million.
General and Administrative. Our general and administrative expense increased $4.5 million, or 12.4%, for 2017
compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $4.0 million,
professional service cost increases of $0.4 million primarily related to outside legal and accounting services, and stock-based
compensation cost increases of $1.3 million, partially offset by a decrease in facility and administrative costs of $1.2 million
resulting from $0.8 million of non-recurring costs related to facility moves and vacating leases in 2016.
Other Income, Net and Provision for Income Taxes
Other Income, Net. We recognized other income, net of $2.2 million in 2017, a decrease of $0.3 million compared
to other income, net of $2.5 million for 2016. Other income, net decreased primarily due to a decrease of $1.1 million in
foreign currency exchange gains, which were partially offset by a $0.4 million favorable legal settlement in the second quarter
of 2017 and an increase of $0.5 million in interest income on investments.
Provision for Income Taxes. Our income tax provision increased by $1.1 million for 2017 compared to 2016. This
was the result of a significant increase to taxable income along with a tax provision for the transition tax that was part of the
Tax Cuts and Jobs Act. Partially offsetting these tax increases was a tax benefit recorded to reflect the decrease to the valuation
of our deferred tax liabilities caused by the U.S. corporate income tax rate reduction. As a result of this decrease to the
valuation of deferred tax liability, our effective tax rate decreased to 30.4% in 2017 from 33.4% in 2016.
Comparison of Years Ended December 31, 2016 and 2015
Revenue
Revenue by reportable segment and the related changes for 2016 and 2015 is summarized as follows:
(dollars in thousands)
$
Revenue
Year Ended December 31,
2016
2015
Change
% of Total
Revenue
$
% of Total
Revenue
$
%
United States ...................... $
Europe ................................
Japan ..................................
Total revenue ............................. $
223,930
63,365
10,760
298,055
75.1% $
21.3
3.6
100.0% $
208,018
47,433
8,655
264,106
78.7% $
18.0
3.3
100.0% $
15,912
15,932
2,105
33,949
7.6%
33.6
24.3
12.9%
Our revenue increased $34.0 million, or 12.9%, for 2016 compared with 2015. By reportable segment, revenue in
the United States increased $15.9 million, or 7.6%, for 2016 compared with 2015. Revenue in Europe increased $15.9 million,
37
or 33.6%, for 2016 compared with 2015, partially driven by the acquisition of Alphaform in the fourth quarter of 2015.
Revenue in Japan increased $2.1 million, or 24.3%, for 2016 compared with 2015.
Our revenue growth in 2016 was the result of increased volume of the product developers and engineers we served.
During 2016, we served 31,457 unique product developers and engineers, an increase of 15.5% over 2015. Average revenue
per product developer or engineer decreased 6% during 2016 as compared to 2015 due to changes in the mix of products
purchased by our customers.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales
personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts.
Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to
support sales activity. International revenue decreased by $1.3 million in 2016 compared to 2015 as a result of foreign
currency movements, primarily the strengthening of the United States dollar relative to the British pound.
Revenue by product line and the related changes for 2016 and 2015 is summarized as follows:
(dollars in thousands)
$
Revenue
Year Ended December 31,
2016
2015
Change
% of Total
Revenue
$
% of Total
Revenue
$
%
Injection Molding ............... $
CNC Machining .................
3D Printing .........................
Other Product .....................
Total revenue ............................. $
175,974
81,407
37,847
2,827
298,055
59.0% $
27.3
12.7
1.0
100.0% $
163,387
74,368
25,132
1,219
264,106
61.8% $
28.2
9.5
0.5
100.0% $
12,587
7,039
12,715
1,608
33,949
7.7%
9.5
50.6
131.9
12.9%
By product line, our revenue growth was driven by a 7.7% increase in Injection Molding revenue, a 9.5% increase
in CNC Machining revenue and a 50.6% increase in 3D Printing revenue, in each case for 2016 compared with 2015, as well
as a $1.6 million increase in Other Product revenue driven by our acquisition of Alphaform.
During the second quarter of 2016, we made the decision to discontinue offering two manufacturing processes within
our Injection Molding product line, Metal Injection Molding (MIM) and Magnesium Thixomolding (Thixo). In addition, in
the second quarter of 2016, we decided to exit our non-core resin resale business, which was acquired from Alphaform in
October 2015. Revenue from resin resale was included in Other Product revenue in 2015 and 2016. MIM, Thixo and resin
resale in the aggregate represented approximately 1.6% of revenue during 2016.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue. Cost of revenue increased $21.4 million, or 19.5%, for 2016 compared to 2015, which was greater
than the rate of revenue increase of 12.9% for 2016 compared to 2015. The increase in cost of revenue resulted from the
growth of the business, including via the Alphaform acquisition. Additional increase in the cost of revenue was due to raw
material and production cost increases of $5.9 million to support increased sales volumes, an increase in direct labor
headcount resulting in personnel and related cost increases of $10.4 million and equipment and facility-related cost increases
of $5.1 million. Equipment and facility-related cost increases included $0.6 million of accelerated depreciation of leasehold
assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016.
Gross Profit and Gross Margin. Gross profit increased from $154.4 million in 2015 to $166.9 million in 2016
primarily due to increasing revenue growth as noted above. Gross margin decreased from 58.5% of revenue in 2015 to 56.0%
of revenue in 2016 primarily as a result of our lower margins from the acquired Alphaform business, as well as increases in
investments of additional manufacturing capacity, accelerated depreciation of leasehold assets resulting from our move to
new facilities in the U.S. and Japan in the third quarter of 2016 and the impact of fluctuations in foreign currency exchange
rates.
38
Income from Operations
Income from operations decreased $5.4 million, or 8.0%, for 2016 compared with 2015. By reportable segment,
income from operations for the United States and Corporate Unallocated and Japan increased 3.3% and 20.2%,
respectively, as a percentage of revenue for 2016 compared with 2015. Income from operations for Europe decreased 12.4%
as a percentage of revenue for 2016 compared with 2015.
Operating Expenses
Marketing and Sales. Marketing and sales expense increased $6.9 million, or 17.7%, for 2016 compared to 2015
due to an increase in headcount resulting in personnel and related cost increases of $6.2 million and marketing program cost
increases of $0.7 million. The increase in marketing program costs is the result of our focus 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 $4.0 million, or 22.0%, for 2016
compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $3.1 million, other
operating cost increases of $0.8 million and professional services cost increases of $0.1 million.
General and Administrative. Our general and administrative expense increased $6.9 million, or 23.3%, for 2016
compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.2 million, facility
and administrative cost increases of $3.6 million, professional service cost increases of $0.6 million for outside legal and
accounting services and stock-based compensation cost increases of $0.5 million. The increase in administrative costs for
2016 includes accelerated depreciation and facilities-related charges of $0.8 million resulting from our move to new facilities
in the U.S. and Japan in the third quarter of 2016.
Other Income, Net and Provision for Income Taxes
Other Income, Net. We recognized other income, net of $2.5 million in 2016, an increase of $1.8 million compared
to other income, net of $0.7 million for 2015. Other income, net included $1.4 million in foreign currency exchange gains
for 2016 compared to $0.5 million in foreign currency exchange losses in 2015. The increase was primarily due to the amount
of foreign-currency denominated cash balances abroad and movements in the underlying exchange rates at the end of the
period.
Provision for Income Taxes. Our income tax provision increased $0.2 million for 2016 compared to 2015 resulting
in an effective tax rate increase to 33.4% in 2016 from 31.5% in 2015 due primarily to the mix of revenue earned in domestic
and foreign tax jurisdictions and deductions for which we qualify in the current year.
39
Selected Quarterly Results of Operations Data
The following tables set forth selected unaudited quarterly results of operations data for 2017 and 2016. This
unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The
quarterly data should be read in conjunction with our selected financial data and consolidated financial statements and the
related notes appearing elsewhere in this Annual Report on Form 10-K. Operating results for any quarter are not necessarily
indicative of results for a full-year period, and the historical results presented below are not necessarily indicative of the
results to be expected in any future period.
(in thousands, except share and per share
amounts)
Dec. 31,
2017
Sep. 30,
2017
Jun. 30,
2017
Three Months Ended
Dec. 31,
Mar. 31,
2016
2017
(unaudited)
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
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 ..................................................... $
94,178 $
41,290
52,888
15,393
5,776
12,944
34,113
18,775
430
19,205
4,933
14,272 $
88,105 $
38,793
49,312
13,846
5,877
10,222
29,945
19,367
291
19,658
6,438
13,220 $
82,040 $
35,671
46,369
14,630
6,084
9,253
29,967
16,402
1,173
17,575
5,489
12,086 $
80,167 $
34,894
45,273
12,987
5,823
8,781
27,591
17,682
315
17,997
5,797
12,200 $
72,353 $
32,041
40,312
11,949
5,278
8,254
25,481
14,831
112
14,943
5,571
9,372 $
78,173 $
33,448
44,725
11,787
5,976
10,020
27,783
16,942
625
17,567
5,585
11,982 $
74,961 $
32,715
42,246
11,453
5,816
10,126
27,395
14,851
1,092
15,943
5,252
10,691 $
72,568
32,914
39,654
10,942
5,318
8,251
24,511
15,143
625
15,768
5,106
10,662
Net income per share:
Basic ..................................................... $
Diluted .................................................. $
0.53 $
0.53 $
0.50 $
0.49 $
0.46 $
0.45 $
0.46 $
0.46 $
0.35 $
0.35 $
0.45 $
0.45 $
0.41 $
0.40 $
0.41
0.40
Shares used to compute net income per
share:
Basic ..................................................... 26,705,909 26,617,349 26,541,978 26,466,731 26,457,302 26,416,041 26,368,001 26,222,148
Diluted .................................................. 27,009,017 26,802,034 26,649,152 26,599,200 26,609,929 26,609,878 26,561,148 26,442,357
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2017, 2016 and 2015:
(dollars in thousands)
2017
Year Ended December 31,
2016
2015
Net cash provided by operating activities .............................. $
Net cash used in investing activities .......................................
