Proto Labs Annual Report 2019

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549________________ FORM 10-K (Mark One) ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019or ☐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) Minnesota41-1939628(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.) 5540 Pioneer Creek Drive Maple Plain, Minnesota55359(Address of principal executive offices)(Zip Code) (763) 479-3680(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, Par Value $0.001 Per SharePRLBNew 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 thepreceding 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 thepast 90 days. Yes ☒ No ☐ Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 ofthe Exchange Act. Large accelerated filer ☒Accelerated filer ☐ Non-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 revisedfinancial 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, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held bynon-affiliates of the Registrant was approximately $3.1 billion. As of February 14, 2020, there were 26,787,910 shares of the Registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement for its 2020 Annual Meeting of Shareholders are incorporated by reference to Part III of this Annual Report on Form 10-K. 2 Table of Contents PagePART IItem 1. Business 5Item 1A. Risk Factors 13Item 1B. Unresolved Staff Comments 26Item 2. Properties 26Item 3. Legal Proceedings 27Item 4. Mine Safety Disclosures 27 PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28Item 6. Selected Financial Data 30Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32Item 7A. Quantitative and Qualitative Disclosures About Market Risk 46Item 8. Financial Statements and Supplementary Data 47Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80Item 9A. Controls and Procedures 80Item 9B. Other Information 80 PART IIIItem 10. Directors, Executive Officers and Corporate Governance 81Item 11. Executive Compensation 81Item 12. Security Ownership of Certain Beneficial Owners and Management 81Item 13. Certain Relationships and Related Transactions, and Director Independence 81Item 14. Principal Accountant Fees and Services 81 PART IVItem 15. Exhibits and Financial Statement Schedules 82 3 Special Note Regarding Forward Looking Statements Statements contained in this Annual Report on Form 10-K regarding matters that are not historical or current facts are “forward-looking statements” within themeaning 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 ofthese 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 risksassociated with our business include: •the level of competition in our industry and our ability to compete; •our ability to respond to changes in our industry; •our ability to effectively grow our business and manage our growth; •our ability to continue to sell to existing and new customers; •our ability to meet product developers’ and engineers’ 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; •our ability to complete and successfully launch updates to our systems; •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-Kand uncertainties are detailed in this and other reports and filings with the Securities and Exchange Commission (SEC). Other unknown or unpredictable factors alsocould have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you shouldnot place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflectsubsequent events or circumstances.4 PART I Item 1. Business Overview Proto Labs, Inc. was incorporated in Minnesota in 1999. The terms “Proto Labs,” the “Company,” “we,” “us,” and “our” as used herein refer to the business andoperations 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-demandmanufacturing services at unprecedented speeds. Our automated quoting and manufacturing systems allow us to produce commercial-grade plastic, metal, and liquidsilicone rubber parts within days. We manufacture prototype and low volume production parts for companies worldwide, who are under increasing pressure to bringtheir finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metalfabrication to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled laborconventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over the Internet. We target our products to themillions 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 productdevelopers and engineers are located. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many customersand is the primary reason we have become a leading supplier of custom parts. We believe prototype and low volume 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 ofreasons, including: ●they need a prototype to confirm the form, fit and function of one or more components of a product under development; ●they need an initial supply of parts to support pilot production 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 partsas 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 therange 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 additionalmanufacturing 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 $264.1 million in 2015 to $458.7 million in 2019. Wehave grown our net income from $46.5 million in 2015 to $63.7 million in 2019. Our increases in revenue and income from operations can be attributed to expanding our customer base, broadening our parts envelope, and launching newmanufacturing 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; ●liquid silicon rubber (LSR) and lathe manufacturing processes that expanded the breadth and scope of our injection molding and CNC machining product linesin 2014; ●3D printing, including stereolithography (SL), selective laser sintering (SLS), and direct metal laser sintering (DMLS), through our acquisition of FineLinePrototyping, Inc. (FineLine) in 2014 and expanded through our acquisition of certain assets of Alphaform AG (Alphaform) in 2015; ●rapid overmolding technology in 2016 and insert molding technology in 2017, both of which expanded the breadth of our manufacturing capabilities in ourInjection Molding product line; ●PolyJet and Multi Jet Fusion (MJF) in 2017, which expanded the processes with which we produce 3D printed parts;5 ●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; ●expanded CNC machining capabilities for larger and more complex parts through our acquisition of RAPID in 2017; ●Carbon Digital Light Synthesis(TM) (DLS) in 2019, which further expanded the processes with which we produce 3D printed parts; and ●during 2018 and 2019, we have been working on enhancements to our e-commerce customer interface and back-end operations software. These enhancementsare expected to launch in 2020 and are designed to add value for our customers and support the growth of the business in the future. 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 ofthese product developers and engineers use 3D CAD software to create digital models representing their custom part designs that are then used to create physical partsfor 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 representationof a part, but these representations may not meet product developers’ and engineers’ requirements for material properties. As an alternative, injection molding, CNCmachining, 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 orplastic. For follow-on functional testing, market evaluation and production runs, parts are typically manufactured using injection molding, CNC machining and sheetmetal 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 ofmany 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 leadingsupplier of custom parts. Key elements of our solution include: Sophisticated Technology that Reduces Turnaround Time and Provides Consistency in Lead Time Our digital model is centered on our web-based interface and proprietary software, which automate many of the manual and time-consuming processes typicallyrequired to obtain custom parts from conventional suppliers. Our platform automates many aspects of the entire process from design submission throughmanufacturability analysis and feedback, quotation, order submission, mold design, tool path generation, mold or part manufacture and digital inspection. To utilize ourplatform, a prospective customer uploads a 3D CAD file of their required part through our website. Often within minutes of design submission, our software analyzes thedesign, assesses the manufacturability of the design and our ability to make the part, and returns a firm price quotation with any recommendations for designmodifications. Many of our customers find this analysis particularly helpful, as it diagnoses and prevents potential problems prior to manufacturing. We can alsoprovide 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 toinstantly receive an updated quotation. Once an order is received, our software automates much of the manual engineering and skilled labor that is normally required tomanufacture parts. As a result, in many cases we are able to quote orders in minutes and ship parts as soon as the same day ordered. Scale to Process Large Numbers of Unique Part Designs Our proprietary, highly scalable quoting technology addresses the manual processes conventionally involved in submitting a design, analyzing itsmanufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3D CAD part designsubmissions and provide feedback to our prospective product developer and engineer customers. In 2019 alone, we generated quotations for over 1,000,000 designsubmissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large numbers of unique designs and, combined withour manufacturing processes, efficiently and effectively manufacture high volumes of parts to meet the needs of product developers and engineers.6 Enhanced Customer Experience Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysis then quicklyanalyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides suggested design modifications to enhancemanufacturability, which is presented to the product developer or engineer in an interactive quotation containing a color-coded 3D representation of the part. Thisallows product developers and engineers to quickly determine the manufacturability of their parts, understand the cost and when they can be shipped. Our interactivequotations provide instant visibility into the impact of changing an order’s various parameters such as material, finish, quantity or shipping schedule. As a result, weprovide 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 ofour 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 developersand 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 andefficiently outsource their quick-turn custom parts manufacturing. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” 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 toproduce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially availableequipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable aluminummolds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Prototype quantities typically rangefrom 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 productline for additional quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being prepared, because theyneed 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 tofulfill 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 plasticand 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 combinesboth lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of thesemachines and a proprietary fixturing process. Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components forend-use applications. We offer competitive pricing at higher quantities, in addition to First Article Inspection (FAI) reporting, material certifications and additional in-house and outsourced finishing options, like anodizing and chromate plating. The CNC Machining product line is well suited to produce small quantities, typically in therange of 15 to 1,000 parts. 3D Printing Our 3D Printing product line includes SL, SLS, DMLS, MJF, PolyJet and Carbon DLS processes, which offers customers a wide-variety of high-quality, precisionrapid prototyping and low volume production. These processes create parts with a high level of accuracy, detail, strength and durability. Industrial 3D Printing is bestsuited for functional prototypes, complex designs and end-use applications. 3D Printing is well suited to produce small quantities, typically in the range of one toseveral hundred parts.7 Sheet Metal Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, providing customers with prototype and low-volumeproduction 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 3DCAD models uploaded by the product developer or engineer to fabricate rapid prototyping sheet metal or end-use production parts and assemblies. The Sheet Metalproduct 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 geometrythrough our website. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and support the creation of aninteractive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer or engineer,who can access the quotation, change a variety of order parameters and instantly see the effect on price before finalizing the order. Our proprietary software supportsthe 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 fromdesign submission. We ship our parts via small parcel common carriers on standard terms and conditions. Our other services have similar processes, but differ mainlydue to the nature of the manufacturing processes on which each service is based.8 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. Individualproduct developers and engineers typically make or influence the choice of vendor when sourcing custom parts. We believe a significant opportunity exists for us toleverage highly satisfied product developers and engineers to encourage others within the same organization to utilize our product lines. We have historically gained asignificant number of new customers through word-of-mouth referrals from other product developers and engineers, and combine these referrals with the efforts of ourmarketing 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 ourproducts. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies onwhich 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 andlaunched operations in Japan in 2009. For 2019, revenue earned in these markets represents approximately 22.0% of our total revenue. While we currently do not havespecific plans to expand our manufacturing into any particular geographic markets, we believe opportunities exist to serve the needs of product developers andengineers 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 customer-facing and back-end systems in order tofurther increase automation and meet the evolving needs of product developers and engineers worldwide. We believe product developers and engineers have come toexpect advanced web-based tools and a fully integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers andengineers 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 productdevelopers’ and engineers’ needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunity to cross-sellour existing product lines to our existing customer base. We regularly evaluate new manufacturing processes to offer product developers and engineers and introducesuch 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 fromus. We were founded with Injection Molding which represents 47.4% of our total revenue for the year ended December 31, 2019. Examples of new manufacturingservices we have added include CNC Machining, 3D Printing and Sheet Metal. Our CNC Machining product line was first introduced in the United States and Europe in2007, expanded to Japan in 2009, and further expanded in the United States through our acquisition of RAPID in November 2017. CNC Machining represents 33.9% ofour total revenue for the year ended December 31, 2019. 3D printing technologies were introduced through our acquisition of FineLine in April 2014. We furtherexpanded our 3D printing capabilities in October 2015 through our acquisition of Alphaform. Our 3D product line represents 13.4% of our total revenue for the yearended December 31, 2019. Our Sheet Metal product line was introduced through our acquisition of RAPID in November 2017 and represents 4.6% of total revenue forthe year ended December 31, 2019. We continue to expand our core product lines through product line extensions including liquid silicone rubber injection molding, lathe-turned parts, rapidovermolding, insert molding, PolyJet, MJF and Carbon DLS. We introduced liquid silicone rubber injection molding during 2014. In 2015, we introduced lathe-turnedproducts to expand our CNC product line. In 2016, we expanded the breadth of our manufacturing capabilities by adding rapid overmolding technology. In 2017, weadded 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 toaddress 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-useproduction parts, including First Article Inspection Reports and digital inspection reports. In 2019, we added Carbon DLS to provide a cost-effective productionsolution for geometric complexities that cannot be molded or otherwise fabricated. Enhance Customer Experience We serve nearly all our customers over the internet using our e-commerce, digital model. The majority of customers upload CAD files through our secure e-commerce platform to receive a quote, and ultimately, place an order. The order is then processed through our digital model that is connected by our systems. Having anindustry leading customer experience is important to our overall growth strategy. In 2019, and as we look to 2020, the Company is focused on Protolabs 2.0, an internalproject focused on our business systems designed to evolve the way we engage and serve our customers. Through development of our customer-facing and back-endsystems, Protolabs 2.0 will allow us to capitalize on the market opportunity and properly serve the long-term needs of our customers. We expect the long-term benefits ofthe project to be an improved customer experience, speed and scalability of the business, internal business insights and internal productivity. 