Net cash provided by financing activities ..............................
Effect of exchange rates on cash and cash equivalents ..........
Net increase (decrease) in cash and cash equivalents ............. $
81,748 $
(123,975)
9,192
947
(32,088) $
77,499 $
(60,755 )
5,315
(917 )
21,142 $
64,096
(63,594)
4,699
(877)
4,324
40
Sources of Liquidity
We finance our operations and capital expenditures through cash flow from operations. We had cash and cash
equivalents of $36.7 million as of December 31, 2017, a decrease of $32.1 million from December 31, 2016. The decrease
in our cash was due primarily to the acquisition of RAPID in November 2017. We had cash and cash equivalents of $68.8
million as of December 31, 2016, an increase of $21.1 million from December 31, 2015. The increase in our cash was due
primarily to cash generated through operations and, to a lesser extent, exercises of stock options and purchases through our
employee stock purchase plan, which were partially offset by investing activity. We had cash and cash equivalents of $47.7
million as of December 31, 2015, an increase of $4.3 million from December 31, 2014. The increase in our cash was due
primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment
activity.
As of December 31, 2017, the amount of cash and cash equivalents held by foreign subsidiaries was $18.4 million.
The Tax Cuts and Jobs Act imposes a transition tax on foreign earnings previously treated as permanently reinvested, resulting
in an increase to our U.S. tax liability. However, our intent is to continue to permanently reinvest these funds outside the U.S.
and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We believe that our
existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital
expenditure requirements for at least the next 12 months.
Cash Flows from Operating Activities
Cash flow from operating activities of $81.8 million during 2017 primarily consisted of net income of $51.8 million,
adjusted for certain non-cash items, including depreciation and amortization of $18.5 million, stock-based compensation
expense of $8.6 million and changes in operating assets and liabilities and other items totaling $2.9 million. The cash flow
from operating activities during 2017 compared to 2016 increased $4.2 million due to increases in net income of $9.0 million,
increases in stock-based compensation expense of $1.8 million driven by an increased level of equity grants to employees
and increases in depreciation and amortization of $1.0 million driven by an increase in capital investments. These increases
were partially offset by decreases to deferred taxes of $1.6 million, amortization of held-to-maturity securities of $0.1 million
and changes in operating assets and liabilities of $5.9 million.
Cash flow from operating activities of $77.5 million during 2016 primarily consisted of net income of $42.7 million,
adjusted for certain non-cash items, including depreciation and amortization of $17.5 million, stock-based compensation
expense of $6.8 million, deferred taxes of $2.8 million, loss on impairment of assets of $0.5 million and amortization of held-
to-maturity securities of $1.2 million. The cash flow from operating activities during 2016 compared to 2015 increased $13.4
million due to changes in operating assets and liabilities of $14.0 million, increases in depreciation and amortization of $3.4
million driven by an increase in capital investments, stock-based compensation expense of $0.7 million driven by an increased
level of equity grants to employees, loss on impairment of assets of $0.5 million driven by the decision to exit certain product
lines, and a $0.3 million of gain from the Alphaform acquisition in 2015 that did not recur. These increases were partially
offset by a decrease in net income of $3.8 million, a decrease in deferred taxes of $0.1 million, a decrease in amortization of
held-to-maturity securities of $0.1 million, as well as other adjustments of $1.5 million primarily related to unrealized gains
on the translation of foreign currency denominated cash.
Cash flow from operating activities of $64.1 million during 2015 primarily consisted of net income of $46.5 million,
adjusted for certain non-cash items, including depreciation and amortization of $14.1 million and stock-based compensation
expense of $6.1 million. The cash flow from operating activities during 2015 compared to 2014 increased $2.4 million due
to increases in net income of $4.9 million, depreciation and amortization of $3.0 million, deferred taxes of $4.7 million and
stock-based compensation expense of $1.3 million, which were partially offset by a gain on acquisition of $0.3 million 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 Flows from Investing Activities
Cash used in investing activities was $123.9 million for the year ended December 31, 2017, consisting of $110.5
million for the purchase of RAPID, $32.6 million for the purchase of property and equipment primarily to expand our
production capacity, $20.0 million for the purchase of marketable securities and $8.8 million for the purchases of other assets
and investments, which were partially offset by $48.0 million in proceeds from maturities and call redemption of marketable
securities.
Cash used in investing activities was $60.8 million for the year ended December 31, 2016, consisting of $33.6
million for the purchase of property and equipment primarily to expand our production capacity, and $89.3 million for the
41
purchase of marketable securities, which were partially offset by $62.1 million in proceeds from maturities and call
redemption of marketable securities.
Cash used in investing activities was $63.6 million for the year ended December 31, 2015, consisting of $44.4
million for the purchase of property and equipment primarily to expand our production capacity, $5.0 million for the payments
on business acquisitions and $66.4 million for the purchase of marketable securities, which were partially offset by $52.2
million in proceeds from maturities and call redemption of marketable securities.
Cash Flows from Financing Activities
Cash provided by financing activities was $9.2 million for the year ended December 31, 2017, consisting of $5.0
million in short-term debt obligations and $8.6 million in proceeds from exercises of stock options, partially offset by $4.4
million for repurchases of common stock.
Cash provided by financing activities was $5.3 million for the year ended December 31, 2016, consisting of $5.7
million in proceeds from exercises of stock options, partially offset by $0.4 million for payments of acquisition-related
contingent consideration.
Cash provided by financing activities was $4.7 million for the year ended December 31, 2015, consisting of $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.
Operating and Capital Expenditure Requirements
We believe, based on our current operating plan, that our cash balances and cash generated through operations and
interest income will be sufficient to meet our anticipated cash requirements through at least the next 12 months. From time
to time we may seek to sell equity or convertible debt securities or enter into credit facilities. The sale of equity and convertible
debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt
securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common
stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our
currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all.
Our future capital requirements will depend on many factors, including the following:
the revenue growth in Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines;
costs of operations, including costs relating to expansion and growth;
the emergence of competing or complementary technological developments;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights,
or participating in litigation-related activities; and
the acquisition of businesses, products and technologies, although we currently have no commitments or
agreements relating to any of these types of transactions.
•
•
•
•
•
Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We
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.
42
Contractual Obligations
As of December 31, 2017, our contractual obligations and the effect such obligations are expected to have on our
liquidity and cash flows in future periods were as follows:
(in thousands)
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Payment Due by Period
Operating leases ................................ $
Total .................................................. $
12,965 $
12,965 $
4,322 $
4,322 $
4,534 $
4,534 $
3,923 $
3,923 $
186
186
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 manufacturing and office facilities located in Germany and Finland; and our Japan facility.
Financing Arrangements
The following table summarizes our financing arrangements as of December 31, 2017 and 2016:
(in thousands)
December 31,
2017
2016
Revolving Credit Facility, with interest rates from 2.50% to 2.56%, due at maturity in
November 2019 ............................................................................................................ $
Total Financing Obligations ............................................................................................ $
5,000 $
5,000 $
-
-
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.
43
Revenue Recognition
We recognize revenue in accordance with ASC 605, Revenue Recognition, which states that revenue is realized or
realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery
has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is
reasonably assured.
Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our
Injection Molding, CNC Machining, 3D Printing, Sheet Metal and Other product lines.
As of January 1, 2018, the Company has adopted ASC 606, Revenue from Contracts with Customers, using the
modified retrospective approach. The Company manufactures parts that have no alternative use to the Company (since the
parts are custom made to specific customer orders), and the Company believes for certain customers there is a legally
enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts
that meet these two criteria, the Company will recognize revenue over time.
Goodwill
We recognize goodwill in accordance with ASC 350, 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, 2017 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
independent parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on
a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances
indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when
the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. As of December 31,
2017 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 of stock options is estimated from the vesting period of the award and represents the weighted average period
that our stock options are expected to be outstanding. We estimated the volatility of our stock price based on the historic
volatility of our common stock. We have never paid and do not anticipate paying any cash dividends in the foreseeable future
and, therefore, we use an expected dividend yield of zero in the option pricing model. We account for forfeitures as they
occur.