9 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 anddevelopment 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 expandedthe 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. In2017, we launched PolyJet and MJF, which expanded our 3D Printing processes to support a broader range of our customers needs. Through our acquisition of RAPIDin November 2017, we added quick-turn and e-commerce-enabled Sheet Metal services to our portfolio and expanded our CNC Machining capabilities to support largerand more complex projects. In 2019, we added Carbon DLS to our 3D Printing processes, introduced precision color matching on Injection Molding parts and launchedproduction capabilities for metal 3D Printing. As we continue to expand the range of our existing process capabilities, we believe we will meet the needs of a broader setof product developers and engineers and consequently convert a higher number of quotation requests into orders. Marketing As a customer centric organization, we continue to evolve our go-to-market strategy. Our global marketing effort generates prospects for our sales teams andseeks 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 andsales 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 designguidelines and helpful tips, engineering white papers, educational webinars, quick videos, and a quarterly journal focused on important industry topics. We also providecomplimentary physical design aids to designers and engineers — as well as teachers and students — that highlight technical aspects of injection molding to helpcreate 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 — whetherprint, 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 ofour processes over alternate methods of custom parts manufacturing. We organize our sales team into complementary roles: business development, accountmanagement and strategic account management, with the former focused on selling to new customer companies within targeted market segments and the latter twofocused 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 needfor our products. We also have a team of customer service engineers who can support highly technical engineering discussions with product developers and engineersas 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 totalrevenue in 2019. Competition The market for custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. Our potential competitorsinclude: ●Other custom parts manufacturers. There are thousands of alternative manufacturing machine shops, injection molding suppliers, sheet metal fabricators,and 3D printing service bureaus and vendors worldwide. The size and scale of these businesses range from very small specialty shops to large, high-volumeproduction manufacturers. ●Captive in-house product manufacturing. Many larger companies undertaking product development have established additive rapid prototyping (3Dprinting), CNC machining, injection molding or sheet metal capabilities internally to support prototyping or manufacturing requirements of their productdevelopers and engineers. ●Brokers. There are an increasing number of digital brokers that provide product developers with a network of manufacturers, generally a subset of the othercustom parts manufacturers described above, that can offer a diverse range of capabilities, capacity, competitive pricing and desired lead times to meetcustomer demand. We believe that the key competitive factors in our industry include: ●Quality: dimensional accuracy, surface finish, material properties, color and cleanliness; ●Speed: turnaround time for quotations and parts;10 ●Reliability: greater than 97% on-time delivery with predictable lead times; ●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-processingprovided; ●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 ●Price: mold and part pricing, including total cost of ownership. 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 believethat 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, andgenerally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and more establishedcompanies with developed technological capabilities, may begin to focus on low volume, high mix custom parts manufacturing. These companies could more directlycompete 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 marketacceptance. 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 businessand rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, vendors andothers 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 ofDecember 31, 2019, we owned and had applications pending for patents relating to various aspects of our quoting and manufacturing processes as follows: Jurisdiction Issued Patents Applications Pending United States 18 11 United Kingdom 2 0 Germany 0 2 Our patents have expiration dates ranging from 2022 to 2032. We also owned approximately 20 registered and 3 pending United States trademarks or service marksas of December 31, 2019, with corresponding registered protection in Europe and Japan for the most important of these marks such as PROTO LABS, PROTOMOLD,FIRSTCUT, PROTOQUOTE, FIRSTQUOTE, PROTOFLOW and FINELINE, corresponding approved protection in Canada for PROTO LABS, FIRSTCUT and FINELINE,and corresponding registered protection in Australia, Canada and Mexico for PROTOMOLD. There can be no assurance that the steps we take to protect ourproprietary 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 legalproceedings 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, 2019 we had 2,535 full-time employees. We also regularly use independent contractors and other temporary employees across theorganization to augment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Available Information Our principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359 and our telephone number is (763) 479-3680. Our websiteaddress 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 theSEC. 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 filedor 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 anyamendments to these reports. Our SEC reports can be accessed through the investor relations section of our website.11 The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file information electronicallywith 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 fiveyears: Victoria M. Holt62President, Chief Executive Officer and DirectorRobert Bodor47Vice President/General Manager – AmericasJohn A. Way47Chief Financial Officer and Executive Vice President of DevelopmentArthur R. Baker III52Chief Technology OfficerBjoern Klaas50Vice 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 amongany of the executive officers or directors of the Company. Victoria M. Holt. Ms. Holt has been our President and Chief Executive Officer since February 2014. Prior to joining Proto Labs, Ms. Holt served as President andChief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September 2010 until Spartech waspurchased by PolyOne Corporation in March 2013. Ms. Holt also is a member of the Board of Directors of Waste Management, Inc. and Piper Sandler Companies. 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 asour Chief Technology Officer. From December 2012 to June 2013, Dr. Bodor served as our Director of Business Development. Prior to joining Proto Labs, from January2011 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 September 2012 toSeptember 2014, Mr. Way served as Chief Financial Officer for portfolio companies of two Private Equity Firms. From October 2002 to September 2012, Mr. Way workedin senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer of Optum Care, Medicare Advantage 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 Officerof 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 theTest Division, Chief Technology Officer, and Vice President of Engineering and Operations. MTS Systems was a leader in mechanical testing and simulation systems forautomotive, aerospace, medical, civil-seismic and general research. 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 GeneralManager for its ColorMatrix Group headquartered in the United States. From 2008 to 2012, Mr. Klaas worked at Colorant-Chromatics, a global leader for high temperaturepolymer formulations, as the General Manager for the global business.12 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 affectthe 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 manufacturersand methods. Some of our current and potential competitors include captive in-house product lines, other custom parts manufacturers, brokers of custom parts andalternative manufacturing vendors such as those utilizing 3D printing processes. 