44
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,
2016
2017
2015
Risk-free interest rate ................................................................... 2.24 - 2.36% 1.53 - 2.68% 1.69 - 1.77%
Expected life (years) ....................................................................
Expected volatility ....................................................................... 42.68 - 44.68% 44.38 - 45.93% 46.80 - 47.23%
Expected dividend yield ...............................................................
Weighted average grant date fair value ........................................
0%
$32.26
0%
$26.61
0%
$32.42
5.50 - 6.50
6.50
6.50
Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares
of our common stock during each offering period at a discount through payroll deductions of up to 15% of their eligible
compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period,
and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of
our common stock on the first trading day of the offering period or on the last trading day of the offering period. We determine
the fair value stock-based compensation related to our ESPP in accordance with ASC 718 using the component measurement
approach and the Black-Scholes standard option pricing model.
The fair value of each offering period was estimated using the Black-Scholes option pricing model with the
following assumptions:
Year ended December 31,
2016
2017
2015
Risk-free interest rate ................................................................... 0.97 - 1.48% 0.56 - 0.59%
Expected life (months) .................................................................
Expected volatility ....................................................................... 24.49 - 34.51% 39.51 - 49.13% 29.41 - 37.64%
Expected dividend yield ...............................................................
0.08 - 0.39%
0.00%
6.00
6.00
6.00
0%
0%
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 relating to stock options, restricted stock awards and our ESPP of $8.6 million,
$6.8 million and $6.1 million during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31,
2017, we had $3.8 million of unrecognized stock-based compensation costs related to unvested stock options that are expected
to be recognized over a weighted average period of 3.3 years. We issued options to purchase 60,100, 117,480 and 110,335
shares of our common stock in 2017, 2016 and 2015, 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.
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
45
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 $4.6 million as of December 31, 2017.
The effective tax rate decreased by 3.0% for the year ended December 31, 2017 when compared to 2016 primarily
due to the impact of tax reform. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces
the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The reduction to the
U.S. tax rate resulted in revaluing deferred tax liabilities which provided a tax benefit of $4.2 million. At December 31, 2017,
we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a reasonable
estimate on the effects of the transition tax and recognized a provisional amount of $2.4 million which is included as a
component of income tax expense from continuing operations. The foreign tax effects of the transition tax is based on our
total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed
our calculation of the total post-1986 E&P. Furthermore, the transition tax is based in part on the amount of those earnings
held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P
previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional
income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any
additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign
operations.
Recently adopted accounting pronouncements
During the first quarter of 2017, the Company adopted the Financial Accounting Standards Board (FASB)
Accounting Standards Update (ASU) 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify
several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes,
forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. As a result of the
adoption, the amount in excess tax benefits from stock-based compensation is recorded in our provision for income taxes.
For the three and twelve months ended December 31, 2017, the amount recorded in the provision for income taxes was $0.4
million and $0.7 million, respectively. Historically, these amounts were recorded as additional paid-in capital as required by
the accounting pronouncements in force during the periods presented. In addition, for each period presented, cash flows
related to excess tax benefits are now classified as an operating activity along with other income tax cash flows. Retrospective
application of the cash flow presentation requirements resulted in an increase to net cash provided by operations and a
decrease to net cash provided by financing activities of $2.5 million and $5.5 million for the twelve months ended December
31, 2016 and 2015, respectively.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which is intended to clarify the definition
of a business to assist with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or
businesses. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim
periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance
effective October 1, 2017. The impact on its consolidated financial statements is not material.
Recently issued accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is a
comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or
services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those
goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application
methods.
46
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. As of January 1, 2018, the Company has adopted the new
revenue standard using the modified retrospective approach. The Company manufactures parts that have no alternative use
to the Company (since the parts are custom made to specific customer orders), and the Company believes for certain
customers there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For
those manufactured parts that meet these two criteria, the Company will recognize revenue over time. The expected transition
adjustment to be recorded is an increase to the Company’s retained earnings balance on January 1, 2018 of $1.5 million.
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the balance sheet recognition of lease
assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance
will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years
with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its
consolidated financial statements, but does not expect the impact to be material because the Company owns a majority of its
buildings and significant assets.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which is intended to reduce diversity in
how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance
will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years
with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance on its
consolidated financial statements, but does not expect the impact to be material.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify
the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after
December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating
the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be
material.
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.
47
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 assessed by estimating the change in results of operations or financial position resulting from a
hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material
impact on our financial position, but could have a material impact on our results of operations. We recognized foreign
currency gains of $0.4 million and $1.4 million for the year ended December 31, 2017 and 2016, respectively and foreign
currency losses of $0.5 million the year ended December 31, 2015.
48
Item 8. Financial Statements and Supplementary Data
Proto Labs, Inc.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm ........................................................................................ 50
Consolidated Balance Sheets at December 31, 2017 and 2016 ...................................................................................... 52
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 ............ 53
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015 ................. 54
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 ............................... 55
Notes to Consolidated Financial Statements .................................................................................................................. 56
Page
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Proto Labs, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. (the Company) as of December 31, 2017
and 2016, the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2017, 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)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Minneapolis, Minnesota
February 23, 2018
50
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Proto Labs, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Proto Labs, Inc.’s internal control over financial reporting as of December 31, 2017, 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). In our opinion, Proto Labs, Inc. (the Company) maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO
criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include
the internal controls of Rapid Manufacturing Group, LLC, which is included in the 2017 consolidated financial statements
of the Company and constituted 3% of total assets as of December 31, 2017 and 1% of revenues for the year then ended. Our
audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control
over financial reporting of Rapid Manufacturing Group, LLC.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Proto Labs, Inc. as of December 31, 2017 and 2016, the related consolidated
statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and our report dated February 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
the effectiveness of
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of
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 are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
internal control over financial reporting
included
in
We conducted our audit in accordance with the standards of the PCAOB. 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 audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 23, 2018
51
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 $757 and $442 as
of December 31, 2017 and December 31, 2016, respectively ...............................
Inventory ...................................................................................................................
Prepaid expenses and other current assets .................................................................
Income taxes receivable ............................................................................................
Total current assets.............................................................................................
Property and equipment, net .............................................................................................
Goodwill ...........................................................................................................................
Other intangible assets, net ...............................................................................................
Long-term marketable securities ......................................................................................
Other long-term assets ......................................................................................................
Total assets ......................................................................................................... $
Liabilities and shareholders' equity
Current liabilities
Accounts payable ...................................................................................................... $
Accrued compensation ..............................................................................................
Accrued liabilities and other .....................................................................................
Short-term debt obligations .......................................................................................
Income taxes payable ................................................................................................
Total current liabilities .......................................................................................
Long-term income taxes payable ......................................................................................
Long-term deferred tax liabilities .....................................................................................
Other long-term liabilities ................................................................................................
Total liabilities ...................................................................................................
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and
outstanding 0 shares as of December 31, 2017 and December 31, 2016,
respectively ............................................................................................................
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and
outstanding 26,828,651 and 26,504,868 shares as of December 31, 2017 and
December 31, 2016, respectively ...........................................................................
Additional paid-in capital ..........................................................................................
Retained earnings ......................................................................................................
Accumulated other comprehensive loss ....................................................................
Total shareholders' equity ..................................................................................
Total liabilities and shareholders' equity ............................................................ $
December 31,
2017
2016
36,707 $
57,424
51,503
11,271
6,267
1,832
165,004
166,440
128,504
19,084
37,034
2,672
518,738 $
15,876 $
12,100
8,408
5,000
2,371
43,755
2,181
6,966
4,621
57,523
68,795
39,477
34,060
9,310
5,697
445
157,784
139,474
28,916
2,655
84,479
933
414,241
11,322
7,670
4,435
-
-
23,427
-
7,003
3,978
34,408
-
-
27
241,725
224,697
(5,234)
461,215
518,738 $
26
213,857
176,703
(10,753)
379,833
414,241
The accompanying notes are an integral part of these consolidated financial statements.
52
Proto Labs, Inc.
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
Year Ended December 31,
2016
2017
2015
Statements of Operations:
Revenue .......................................................................................... $
Cost of revenue ...............................................................................
Gross profit .....................................................................................
Operating expenses ........................................................................
Marketing and sales .................................................................
Research and development ......................................................
General and administrative ......................................................
Total operating expenses .....................................................
Income from operations ..................................................................
Other income, net ...........................................................................
Income before income taxes ...........................................................
Provision for income taxes .............................................................
Net income ..................................................................................... $
344,490 $
150,648
193,842
56,856
23,560
41,200
121,616
72,226
2,209
74,435
22,657
51,778 $
298,055 $
131,118
166,937
46,131
22,388
36,651
105,170
61,767
2,454
64,221
21,514
42,707 $
264,106
109,703
154,403
39,188
18,350
29,716
87,254
67,149
712
67,861
21,347
46,514
Net income per share:
Basic ........................................................................................ $
Diluted ..................................................................................... $
1.94 $
1.93 $
1.62 $
1.61 $
1.79
1.77
Shares used to compute net income per share:
Basic ........................................................................................