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 relatedtechniques for custom parts manufacturing that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability todevelop certain products and from improvements to existing technologies. Furthermore, our competitors may attempt to adopt and improve upon key aspects of ourbusiness 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 efficientcustom production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete withour business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that could more effectively compete withus on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminatesuch 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 andname recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enablethem 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 tomaintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developing new products isfinding product lines for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any newproduct 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 tochanges 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 forprototyping, support of internal manufacturing and limited quantity product release. Our business has been, and, we believe, will continue to be, affected by changes inproduct developer and engineering requirements and preferences, rapid technological change, new product and product line introductions and the emergence of newstandards and practices, any of which could render our technology, products and product lines less attractive, uneconomical or obsolete. To the extent that ourcustomers’ 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 harmour competitive position. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remaincompetitive, we must continually expend resources to enhance and improve our technology, product offerings and product lines.13 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 ourtechnology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within the research anddevelopment 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 ourbusiness 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 atall. 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 manyquotation requests. There are no guarantees that the resources devoted to executing on this aspect of our business plan will improve our business and operating resultsor 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 newtechnologies, processes and product lines that are superior to ours. Our research and development costs were approximately $32.7 million, $28.7 million and $23.6 millionfor the years ended December 31, 2019, 2018 and 2017, respectively, and there is no guarantee that these costs will enable us to maintain or grow our revenueprofitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K foradditional 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 customers' 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, oftenresulting 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 ourresults to date. There are no guarantees we will be able to meet product developers’ and engineers’ increasing expectations regarding quick turnaround time, especiallyas 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 ofoperations will likely suffer. Our failure to meet our customers’ 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 inour pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our production and personnel costs andour 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 customers' 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 partswith 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 givenperiod, 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 ourcustomer 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 repeatcustomers 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 thesuccess 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 incurredand plan to continue to incur substantial expense related to advertising and other marketing efforts directed toward enhancing our brand. We have initiated marketingefforts 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 maychoose 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 enhanceour brand, this could have a negative impact on our business and ability to generate revenue.14 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 andsuccessfully 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 prospectivecustomers. 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 sizeand diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product developersand 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 diversecustomer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized to help us identify significantbusiness 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, couldharm 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 theseindividuals, 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 orprevent 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 andmotivate qualified personnel. A possible shortage of qualified individuals in the regions where we operate might require us to pay increased compensation to attract andretain key employees, thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many of whom havesubstantially greater financial and other resources and name recognition than us. We may be unable to attract and retain suitably qualified individuals who are capableof meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract,hire, integrate and retain qualified personnel could impair our ability to achieve our business objectives. If we fail to grow our business as anticipated, our net sales, gross margin and operating margin will be adversely affected. We are attempting to grow our business substantially. To this end, we have made and expect to continue to make significant investments in our business,including investments in our infrastructure, technology, and marketing and sales efforts. These investments include dedicated facilities expansion and increasedstaffing, both domestic and international. If our business does not generate the level of revenue required to support our investment, our net sales and profitability willbe 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 ofoperations may be harmed. Over the past several years, we have experienced rapid growth. For example, we have grown from 1,549 full-time employees as of January 1, 2016 to 2,535 full-timeemployees as of December 31, 2019. We have expanded internationally, including establishing manufacturing operations in Europe in 2005 and Japan in 2009. In 2014, weexpanded our product lines with 3D Printing through our acquisition of FineLine. In 2015, we expanded our manufacturing operations and our 3D Printing product linesin Europe through our acquisition of Alphaform. In 2017, we expanded our product lines to include Sheet Metal through our acquisition of RAPID. We expect thisgrowth 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 growthand expansion of our operations will require us to do, among other things, the following: •enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures, in particularas 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, develop, 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 managementinfrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any futuregrowth 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 expansioncould have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation and brand, including impairing our ability toperform to our customers’ expectations.15 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 acrossgeographic regions and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes andinfrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improvetheir 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 atimely 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 andadapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers and attract new customers, damage ourreputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations. We may experience difficulties implementing our new e-commerce system and updates to our back-end systems. We are engaged in implementing a new e-commerce system. The e-commerce system is designed to improve our customer experience which will allow us tocapitalize on the market opportunity and properly serve the long-term needs of our customers. We are updating back-end systems with standard software packagesaugmented by internally developed software to ensure the scalability of our architecture moving forward. These activities have required, and will continue to require, theinvestment of significant personnel and financial resources. We may not be able to successfully implement the e-commerce system without experiencing delays,increased costs and other difficulties. If we are unable to successfully design and implement the new e-commerce system and supporting architecture as planned, ourfinancial positions, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the new e-commerce system asplanned or the back-end systems do not operate as intended, our ability to process orders, manufacture and ship parts, send invoices and track payments, fulfillcontractual obligations or otherwise operate our business could be adversely affected. While we have invested significant resources in planning, project management,and training, additional and significant implementation issues may arise. 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 $264.1 million for the year ended December 31, 2015 to $458.7 million for the year endedDecember 31, 2019, we may not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, anumber of which are out of our control, including among others, our ability to: •retain and further penetrate existing customer companies, as well as attract new customer companies; •consistently execute on custom part orders in a manner that satisfies product developers’ and engineers’ needs and provides them with a superiorexperience; •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 perweek; •increase the strength and awareness of our brand across geographic regions; •respond to changes in product developer and engineer needs, technology and our industry; •react to challenges from existing and new competitors; and •respond to an economic recession which negatively impacts manufacturers' ability to innovate and bring new products to market. 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 causethe 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 theirexpectations 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 “RiskFactors” section: •the development of new competitive systems or processes by others; •the entry of new competitors into our market, whether by established companies or by new companies;16 •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 mayfluctuate in the future; •delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto; •our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth; •limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue; •changes in our pricing policies or those of our competitors, including our responses to price competition; •changes in the amount we spend in our marketing and other efforts; •unexpected increases in expenses as compared to our related accounting accruals or operating plan; •the volatile global economy; •general economic and industry conditions that affect customer demand and product development trends; •interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or otheroperations; •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-yearcomparisons 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 operationscould 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. Anyinterruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, ornegatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costsseeking 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, challengesassociated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts ofterrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce-related issues, capacity constraints due to an unusually largenumber 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 factthat our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to theseproduct 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 thecomputer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we havenot identified alternatives to these facilities or established fully redundant systems in multiple locations. However, we have back-up computing systems for each of ourUnited States, European and Japanese operations. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects ofour communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extentoutside of our control.17 Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including the potentialharm to the future growth of our business that may result from interruptions in our product lines as a result of system failures. We store confidential customer information in our systems that, if breached or otherwise subjected to unauthorized access, may harm our reputation or brand orexpose us to liability. Our system stores, processes and transmits our customers’ confidential information, including the intellectual property in their part designs and other sensitivedata. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure suchconfidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation andliability that would substantially harm our business and operating results. We may not have adequately assessed the internal and external risks posed to the security ofour company’s systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of asecurity incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involvingtheir personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospectivecustomers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brandand could cause the loss of customers. Aspects of our business are subject to privacy, data use and data security regulations, which may impact the way we use data to target customers. Privacy and security laws and regulations may limit the use and disclosure of certain information and require us to adopt certain cybersecurity and data handlingpractices that may affect our ability to effectively market our services to current, past or prospective customers. In many jurisdictions consumers must be notified in theevent of a data security breach, and such notification requirements continue to increase in scope and cost. The changing privacy laws in the United States, Europe andelsewhere—including the General Data Protection Regulation (GDPR) in the European Union, which became effective May 25, 2018, and the California Consumer PrivacyAct of 2018, which was enacted on June 28, 2018 and became effective on January 1, 2020—create new individual privacy rights and impose increased obligations,including disclosure obligations, on companies handling personal data. The impact of these continuously evolving laws and regulations could have a material adverseeffect on the way we use data to digitally market and pursue our 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 asreduced access to capital for businesses may cause product developers and engineers to further delay or reduce the product development projects that our businesssupports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, productdevelopers and engineers and other related risks to our business.18 Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in the European Union could adversely affectour 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 UK's withdrawal became effective on January 31, 2020. A transition period will apply until the end of 2020 while the UK and EU negotiate rules that willapply to their future relationship. It is possible that the level of economic activity in this region will be adversely impacted and that there will be increased regulatory andlegal complexities, including those relating to tax, trade, security and employees. In addition, Brexit could lead to economic uncertainty, including significant volatility inglobal stock markets and currency exchange rates, which may adversely impact our business. To mitigate the potential impact of Brexit on the import and export ofgoods to and from the UK, the Company is establishing business processes with shipping entities, including obtaining Authorized Economic Operator certification. Inaddition, the Company is increasing inventory in the UK and EU in an effort to maintain inventory required to meet customer demand in the event of disruption inshipments. Although the specific terms and the timeframe of the negotiations are unknown, it is possible that these changes could adversely affect our business andresults 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 31,2019, we had sold products into approximately 60 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese andSpanish. Our international revenue accounted for approximately 22%, 21% and 24% of our total revenue in the years ended December 31, 2019, 2018 and 2017,respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors haveadversely affected our international operations and sales to customers located outside of the United States and may again in the future: •difficulties in staffing and managing foreign operations, particularly in new geographic locations; •challenges in providing solutions across a significant distance, in different languages and among different cultures; •rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, and other similaroutbreaks or events; •economic uncertainty, including significant volatility in global stock markets and currency exchange rates, resulting from Brexit; •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 thoseassociated 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.19 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 affectpotential customers in ways that reduce demand for our product lines, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact ourbusiness. 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 ourcustomers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes inforeign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and adeterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country orregion. 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 andour sales will decline. We manufacture all of our products in 12 manufacturing facilities, located in Maple Plain, Minnesota; Rosemount, Minnesota; Plymouth, Minnesota; BrooklynPark, Minnesota; Cary, North Carolina; Nashua, New Hampshire (3 facilities); Telford, United Kingdom; Feldkirchen, Germany; Eschenlohe, Germany; 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. Ourfacilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, hurricanes, tsunamis and nucleardisasters. 