Diluted .....................................................................................
26,647,610
26,845,071
26,365,173
26,564,639
26,005,858
26,320,284
Other Comprehensive Income (Loss), net of tax
Foreign currency translation adjustments ....................................... $
Comprehensive income .................................................................. $
5,519 $
57,297 $
(5,541) $
37,166 $
(2,283)
44,231
The accompanying notes are an integral part of these consolidated financial statements.
53
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.............
Common shares issued for
RAPID acquisition ................
Stock-based compensation
expense ..................................
Repurchases of Common Stock
Net income ................................
Other comprehensive income
Foreign currency translation
adjustment ..........................
Comprehensive income.............
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, 2015 ........ 25,838,110
26
180,960
87,482
(2,929)
265,539
Common shares issued on
exercise of options and other .
362,608
-
6,254
-
-
-
-
(2,283)
Balance at December 31, 2015 ... 26,200,718 $
26 $ 198,835 $ 133,996 $
(5,212) $
Common shares issued on
exercise of options and other .
304,150
-
5,715
-
-
-
-
-
5,539
-
-
6,082
-
-
46,514
-
2,532
-
-
6,775
-
-
42,707
-
-
-
-
-
-
-
-
-
-
(5,541)
Balance at December 31, 2016 ... 26,504,868 $
26 $ 213,857 $ 176,703 $
(10,753) $
Common shares issued on
exercise of options and other .
283,449
118,140
-
(77,806)
-
1
1
8,603
11,335
-
-
-
(1)
-
8,558
(628)
-
-
(3,784)
51,778
-
-
-
-
-
-
-
-
5,519
Balance at December 31, 2017 ... 26,828,651 $
27 $ 241,725 $ 224,697 $
(5,234) $
The accompanying notes are an integral part of these consolidated financial statements.
54
-
6,254
-
5,539
-
-
6,082
46,514
(2,283 )
44,231
327,645
-
5,715
-
2,532
-
-
6,775
42,707
(5,541 )
37,166
379,833
8,604
11,336
8,558
(4,413 )
51,778
5,519
57,297
461,215
Proto Labs, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2016
2017
2015
51,778 $
42,707 $
46,514
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 .............................................................
Loss on impairment of assets ......................................
Gain on acquisition .....................................................
Amortization of held-to-maturity securities ................
Other ...........................................................................
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable .............................................
Inventories ...........................................................
Prepaid expenses and other ..................................
Income taxes ........................................................
Accounts payable .................................................
Accrued liabilities and other ................................
Net cash provided by operating activities ..........................
18,474
8,558
1,174
513
-
1,063
(153)
(9,933)
(985)
(691)
1,646
3,176
7,128
81,748
Investing activities
Purchases of property and equipment ................................
Cash used for acquisitions, net of cash acquired ................
Purchases of other assets and investments .........................
Purchases of marketable securities .....................................
Proceeds from maturities of marketable securities .............
Net cash used in investing activities ...................................
(32,635)
(110,533)
(8,742)
(20,037)
47,972
(123,975)
Financing activities
Payments on debt ...............................................................
Proceeds from issuance of debt ..........................................
Acquisition-related contingent consideration .....................
Repurchases of common stock ...........................................
Proceeds from exercises of stock options and other ...........
Net cash provided by financing activities ..........................
Effect of exchange rate changes on cash and cash
equivalents ......................................................................
Net (decrease) increase in cash and cash equivalents ...........
Cash and cash equivalents, beginning of period ...................
Cash and cash equivalents, end of period .............................. $
-
5,000
-
(4,410)
8,602
9,192
947
(32,088)
68,795
36,707 $
17,485
6,775
2,780
455
-
1,173
(1,541)
900
136
(1,312)
8,207
(1,116)
850
77,499
(33,616)
-
-
(89,315)
62,176
(60,755)
-
-
(400)
-
5,715
5,315
(917)
21,142
47,653
68,795 $
14,126
6,082
2,837
-
(344)
1,234
-
(11,371)
(2,097)
(2,047)
(2,310)
5,781
5,691
64,096
(44,362)
(5,032)
-
(66,393)
52,193
(63,594)
(152)
-
(1,400)
-
6,251
4,699
(877)
4,324
43,329
47,653
Supplemental cash flow disclosure
Cash paid for interest ......................................................... $
Cash paid for taxes ............................................................. $
19 $
19,113 $
1 $
9,802 $
5
20,330
The accompanying notes are an integral part of these consolidated financial statements.
55
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 1 — Nature of Business
Organization and business
Proto Labs, Inc. and its subsidiaries (Proto Labs, the Company, we, us, or our) is an e-commerce driven digital
manufacturer of quick-turn, on-demand injection-molded, computer numerical control (CNC) machined, 3D-printed and
sheet metal-fabricated custom parts for prototyping and short-run production. The Company’s customers are product
developers and engineers throughout the world who require a faster and less expensive way to obtain low volumes of parts.
The Company’s proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally
required to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the
Company over the Internet. The Company targets its product lines to the millions of product developers and engineers who
use three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets.
The Company has established operations in the United States, Europe and Japan, which the Company believes are among the
largest geographic markets where these product developers and engineers are located. The Company’s primary manufacturing
product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. Proto Labs, Inc. is located
in Maple Plain, Minnesota. The Company’s subsidiaries are:
Name
PL-US International LLC ......................................................................................................
Rapid Manufacturing Group LLC .........................................................................................
Rapid Sheet Metal LLC .........................................................................................................
NH Rapid Machining LLC ....................................................................................................
Rapid Wire and Cable LLC ...................................................................................................
Proto Labs Ltd. ......................................................................................................................
PL Euro Services Ltd. ............................................................................................................
PL International UK LLP ......................................................................................................
PL International Holdings, UK, Ltd. .....................................................................................
Proto Labs Distribution, Ltd. .................................................................................................
PL DE Holding GmbH ..........................................................................................................
Proto Labs GmbH ..................................................................................................................
Proto Labs Eschenlohe GmbH ..............................................................................................
PL Finland Oy .......................................................................................................................
Proto Labs AB .......................................................................................................................
Proto Labs, G.K. ....................................................................................................................
Location
United States
United States
United States
United States
United States
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 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.
56
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash and other investments, 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. As of each balance
sheet date, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a
combination of specific customer circumstances and credit conditions taking into account the history of write-offs and
collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice.
Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously
written off are recorded when received.
Inventory
Inventory consists primarily of raw materials, which are recorded at the lower of 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 asset is put into
use.
57
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The Company follows ASC 350-40, Internal-Use Software, in accounting for internally developed software. As of
December 31, 2017, $4.9 million of external software development costs were capitalized. As of December 31, 2016 and
2015, all internal use software projects were in the post-implementation/operation stage and therefore, no software
development costs were capitalized.
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
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.
During the fourth quarter of 2016, the Company changed the date of the annual impairment test from December 31
to October 1. The change was made to more closely align the impairment testing date with the Company’s forecasting process.
This change in method of applying an accounting principal was not material.
Other Intangible Assets
Other intangible assets include internally developed software, customer relationships and other intangible assets
acquired from other independent parties. Other intangible assets with a definite life are amortized over a period ranging from
two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events
or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is
recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. The
amount of the impairment loss recorded is calculated by the excess of the asset’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 Injection Molding, CNC Machining, 3D Printing and Sheet
Metal product lines. Freight billed to customers is included in revenues, and all freight expenses paid by the Company are
included in cost of revenue.
58
Proto Labs, Inc.
Notes to Consolidated Financial Statements
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 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 may 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.
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 accounts
for forfeitures as they occur. Ultimately, the total expense recognized over the vesting period will only be for those awards
that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the awards vest early in
the event of a change in control.
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 $10.7 million, $10.5 million and $10.0 million for the
years ended December 31, 2017, 2016 and 2015, 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.
Research and development costs were approximately $23.6 million, $22.4 million and $18.4 million for the years ended
December 31, 2017, 2016 and 2015, 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.
59
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Business combinations
The Company accounts for business combinations in accordance with ASC 805, Business Combinations (ASC 805).
On November 30, 2017, the Company acquired RAPID for $121.8 million, consisting of $110.5 million in cash and $11.3
million in the Company’s common stock.
Recently adopted accounting pronouncements
During the first quarter of 2017, the Company adopted the Financial Accounting Standards Board (FASB)
Accounting Standards Update (ASU) 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify
several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes,
forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. As a result of the
adoption, the amount in excess tax benefits from stock-based compensation is recorded in our provision for income taxes.
For the three and twelve months ended December 31, 2017, the amount recorded in the provision for income taxes was $0.4
million and $0.7 million, respectively. Historically, these amounts were recorded as additional paid-in capital as required by
the accounting pronouncements in force during the periods presented. In addition, for each period presented, cash flows
related to excess tax benefits are now classified as an operating activity along with other income tax cash flows. Retrospective
application of the cash flow presentation requirements resulted in an increase to net cash provided by operations and a
decrease to net cash provided by financing activities of $2.5 million and $5.5 million for the twelve months ended December
31, 2016 and 2015, respectively.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which is intended to clarify the definition
of a business to assist with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or
businesses. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim
periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance
effective October 1, 2017. The impact on its consolidated financial statements is not material.