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 andcustomer 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 allof 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 maybe 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 ourbusiness from several third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While mostmanufacturing 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 unacceptableto 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 notbe 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 totime, 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 suitablesupplier for a particular type of manufacturing equipment or material, we could be required to modify our existing business processes and offerings to accommodate thesituation. 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 financialcondition. 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, trademarksand trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts toprotect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologiesand 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 underthese 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 foreignpatents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect ourtechnology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to develop similar technology independently or designaround 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.20 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 thefields of injection molding, CNC machining, 3D printing, sheet metal fabrication or part production for purposes of developing competing products or for the solepurpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolutionof 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 tocommercialize 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 ofactivities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of ouremployees, 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 affordableprices. 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 ableto 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 andreputation 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 theproducts have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, orsignificant 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 defectsor 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 resultin 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 orto 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 substantiallyharm 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 futurelaws 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, theprovision of online payment services, broadband residential Internet access and the characteristics and quality of products and product lines. It is not clear how existinglaws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especiallywhere 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. Thoselaws that do reference the Internet are being interpreted by the courts and their applicability and reach are therefore uncertain. The costs of compliance with theseregulations 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 theseregulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm ourbusiness and results of operations. Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability. We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic and abroad. Our future effective tax ratescould 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, andregulations 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 inthe valuation of deferred tax assets and liabilities.21 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 andforeign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved forpotential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the finaldetermination 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 theneed to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property orproduct line capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through futureissuances 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 toour capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue businessopportunities, 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 adequatefinancing 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 challengescould 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 orexpand into other markets, or broaden our technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us tooffer our customers 3D printing manufacturing processes; in October 2015, we acquired Alphaform to enable us to expand our 3D printing capabilities in Europe, and inNovember 2017, we acquired RAPID to enable us to offer our customers Sheet Metal and expand our CNC Machining processes. We cannot forecast the number, timingor 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. Wehave limited experience engaging in these types of transactions. Such transactions may be complex, time consuming and expensive, and may present numerouschallenges 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 anacquisition; •significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses,assets or technologies; •acquisition of a significant amount of goodwill, which could result in future impairment charges that would reduce our earnings; and •requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensation and otheritems, 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 investmentsafter 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 ourbusiness and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or stakeholders.22 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. Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, which can be expensive andrestrict 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 asforeign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safetyprocedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, wecannot 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 ofthese materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a resultof 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 quality standards applicable to our manufacturing and quality processes for the parts we manufacture, our business, financial conditionor operating results could be harmed. As a manufacturer of CNC-machined and injection-molded custom parts, we conform to certain international standards, including International Organization forStandardization, or ISO, 9001:2015 for our injection molding facilities and the AS9001D standard for our CNC-machined facilities in Minnesota. In North Carolina, weconform to the ISO 9001:2015 standard for our plastics manufacturing and the AS9100D standard for our metals manufacturing. In New Hampshire, we conform to theISO 9001:2015 and the AS9100D standards for our CNC-machined and sheet metal custom parts. We also conform to international standard ISO 9001:2008 at ourmanufacturing facilities in Feldkirchen, Germany and Eschenlohe, Germany. Additionally, we conform to international standard ISO 13485 at our manufacturing facilityin Eschenlohe, Germany and international standard ISO 14001 at our manufacturing facility in Feldkirchen, Germany. Lastly, we conform to international standards ISO9001, ISO 14001 and ISO 27001 at our facilities in Japan. If any system inspection reveals that we are not in compliance with applicable standards, registrars may takeaction against us, including issuing a corrective action request or discontinuing our certifications. If any of these actions were to occur, it could harm our reputation aswell as our business, financial condition and operating results. 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 newpayment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including creditand 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 toprovide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our business if these companiesbecome unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rulesgoverning 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 orrequirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, processelectronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.23 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, 2019, our common stock traded as high as $130.60 and as low as $88.75. The market for our common stock may become lessactive, 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 themarket 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 ExchangeCommission 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’ financialestimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock; •changes in the market valuations of similar companies; •significant lawsuits, including patent or shareholder litigation; •changes in laws or regulations applicable to us; •changes in accounting principles; •the sustainability of an active trading market for our common stock; •future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders; •share price and volume fluctuations attributable to inconsistent trading levels of our shares; 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 equitysecurities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to