Recently issued accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is a
comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or
services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those
goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application
methods.
On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December
15, 2017 for annual reporting periods beginning after that date. As of January 1, 2018, the Company has adopted the new
revenue standard using the modified retrospective approach. The Company manufactures parts that have no alternative use
to the Company (since the parts are custom made to specific customer orders), and the Company believes for certain
customers there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For
those manufactured parts that meet these two criteria, the Company will recognize revenue over time. The expected transition
adjustment to be recorded is an increase to the Company’s retained earnings balance on January 1, 2018 of $1.5 million.
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the balance sheet recognition of lease
assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance
will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years
with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its
consolidated financial statements, but does not expect the impact to be material because the Company owns a majority of its
buildings and significant assets.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which is intended to reduce diversity in
how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance
will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years
with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance on its
consolidated financial statements, but does not expect the impact to be material.
60
Proto Labs, Inc.
Notes to Consolidated Financial Statements
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify
the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after
December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating
the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be
material.
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)
2017
Year Ended December 31,
2016
2015
Net Income ........................................................................... $
51,778 $
42,707 $
46,514
Basic - weighted-average shares outstanding: ......................
Effect of dilutive securities:
Employee stock options, restricted stock and other ......
Diluted - weighted-average shares outstanding: ...................
Net income per share attributable to common shareholders:
Basic .............................................................................. $
Diluted ........................................................................... $
26,647,610
26,365,173
26,005,858
197,461
26,845,071
199,466
26,564,639
314,426
26,320,284
1.94 $
1.93 $
1.62 $
1.61 $
1.79
1.77
Note 4 – Business Combinations
On November 30, 2017, the Company acquired Rapid Manufacturing Group, LLC (“RAPID”) for $121.8 million,
consisting of $110.5 million in cash (net of cash acquired) and $11.3 million in the Company’s common stock. The operations
of RAPID will be integrated into the operations of the Company.
RAPID is a New Hampshire-based custom parts supplier specializing in quick-turn sheet metal fabrication and CNC
machining. With the acquisition, the Company will be able to offer its customers another quick-turn manufacturing service
while expanding its CNC machining capabilities.
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805.
The fair value of the consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted
in goodwill of $99.6 million. The goodwill primarily relates to synergies resulting from the acquisition and is deductible for
tax purposes over a 15-year period.
61
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The RAPID amortizable intangible assets were valued as of the acquisition date and were deemed to have a
weighted-average useful life of 5.5 years. The customer relationships were valued at $7.5 million based on the Multi-Period
Excess Earnings Method and are amortized over 6.0 years. The trade names were valued at $1.1 million based on the Relief-
from-Royalty Method and are amortized over 2.0 years. The non-competition agreement was valued at $0.1 million based on
the Discounted Cash Flow method and will be amortized over 5 years. The allocation of the purchase price to assets acquired
and liabilities assumed is as follows:
(in thousands)
Assets acquired:
Current assets .......................................................................................................................................... $
Goodwill ..................................................................................................................................................
Other intangible assets.............................................................................................................................
Other long-term assets .............................................................................................................................
Total assets acquired ........................................................................................................................
Liabilities assumed:
Current liabilities .....................................................................................................................................
Other long-term liabilities .......................................................................................................................
Total liabilities assumed ...................................................................................................................
Net assets acquired ........................................................................................................................... $
Cash paid ................................................................................................................................................. $
Cash acquired ..........................................................................................................................................
Net cash consideration .....................................................................................................................
Equity portion of purchase price .............................................................................................................
Total purchase consideration ................................................................................................................... $
6,720
99,588
8,700
9,013
124,021
2,067
85
2,152
121,869
115,288
(4,755)
110,533
11,336
121,869
The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2017
acquisition of RAPID had occurred at the beginning of fiscal 2016. These performance results may not be indicative of the
actual results that would have occurred under the ownership and management of the Company.
(in thousands)
Revenue ........................................................................................................... $
Net income ......................................................................................................
(unaudited)
386,677 $
55,070
336,634
41,805
Year Ended December 31,
2016
2017
The unaudited pro forma net income for the year ended December 31, 2017 excludes transaction costs of
approximately $1.9 million and includes the increase in estimated depreciation expense of approximately $0.9 million and
the increase in estimated amortization expense of approximately $3.0 million. The unaudited pro forma net income for the
year ended December 31, 2016 includes the impact of new stock options and restricted stock units granted to employees of
approximately $0.2 million in connection with the acquisition, an increase in estimated depreciation expense of approximately
$0.6 million and the increase in estimated amortization expense of approximately $3.1 million. The pro forma net income for
the years ended December 31, 2017 and 2016 include the related tax effects of the adjustments. The pro forma information
has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are
estimates based on currently available information and actual amounts may differ materially from these estimates. They do
not reflect the effect of costs or synergies that would have been expected to result from the integration of the RAPID
acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have
resulted had the RAPID acquisition occurred on January 1, 2016. The Company’s 2017 Consolidated Statements of
Comprehensive Income include $3.6 million of revenue and $0.7 million of net loss related to RAPID. The net loss was
primarily driven by $1.1 million of bonus payments to RAPID employees as a result of the acquisition.
62
Proto Labs, Inc.
Notes to Consolidated Financial Statements
On October 1, 2015, the Company acquired certain assets 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. As of December 2016, the
operations of Alphaform have been integrated into the operations of the Company.
Alphaform was a leading service bureau headquartered in Feldkirchen (Munich), Germany and also had locations
in Eschenlohe, Germany; Rusko, Finland and Reading, UK. Alphaform produces high-quality parts using stereolithography
(SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies as well as injection molding
capabilities and other production processes. The revenue associated with these processes is reported under the 3D Printing,
Injection Molding and Other product lines. In the second quarter of 2016, the Company made the decision to exit the resin
resale business.
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 was accounted for under the acquisition method of accounting in accordance with ASC 805. Because
Alphaform was insolvent, the fair value of the assets purchased and liabilities assumed exceeded the fair value of
consideration paid, which resulted in a bargain purchase gain of $0.3 million. The bargain purchase gain was recorded in
Other Income, Net in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2015. The final
allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(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
Note 5 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:
(in thousands)
Goodwill
acquired
during
2016
Dec. 31,
2015
2016 Other
Dec. 31,
2016
Goodwill
acquired
during
2017
2017 Other
Dec. 31,
2017
United States ............................ $
Europe ......................................
Other ........................................
Total goodwill .......................... $
28,916 $
-
-
28,916 $
- $
-
-
- $
(4,869) $
4,239
630
- $
24,047 $
4,239
630
28,916 $
99,588 $
-
-
99,588 $
- $ 123,635
4,239
-
630
-
- $ 128,504
63
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Effective in the fourth quarter of 2016, the Company changed its reportable segments to be based upon geographic
regions, which also resulted in the revision of reporting units and the allocation of goodwill to the reportable segments. As
described in Note 4 – Business Combinations, the Company acquired RAPID in November 2017. The fair value of the
consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill in the
United States of $99.6 million.
Intangible assets other than goodwill for the years ended December 31, 2017 and 2016 were as follows:
Year Ended December 31, 2017
Year Ended December 31, 2016
Gross
Accumulated
Amortization Net
Gross
Accumulated
Amortization Net
Weighted
Average
Useful Life
Remaining
(in years)
Useful
Life
(in years)
(in thousands)
Intangible Assets
with finite lives:
Marketing assets... $
Non-compete
agreement .........
Trade secrets ........
Trade names .........
Internally
developed
software ............
Software
technology ........
Customer
930 $
(341) $
589 $
930 $
(248) $
682 10.0
270
250
1,080
680
8,229
(190)
(183)
-
80
67
1,080
190
250
-
(190) $
(133) $
-
- 2.0 - 5.0
5.0
2.0
117
-
(680)
-
680
(604) $
76
3.0
-
8,229
-
-
- 10.0
6.3
5.0
1.3
2.0
-
10.0
relationships ..... 10,070
(1,031)
9,039
2,530
(750) $
1,780 6.0 - 9.0
5.4
Total intangible
assets .................... $ 21,509 $
(2,425) $ 19,084 $
4,580 $
(1,925) $
2,655
Amortization expense for intangible assets was $0.5 million for the year ended December 31, 2017 and $0.7 million
for each of the years ended December 31, 2016 and 2015, respectively.
The Company acquired a software company in December 2017, which was accounted for as an asset acquisition and
resulted in an $8.2 million software technology intangible asset for the year ended December 31, 2017. The acquisition did
not meet the definition of a business under ASC 805. The asset acquisition included an additional $5.0 million in contingent
consideration to be recognized and paid upon completion of certain milestones over a 24 month period. The completion of
each milestone will result in additional value to the software technology intangible asset. We did not recognize any of the
contingent consideration for the year ended December 31, 2017 as the contingency was not resolved.