becomeinvolved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.24 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. Wedo 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 orpublishes 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 topublish 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 priceand 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 preventor 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 costlyand time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controlover financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of ourinternal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controlover 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 failto 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 ourcommon 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 acquisitionof our company more difficult without the approval of our board of directors. These provisions: •permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our board 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 ofdirectors 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 ofshareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a shareholder’s notice; and •do not provide for cumulative voting rights. We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibitsany 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 isapproved 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 interestedshareholder. These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefitour shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosingand 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 foreseeablefuture. 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 thefuture will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed byapplicable law and other factors our board of directors deems relevant.25 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 alsoown a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We own a facility in Rosemount, Minnesota that encompassesapproximately 130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses approximately 170,000 squarefeet of manufacturing and office space. In 2018, we purchased a facility in Brooklyn Park, Minnesota that encompasses approximately 215,000 square feet ofmanufacturing 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 approximately146,000 square feet of manufacturing and office space. The leases expire at various times from 2020 to 2022. Europe Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing approximately 178,000 square feet of office andmanufacturing space. We also lease office space in the United Kingdom; Mosbach, Germany; Le Bourget du Lac, France; Novara, Italy and Nacka, Sweden, for sales, customer serviceand technical support staff. The leases expire at various times from 2021 to 2025. 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 andapproximately 22,000 square feet in Eschenlohe, Germany. The leases expire at various times from 2021 to 2028. Japan Our Japan operations are headquartered in Zama, Kanagawa, Japan (southwest of Tokyo). In 2016, we moved into a new leased facility encompassingapproximately 96,000 square feet of office and manufacturing space. The lease expires in April 2023.26 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 oflitigation 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 outcomeof 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 publicmarket for our common stock. As of February 14, 2020, we had 10 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, andincludes 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 foreseeablefuture. 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 deemrelevant. Outstanding Equity Awards The following table summarizes, as of December 31, 2019, information about shares of our common stock that may be issued under equity compensation plansapproved by shareholders and plans not approved by shareholders: Plan Category Number of shares to be issuedupon exercise of outstandingoptions, warrants and rights Weighted-average exercise priceof outstanding options, warrantsand rights Number of shares remainingavailable for future issuanceunder equity compensation plans(excluding shares in firstcolumn) Equity compensation plans approved byshareholders(1) 656,011 $72.38 6,160,817(2) Equity compensation plans not approved byshareholders None N/A None (1)Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan.(2)Includes 1,168,830 shares remaining available for issuance as of December 31, 2019 under our Employee Stock Purchase Plan.28 Performance Graph The following graph shows a comparison from December 31, 2014 through December 31, 2019 of the cumulative total return for our common stock, the S&P 500Index and the Russell 2000 Index. We have selected the Russell 2000 Index because the Russell 2000 Index measures the performance of the small market capitalizationsegment 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 intendedto suggest future performance. Data for the S&P 500 Index and the Russell 2000 Index assume reinvestment of dividends. Index 12/31/14 06/30/15 12/31/15 06/30/16 12/31/16 06/30/17 12/31/17 06/30/18 12/31/18 06/30/19 12/31/19 Proto Labs, Inc. 100.00 100.48 94.83 85.71 76.46 100.13 153.37 177.11 167.94 172.75 151.21 S&P 500 100.00 100.20 99.27 101.94 108.74 117.70 129.86 132.03 121.76 142.88 156.92 Russell 2000 100.00 104.09 94.29 95.62 112.65 117.49 127.46 136.39 111.94 130.04 138.5029 Unregistered Sales of Equity Securities and Issuer Purchases of Equity Securities On May 15, 2019 the Board of Directors authorized the repurchase of shares of the Company’s common stock from time to time on the open market or in privatelynegotiated purchases, at an aggregate purchase price of up to $100 million. The timing and amount of any share repurchases will be determined by our managementbased on market conditions and other factors. The term of the program runs through December 31, 2023. The Company had no repurchases in the fourth quarter of 2019. During the year ended December 31, 2019, we repurchased 326,462 shares at an average price of$102.65 per share for an aggregate purchase price of $33.5 million. We have $49.9 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 ofcomprehensive income data for the years ended December 31, 2019, 2018 and 2017 and selected consolidated balance sheets data as of December 31, 2019 and 2018 arederived from our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Theselected consolidated statements of comprehensive income data for the years ended December 31, 2016 and 2015 and selected consolidated balance sheet data as ofDecember 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements not included in this report.30 The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selectedconsolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and theconsolidated financial statements and related notes appearing in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Year Ended December 31, (in thousands, except share and per share amounts) 2019 2018 2017 2016 2015 Consolidated Statements of Comprehensive Income Data Revenue $458,728 $445,596 $344,490 $298,055 $264,106 Cost of revenue 223,438 206,917 150,648 131,118 109,703 Gross profit 235,290 238,679 193,842 166,937 154,403 Operating expenses: Marketing and sales 72,976 68,533 56,856 46,131 39,188 Research and development 32,692 28,735 23,560 22,388 18,350 General and administrative 49,766 52,513 41,200 36,651 29,716 Total operating expenses 155,434 149,781 121,616 105,170 87,254 Income from operations 79,856 88,898 72,226 61,767 67,149 Other income, net 1,337 2,757 2,209 2,454 712 Income before income taxes 81,193 91,655 74,435 64,221 67,861 Provision for income taxes 17,538 15,067 22,657 21,514 21,347 Net income $63,655 $76,588 $51,778 $42,707 $46,514 Net income per share(1) Basic $2.37 $2.84 $1.94 $1.62 $1.79 Diluted $2.35 $2.81 $1.93 $1.61 $1.77 Weighted average shares outstanding(1) Basic 26,866,985 26,982,614 26,647,610 26,365,173 26,005,858 Diluted 27,049,423 27,278,816 26,845,071 26,564,639 26,320,284 Other comprehensive income (loss) (net of tax) Foreign currency translation adjustments $1,474 $(3,258) $5,519 $(5,541) $(2,283)Comprehensive income $65,129 $73,330 $57,297 $37,166 $44,231 (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 shareattributable to common shareholders and weighted average shares outstanding of the years ended December 31, 2019, 2018, and 2017 respectively. Stock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (in thousands) 2019 2018 2017 2016 2015 Stock options and grants $9,591 $10,113 $7,954 $6,177 $5,580 Employee stock purchase plan 1,190 815 604 598 502 Total stock-based compensation expense $10,781 $10,928 $8,558 $6,775 $6,082 Cost of revenue $2,056 $1,543 $970 $691 $513 Operating expenses: Marketing and sales 2,632 1,942 1,429 977 1,074 Research and development 1,851 1,517 1,091 1,396 1,285 General and administrative 4,242 5,926 5,068 3,711 3,210 Total stock-based compensation expense $10,781 $10,928 $8,558 $6,775 $6,082 Year Ended December 31, (in thousands) 2019 