64
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)
2018 ............................................................................................................................................................... $
2019 ...............................................................................................................................................................
2020 ...............................................................................................................................................................
2021 ...............................................................................................................................................................
2022 ...............................................................................................................................................................
Thereafter ......................................................................................................................................................
Total estimated amortization expense ........................................................................................................... $
Estimated
Amortization
Expense
3,060
3,026
2,470
2,470
2,470
5,588
19,084
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, 2017 and 2016, respectively, consist of
money market mutual funds. The Company determines the fair value of these financial assets using Level I inputs.
The following tables summarizes financial assets as of December 31, 2017 and 2016 measured at fair value on a
recurring basis:
(in thousands)
Level 1
December 31, 2017
Level 2
Level 3
Level 1
December 31, 2016
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual
funds .......................... $
Total ............................. $
3,034 $
3,034 $
- $
- $
- $
- $
11,771 $
11,771 $
- $
- $
-
-
65
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 7 – Marketable Securities
The Company invests in short-term and long-term agency, municipal, corporate 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, 2017 and 2016 is as follows:
(in thousands)
December 31, 2017
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 ................................................... $
32,320 $
29,806
28,364
3,968
94,458 $
- $
-
-
-
- $
(199) $
(128)
(104)
(32)
(463) $
32,121
29,678
28,260
3,936
93,995
(in thousands)
December 31, 2016
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 ................................................... $
31,706 $
38,490
46,578
7,182
123,956 $
1 $
2
1
12
16 $
(141) $
(147)
(187)
(22)
(497) $
31,566
38,345
46,392
7,172
123,475
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.
66
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The December 31, 2017 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,
2017
Due in one year or less ................................................................................................................................ $
Due after one year through five years .........................................................................................................
Total marketable securities .......................................................................................................................... $
57,424
37,034
94,458
Note 8 – Property and Equipment
Property and equipment consists of the following:
(in thousands)
December 31,
2017
2016
Land............................................................................................................................. $
Buildings and improvements .......................................................................................
Machinery and equipment ...........................................................................................
Computer hardware and software ................................................................................
Leasehold improvements .............................................................................................
Construction in progress ..............................................................................................
Total ............................................................................................................................
Accumulated depreciation and amortization ...............................................................
Property and equipment, net ........................................................................................ $
8,910 $
49,921
148,535
17,634
6,634
8,988
240,622
(74,182)
166,440 $
8,805
48,467
114,729
15,053
6,688
3,491
197,233
(57,759)
139,474
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $18.0 million, $16.8 million and
$13.4 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,
2017
2016
Raw materials .............................................................................................................. $
Work in progress .........................................................................................................
Total inventory ............................................................................................................
Allowance for obsolescence ........................................................................................
Inventory, net of allowance ......................................................................................... $
9,767 $
1,998
11,765
(494)
11,271 $
8,057
1,531
9,588
(278)
9,310
67
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 10 – Financing Obligations
The Company’s debt consists of the following:
(in thousands)
December 31,
2017
2016
Revolving Credit Facility, with interest rates from 2.50% to 2.56%, due at maturity
in November 2019 ................................................................................................... $
Total Financing Obligations ........................................................................................ $
5,000 $
5,000 $
-
-
The Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association, as lender on November 27, 2017. The Credit Agreement provides the Company with a committed $30 million
unsecured revolving credit facility (the “Facility”), which includes a $5 million letter of credit sub-facility. The commitments
under the Facility will expire on November 30, 2019, and any loans outstanding on such date will mature and be payable on
such date. The Company’s obligations under the Credit Agreement are guaranteed by the Company’s domestic subsidiaries.
Loans under the Facility bear interest at a rate per annum equal to, at the election of the Company, either (i) a fluctuating rate
per annum equal to daily one month LIBOR plus 1%, or (ii) a fixed rate per annum equal to LIBOR for an interest period of
one, two or six months (as designated by the Company) plus 1%. In addition, the Company will pay a commitment fee on the
average daily unused amount of the Facility at a rate per annum equal to 0.15%.
Note 11 – Employee Benefit Plans
The Company maintains a 401(k) retirement plan that covers employees in the United States. Under the plan, a full-
time or regular part-time (over 20 hours/week) employee becomes a participant after completing three months of employment.
Employees may elect to contribute up to 50 percent of regular gross pay, subject to federal law limits on the dollar amount
that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions
and may make a discretionary contribution to the plan. Total employer contributions were approximately $1.9 million, $1.6
million and $1.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company also sponsors a defined contribution retirement plan that covers the employees in the United Kingdom.
Total employer contributions were approximately $0.3 million, $0.2 million and $0.2 million for the years ended December
31, 2017, 2016 and 2015, respectively.
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 but not
issued under the 2000 Plan were assumed by the 2012 Plan. No additional shares will be issued under the 2000 Plan. Under
the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock,
performance stock, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a
maximum term of ten years from the date of grant. The compensation committee of the board of directors may provide that
the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the
satisfaction of any continued service requirements, and the compensation committee will determine whether such measures
have been achieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally may not
be less than the fair market value of a share of our common stock on the date of the grant. Restricted stock is valued at fair
market value on the date of grant.
68
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable
number of shares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their
eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase
period, and at the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair
market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the
offering period. The Company determines the fair value stock-based compensation related to its ESPP in accordance with
ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.
Employees purchased 41,307 and 40,279 shares of common stock under the ESPP at an average exercise price of
$48.91 and $48.38 during 2017 and 2016, respectively. As of December 31, 2017, 1,244,007 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, stock price volatility and forfeiture
rates.
The expected term of stock options is estimated from the vesting period of the award and represents the weighted
average period that the Company's stock options are expected to be outstanding. The Company estimates the volatility of its
stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in
the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the
award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future
and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. The Company accounts for
forfeitures as they occur. 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, 2017, 2016
and 2015, respectively:
(in thousands)
2017
Year Ended December 31,
2016
2015
Stock options, restricted stock and other ........................... $
Employee stock purchase plan ..........................................
Total stock-based compensation expense .......................... $
7,954 $
604
8,558 $
6,177 $
598
6,775 $
Cost of revenue .................................................................. $
Operating expenses:
Marketing and sales ....................................................
Research and development .........................................
General and administrative .........................................
Total stock-based compensation expense .......................... $
970 $
691 $
1,429
1,091
5,068
8,558 $
977
1,396
3,711
6,775 $
5,580
502
6,082
513
1,074
1,285
3,210
6,082
69
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Stock Options
The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended
December 31, 2017, 2016 and 2015:
2017
Year Ended December 31,
2016
2015
Risk-free interest rate .....................................................
Expected life (years) .......................................................
Expected volatility .......................................................... 42.68 - 44.68%
Expected dividend yield .................................................
Weighted average grant date fair value ..........................
2.24 - 2.36%
6.50
0%
$32.26
1.53 - 2.68%
6.50
1.69 - 1.77%
5.50 - 6.50
44.38 - 45.93%
46.80 - 47.23%
0%
$26.61
0%
$32.42
The following table summarizes stock option activity and the weighted average exercise price for the years ended
December 31, 2017, 2016 and 2015:
Weighted-
Average
Stock Options Exercise Price
Options outstanding at January 1, 2015 ..........................................................................
Granted ........................................................................................................................
Exercised .....................................................................................................................
Cancelled .....................................................................................................................
Options outstanding at December 31, 2015 .....................................................................
Granted ........................................................................................................................
Exercised .....................................................................................................................
Cancelled .....................................................................................................................
Options outstanding at December 31, 2016 .....................................................................
Granted ........................................................................................................................
Exercised .....................................................................................................................
Cancelled .....................................................................................................................
Options outstanding at December 31, 2017 .....................................................................
998,987 $
110,335
(316,761)
(26,519)
766,042
117,480
(226,164)
(87,719)
569,639
60,100
(187,313)
(43,371)
399,055 $
26.49
67.36
14.36
51.72
36.52
57.99
16.65
61.41
45.00
69.06
35.93
61.02
51.13
Exercisable at December 31, 2017 ..................................................................................
239,482 $
42.08
The outstanding options 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, 2017, 2016 and 2015, was $7.0
million, $11.1 million and $18.6 million, respectively. The aggregate intrinsic value represents the cumulative difference
between the fair market value of the underlying common stock and the option exercise prices.
For options outstanding at December 31, 2017, the weighted-average remaining contractual term was 5.2 years and
the aggregate intrinsic value was $20.7 million. For options exercisable at December 31, 2017, the weighted-average
remaining contractual term was 3.2 years and the aggregate intrinsic value was $14.6 million. Refer to the table below for
additional information.
70
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at December 31, 2017:
Options Outstanding, Vested and
Expected to Vest
Options Exercisable
Range of
Exercise Prices
Number
Outstanding
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price ($)
Number
Exercisable
Weighted
Average
Exercise
Price ($)
$3.67 to $7.85 ....................................................................
$7.86 ..................................................................................
$7.87 to $31.43 ..................................................................
$31.44 to $47.15 ................................................................
$47.16 to $66.87 ................................................................
$66.88 to $96.20 ................................................................
6,000
53,100
47,788
7,816
179,032
105,319
1.33
1.44
4.03
1.76
6.23
6.29
$
5.56
7.86
26.68
47.08
58.35
74.69
6,000 $
53,100
47,788
5,390
78,874
48,330
5.56
7.86
26.68
47.08
58.83
71.57
The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive
income. As of December 31, 2017, there was $3.8 million of total unrecognized compensation cost related to unvested stock
options, which is expected to be recognized over a weighted average period of 3.3 years. The total fair value of options vested
was $2.8 million, $3.6 million and $2.8 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015:
Weighted-
Average
Grant Date
Restricted
Fair Value
Stock Awards Per Share
Restricted stock at January 1, 2015 .................................................................................
Granted ........................................................................................................................
Restrictions lapsed .......................................................................................................
Forfeited .......................................................................................................................
Restricted stock at December 31, 2015 ...........................................................................
Granted ........................................................................................................................
Restrictions lapsed .......................................................................................................
Forfeited .......................................................................................................................
Restricted stock at December 31, 2016 ...........................................................................
Granted ........................................................................................................................
Restrictions lapsed .......................................................................................................
Forfeited .......................................................................................................................
Restricted stock at December 31, 2017 ...........................................................................
76,574 $
68,580
(16,863)
(3,898)
124,393
161,555
(41,415)
(29,428)
215,105
210,744
(60,102)
(30,916)
334,831 $
69.27
68.89
69.25
72.14
68.97
59.37
67.78
63.23
62.78
63.70
63.60
61.99
63.29
71
Proto Labs, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2017, there was $17.5 million of unrecognized compensation expense related to non-vested
restricted stock, which is expected to be recognized over a weighted-average period of 3.8 years.
Performance Stock
Performance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0
percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance
period depending on the Company’s performance in the final year of the performance period and the award recipient’s
continued employment.
The following table summarizes performance stock activity for the years ended December 31, 2017, 2016 and 2015:
Weighted-
Average
Grant Date
Performance Fair Value
Stock Awards
Per Share
Performance stock at January 1, 2015 .........................................................................
Granted ....................................................................................................................
Restrictions lapsed ...................................................................................................
Forfeited ...................................................................................................................
Performance stock at December 31, 2015 ...................................................................
Granted ....................................................................................................................
Restrictions lapsed ...................................................................................................
Forfeited ...................................................................................................................
Performance stock at December 31, 2016 ...................................................................
Granted ....................................................................................................................
Restrictions lapsed ...................................................................................................
Forfeited ...................................................................................................................
Performance stock at December 31, 2017 ...................................................................
- $
-
-
-
-
-
-
-
-
25,707
-
-
25,707 $
-
-
-
-
-
-
-
-
-
58.35
-
-
58.35
As of December 31, 2017, there was $1.1 million of unrecognized compensation expense related to non-vested
performance stock, which is expected to be recognized over a weighted-average period of 2.1 years.
Employee Stock Purchase Plan
The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended
December 31, 2017, 2016 and 2015:
2017
Year ended December 31,
2016
2015
Risk-free interest rate ....................................................
Expected life (months) ..................................................
Expected volatility .........................................................
Expected dividend yield ................................................
0.97 - 1.48%
6.00
0.56 - 0.59%
6.00
0.08 - 0.39%
6.00
24.49 - 34.51% 39.51 - 49.13%
29.41 - 37.64%
0%
0%
0%
72
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Note 13 – Commitments
The Company leases property from third parties. The Company leases three of its U.S. facilities with terms expiring
at various times from 2018 to 2022. The Company also leases office space in the United Kingdom, France, Germany and
Italy with terms expiring at various times from 2018 to 2023. The Company leases an office and manufacturing space in
Japan, and the initial term expires in April 2023. The Company also leases office and manufacturing space in Germany and
Finland with terms expiring at various times from 2018 to 2022.
Future minimum commitments under non-cancelable leases at December 31, 2017, are as follows:
(in thousands)
Years Ending December 31,
2018 ........................................................................................................................................................... $
2019 ...........................................................................................................................................................
2020 ...........................................................................................................................................................
2021 ...........................................................................................................................................................
2022 ...........................................................................................................................................................
After 2022 .................................................................................................................................................
Total future minimum lease payments ...................................................................................................... $
Operating
Leases
4,322
2,508
2,026
1,975
1,948
186
12,965
Rental expense was approximately $3.0 million, $3.6 million and $1.4 million for the years ended December 31,
2017, 2016 and 2015, respectively.
The Company acquired a software company in December 2017, which was accounted for as an asset acquisition.
The asset acquisition included an additional $5.0 million in contingent consideration to be recognized and paid upon
completion of certain milestones over a 24-month period. The completion of each milestone will result in additional value to
the software technology intangible asset. We did not recognize any of the contingent consideration for the year ended
December 31, 2017 as the contingency was not resolved.
Note 14 – Accumulated Other Comprehensive Loss
Other comprehensive loss is comprised entirely of foreign currency translation adjustments. The following table
presents the changes in accumulated other comprehensive loss balances for the years ending December 31, 2017, 2016 and
2015, respectively:
(in thousands)
Year Ended December 31,
2016
2017
2015
Foreign currency translation adjustments ........................................
Balance at beginning of period ................................................. $
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other
comprehensive income (loss) ............................................
Net current-period other comprehensive income (loss) ...........
Balance at end of period ........................................................... $
(10,753) $
5,519
(5,212) $
(5,541)
-
5,519
(5,234) $
-
(5,541)
(10,753) $
(2,929)
(2,283)
-
(2,283)
(5,212)
73
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, 2017, 2016 and 2015, the Company recorded an income tax
provision of $22.7 million, $21.5 million and $21.3 million, respectively. The effective income tax rate for the years ended
December 31, 2017, 2016 and 2015 was 30.4 percent, 33.4 percent and 31.5 percent, respectively.
The effective tax rate decreased by 3.0% for the year ended December 31, 2017 when compared to 2016 primarily
due to the impact of tax reform. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces
the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The reduction to the
U.S. tax rate resulted in revaluing deferred tax liabilities which provided a tax benefit of $4.2 million. At December 31, 2017,
we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a reasonable
estimate on the effects of the transition tax and recognized a provisional amount of $2.4 million which is included as a
component of income tax expense from continuing operations. The foreign tax effects of the transition tax is based on our
total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed
our calculation of the total post-1986 E&P. Furthermore, the transition tax is based in part on the amount of those earnings
held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P
previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional
income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any
additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign
operations.
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,
2016
2015
2017
Domestic ...................................................................................... $
Foreign .........................................................................................
Total ............................................................................................. $
69,929 $
4,506
74,435 $
59,232 $
4,989
64,221 $
59,421
8,440
67,861
74
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Significant components of the provision for income taxes for the following periods are as follows:
(in thousands)
Current:
Year Ended December 31,
2016
2017
2015
Federal ................................................................................ $
State ....................................................................................
Foreign ...............................................................................
Deferred
Federal ................................................................................
State ....................................................................................
Foreign ...............................................................................
Valuation Allowance .................................................................
Total .......................................................................................... $
17,808 $
1,367
2,215
865
193
(1,918)
2,127
22,657 $
15,119 $
1,091
2,439
2,758
75
(1,960)
1,992
21,514 $
15,845
1,074
1,591
2,798
(38)
294
(217)
21,347
A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:
Year Ended December 31,
2016
2015
2017
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 ..............................................................................
Transition tax...............................................................................
Revaluation of deferred tax liability ............................................
Total ............................................................................................
35.0%
1.7
(0.6)
2.9
(2.2)
(1.9)
0.9
(2.5)
(0.4)
3.2
(5.7)
30.4%
35.0%
0.6
(0.8)
3.1
(2.2)
(2.8)
1.4
(1.8)
0.9
-
-
33.4%
35.0%
0.5
0.6
(0.3)
(2.9)
(1.8)
1.5
(1.4)
0.3
-
-
31.5%
As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, we have recorded a transition tax and
recognized a provisional amount of $2.4 million which is included as a component of our 2017 income tax expense from
continuing operations. In addition, we recorded a tax benefit of $4.2 million in 2017 resulting from the revaluation of our net
deferred tax liabilities utilizing the new U.S. federal corporate income tax rate.
75
Proto Labs, Inc.
Notes to Consolidated Financial Statements
Significant components of deferred tax assets and liabilities are as follows:
(in thousands)
Deferred tax assets:
December 31,
2017
2016
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 ...................................................................................... $
756 $
2,309
429
220
625
6,374
(6,633)
4,080
(9,528)
(1,518)
(11,046)
(6,966) $
857
3,226
612
169
983
4,333
(4,559)
5,621
(10,860)
(1,764)
(12,624)
(7,003)
The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries
as of December 31, 2017. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not
practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2017,
the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $26.5 million.
As of December 31, 2017, the Company had estimated net operating loss carry forwards of $21.9 million for tax
purposes. The net operating losses relate to operations in Japan and Germany. Japan losses can be carried forward for ten
years but are limited to 50 percent of taxable income. Germany net operating losses may be carried forward without any time
limitations but are limited to €1 million, plus 50 percent of taxable income exceeding €1 million. Japan net operating losses
begin to expire at various dates between 2018 and 2026. The Company’s Japan operations are taxed both by local authorities
and in the U.S. Accordingly, a portion of Japan net operating losses has been recognized as a benefit in the U.S.
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 $6.6 million and $4.6 million at December 31, 2017 and 2016, respectively, reduce the
carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient
positive evidence for recognition. The increase in the valuation allowance is primarily attributable to fluctuations in foreign
currency and the net operating losses incurred in Japan and Germany in 2017.
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 2013.
The Company has liabilities related to unrecognized tax benefits totaling $4.2 million and $3.8 million at December
31, 2017 and 2016, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The
liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company does
not anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Company recognizes
interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term
income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2017,
2016 and 2015.
76
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,
2017
2016
Balance at beginning of period ................................................................................ $
Additions for tax positions of current year ..............................................................
Additions for tax positions of prior years ................................................................
Decrease related to expiration of statutes of limitations ..........................................
Balance at period end .............................................................................................. $
3,796 $
831
48
(442 )
4,233 $
2,769
1,077
170
(220)
3,796
Note 16 – Litigation
From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary
course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not
believe it is a party to any litigation the outcome of which, if determined adversely, would individually or in the aggregate be
reasonably expected to have a material adverse effect on its business.
Note 17 – Segment Reporting
The Company’s reportable segments are based on the internal reporting used by the Company’s CEO, who is the
chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of
resources. The Company’s reportable segments are based upon geographic region, consisting of the United States and Europe.
The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and
general and administrative costs that are global in nature and that the Company does not allocate directly to its operating
segments.
Revenue in the United States is derived from Injection Molding, CNC Machining, 3D Printing and Sheet Metal
product lines. Revenue in Europe is derived from Injection Molding, CNC Machining, and 3D Printing product lines. Revenue
in Japan is derived from Injection Molding and CNC Machining product lines. Injection Molding revenue consists of sales
of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined customer
parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet
metal parts.
The accounting policies of the reportable segments are the same as those described in Note 2 – Summary of
Significant Accounting Policies. Intercompany transactions primarily relate to intercontinental activity and have been
eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income
relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not
allocated to business segments.
Revenue and income from operations by reportable segment are as follows:
(in thousands)
Revenue:
2017
Year Ended December 31,
2016
2015
United States ................................................................... $
Europe .............................................................................
Japan ...............................................................................
Total revenue ................................................................... $
263,086 $
70,154
11,250
344,490 $
223,930 $
63,365
10,760
298,055 $
208,018
47,433
8,655
264,106
77
Proto Labs, Inc.
Notes to Consolidated Financial Statements
(in thousands)
Income from Operations:
2017
Year Ended December 31,
2016
2015
United States .............................................................. $
Europe ........................................................................
Corporate Unallocated and Japan ...............................
Total income from operations .................................... $
103,136 $
12,846
(43,756)
72,226 $
89,308 $
11,657
(39,198)
61,767 $
86,450
13,304
(32,605)
67,149
Total long-lived assets, expenditures for additions to long-lived assets and depreciation and amortization expense
are as follows:
(in thousands)
Long-lived assets:
December 31,
December 31,
December 31,
2017
2016
2015
United States .............................................................. $
Europe ........................................................................
Japan ..........................................................................
Total long-lived assets ................................................ $
125,308 $
33,691
7,441
166,440 $
108,650 $
23,199
7,625
139,474 $
98,633
23,636
3,206
125,475
(in thousands)
Expenditures for additions to long-lived assets:
2017
Year Ended December 31,
2016
2015
United States .............................................................. $
Europe ........................................................................
Japan ..........................................................................
Total expenditures for additions to long-lived assets . $
20,370 $
11,704
561
32,635 $
21,190 $
5,954
6,472
33,616 $
32,560
10,396
1,406
44,362
(in thousands)
Depreciation and Amortization:
2017
Year Ended December 31,
2016
2015
United States .............................................................. $
Europe ........................................................................
Japan ..........................................................................
Total depreciation and amortization ........................... $
13,267 $
4,174
1,033
18,474 $
12,533 $
3,386
1,566
17,485 $
11,596
2,132
398
14,126
78
Proto Labs, Inc.
Notes to Consolidated Financial Statements
The Company’s revenue is derived primarily from its Injection Molding, CNC Machining, 3D Printing and Sheet
Metal product lines. Total revenue by product lines is as follows:
(in thousands)
Revenue:
2017
Year Ended December 31,
2016
2015
Injection Molding ......................................... $
CNC Machining ...........................................
3D Printing ...................................................
Sheet Metal ..................................................
Other Product ...............................................
Total revenue ............................................... $
194,432 $
103,739
43,329
1,767
1,223
344,490 $
175,974 $
81,407
37,847
-
2,827
298,055 $
163,387
74,368
25,132
-
1,219
264,106
Note 18 – Subsequent Events
None.
79
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 timeframes 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, 2017, the Company’s internal control over
financial reporting is effective. The Company’s registered public accounting firm’s attestation report on the Company’s
internal control over financial reporting is provided in Part II, Item 8 of this Annual Report on Form 10-K.
Management has excluded certain elements of RAPID from its assessment of internal control over financial
reporting as of December 31, 2017 given that the acquisition of RAPID was not consummated until November 2017.
Subsequent to the acquisition, RAPID maintained its revenue, inventory and payroll systems and processing through the
year ended December 31, 2017. Those elements of the acquired business’s internal control over financial reporting that
were not fully integrated into the Company’s existing internal control over financial reporting during 2017 have been
excluded from management’s assessment of the effectiveness of internal control over financial reporting. RAPID is a
wholly-owned subsidiary of the Company; its combined total assets and total revenues excluded from our assessment
represent approximately 3% and 1%, respectively, of the related consolidated financial statements amounts as of the year
ended December 31, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-
15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
80
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 2018 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 2018
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 2018 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 2018 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 2018 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 2018 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 2018 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.
81
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.
82
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.
SIGNATURE
Date: February 23, 2018
Date: February 23, 2018
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 23, 2018
/s/ Victoria M. Holt
Victoria M. Holt
Date: February 23, 2018
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:
Sven A. Wehrwein*
Directors:
Archie C. Black*
Sujeet Chand*
Rainer Gawlick*
John B. Goodman*
Donald G. Krantz*
*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 23, 2018
/s/ Victoria M. Holt
Victoria M. Holt
President and Chief Executive Officer
(Principal Executive Officer)
83
EXHIBIT INDEX
Exhibit Number
2.1(30)
Description of Exhibit
Membership Interest Purchase Agreement, dated November 16, 2017, by and among Proto Labs, Inc.,
Rapid Manufacturing Group, LLC and the members listed therein. (Certain schedules and exhibits have
been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule
and/or exhibit will be furnished to the Securities and Exchange Commission upon request.)
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
Second Amended and Restated By-Laws of Proto Labs, Inc, as amended through November 8, 2016.
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
Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan
Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan
Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan
Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan
Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and
Wells Fargo Bank, N.A.
Credit Agreement, dated November 27, 2017, by and among Proto Labs and Wells Fargo Bank, National
Association
Form of U.S. Severance Agreement
Form of UK Severance Agreement
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
Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.S. Employees)
Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.K. Employees)
Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (Directors)
Severance Agreement, dated December 18, 2014, by and between Proto Labs, Inc. and John A. Way
Form of Severance Agreement with Executive Officers
Form of Performance Stock Unit Agreement under 2012 Long-Term Incentive Plan
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
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
3.1(1)
3.2(27)
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)#
10.11(14)#
10.12(15)#
10.13(16)#
10.14(17)#
10.15(18)#
10.16(19)#
10.17(20)#
10.18(21)#
10.19(22)#
10.20(23)#
10.21(24)#
10.22(25)#
10.23(26)#
10.24(28)#
10.25(29)#
21.1
23.1
24.1
31.1
31.2
32.1*
101.INS**
101.SCH**
101.CAL**
101.DEF**
101.LAB**
101.PRE**
84
(1) Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745),
filed with the Commission on February 13, 2012.
(2) Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed with the Commission on November 8, 2016.
(3) Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745),
filed with the Commission on February 1, 2012.
(4) Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the Commission on November 3,
2015.
(5) Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(6) Incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(7) Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(8) Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(9) Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on February 13, 2012.
(10) Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 (File No. 333-179651),
filed with the Commission on February 23, 2012.
(11) Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(12) Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(13) Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(14) Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(15) Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(16) Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-175745),
filed with the Commission on July 25, 2011.
(17) Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A (File No. 333-
175745), filed with the Commission on October 26, 2011.
(18) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on December 1, 2017.
(19) Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K, filed with the Commission on March 1, 2013.
(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 10.1 to the Company’s Form 8-K, filed with the Commission on April 6, 2015.
(29) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on February 17, 2017.
(30) Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, filed with the Commission on November 21, 2017.
#
Indicates management contract or compensatory plan or arrangement.
* The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will
not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications
will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by
reference.
** Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
85
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BR743713-0318-10K