2018 2017 2016 2015 Consolidated Balance Sheets Data Cash and cash equivalents $125,225 $85,046 $36,707 $68,795 $47,653 Working capital 188,838 162,628 121,249 134,357 111,740 Total assets 673,667 618,985 518,738 414,241 361,036 Total liabilities 87,877 77,488 57,523 34,408 33,391 Total shareholders' equity $585,790 $541,497 $461,215 $379,833 $327,645 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 financialstatements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involverisks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, includingthose 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 partsfor prototyping and short-run production. We provide custom parts to product developers and engineers worldwide, who are under increasing pressure to bring theirfinished products to market faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the inefficienciesinherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most ofthe time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of theirbusiness 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 productsacross 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 thesize 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. In2014, 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 ourCNC machining capability. In 2019, we added Carbon DLS to our 3D printing processes, introduced precision color matching on Injection Molding parts and launchedproduction capabilities for metal 3D printing. We also continually seek to enhance other aspects of our technology and manufacturing processes, including ourinteractive web-based and automated user interface and quoting system. We intend to continue to invest significantly to enhance our technology and manufacturingprocesses 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 92%, 91% and 89% of our revenue in 2019, 2018 and 2017,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 productdevelopers and engineers are located. We entered the European market in 2005, launched operations in Japan in late 2009. Our operations were further expanded inEurope through our acquisition of Alphaform in 2015 and the United States through our acquisition of RAPID in November 2017. As of December 31, 2019, we had soldproducts into approximately 60 countries. Our revenue outside of the United States accounted for approximately 22%, 21% and 24% of our consolidated revenue in theyears ended December 31, 2019, 2018 and 2017, respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve theneeds of product developers and engineers in select new geographic regions. We have grown our total revenue from $264.1 million in 2015 to $458.7 million in 2019. During this period, our operating expenses increased from $87.3 million in2015 to $155.4 million in 2019. We have grown our income from operations from $67.1 million in 2015 to $79.9 million in 2019. Our recent growth in revenue and incomefrom operations has been accompanied by increased cost of revenues and operating expenses. We expect to increase investment in our operations to supportanticipated 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 believethat many of our target product developer and engineer customers are facing three mega trends, which are disrupting long-term product growth models. We believe ourcustomers are facing increased pressure to shorten product life-cycles, to embed products with connectivity driven by the internet of things technology, and to deliverproducts that are personalized and customized to unique customer specifications. We believe we continue to be well positioned to benefit from these trends, given ourproprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom parts. While our business may be positivelyaffected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom partsin low volumes, including, among others, economic conditions, changes in product developer and engineer preferences or needs, developments in our industry andamong our competitors, and developments in our customers' industries. For a more complete discussion of the risks facing our business, see Part I, Item 1A. “RiskFactors” of this Annual Report on Form 10-K.32 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. CNCMachining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of custom 3D-printed parts. Sheet Metal revenue consists ofsales of fabricated sheet metal custom parts. Our revenue is generated from a diverse customer base, with no single customer company representing more than 2% ofour total revenue in 2019. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer baseby increasing marketing and selling activities, including: •the introduction of our 3D Printing product line through our acquisition of FineLine in 2014; •expanding 3D printing to Europe 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 2019, we served 47,774 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of3.9% over the same period in 2018. During 2018, we served 45,968 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of22.5% over the same period in 2017. During 2017, we served 37,538 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of19.3% over the same period in 2016. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation including benefits and stock-based compensation, facilitiescosts and overhead allocations associated with the manufacturing process for molds and custom parts. We expect our personnel-related costs to increase in order toretain and attract top talent and remain competitive in the market. Overall, we expect cost of revenue to increase in absolute dollars, but remain relatively constant as apercentage 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 productsto our customers. Therefore, during each of 2019, 2018 and 2017 we made significant investments in additional factory space, equipment, and infrastructure in the UnitedStates. We also made significant investments in infrastructure in Europe in 2017 and significant investments in additional factory space in Japan in 2019 and 2016. Weexpect 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 additionalcosts for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins by product line 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 profitand gross margin are affected by many factors, including our mix of revenue by product line, pricing, sales volume, manufacturing costs, the costs associated withincreasing 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 mostsignificant 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. Ourbusiness 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 intechnology and personnel, resulting in increased operating expenses. Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketingprograms such as electronic, print and pay-per-click advertising, trade shows and other related overhead. We expect sales and marketing expense to increase in thefuture 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 newprocesses and product lines, enhancement of existing product lines, software developed for internal use, maintenance of internally developed software, qualityassurance and testing. Costs for internal use software are evaluated by project and capitalized where appropriate under Accounting Standards Codification (ASC) 350-40, Intangibles — Goodwill and Other, Internal-Use Software. We expect research and development expense to increase in the future as we seek to enhance our e-commerce interface technology, internal software and supporting business systems, and continue to expand our product lines. General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professionalservice 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 togrow 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 ouraverage 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 wassigned 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 taxrate from 35% to 21%, which began in 2018, reduced our effective tax rate in 2018 and subsequent years. Overall, our effective tax rate for 2018 and beyond will remainconsistent 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 theresults for future periods. Year Ended Year Ended December 31, Change December 31, Change (dollars in thousands) 2019 2018 $ % 2018 2017 $ % Revenue $458,728 100.0% $445,596 100.0% $13,132 2.9% $445,596 100.0% $344,490 100.0% $101,106 29.3 Cost of revenue 223,438 48.7 206,917 46.4 16,521 8.0 206,917 46.4 150,648 43.7 56,269 37.4 Gross profit 235,290 51.3 238,679 53.6 (3,389) (1.4) 238,679 53.6 193,842 56.3 44,837 23.1 Operating expenses: Marketing and sales 72,976 15.9 68,533 15.4 4,443 6.5 68,533 15.4 56,856 16.5 11,677 20.5 Research and development 32,692 7.1 28,735 6.4 3,957 13.8 28,735 6.4 23,560 6.8 5,175 22.0 General and administrative 49,766 10.9 52,513 11.8 (2,747) (5.2) 52,513 11.8 41,200 12.0 11,313 27.5 Total operating expenses 155,434 33.9 149,781 33.6 5,653 3.8 149,781 33.6 121,616 35.3 28,165 23.2 Income from operations 79,856 17.4 88,898 20.0 (9,042) (10.2) 88,898 20.0 72,226 21.0 16,672 23.1 Other income, net 1,337 0.3 2,757 0.6 (1,420) (51.5) 2,757 0.6 2,209 0.6 548 24.8 Income before income taxes 81,193 17.7 91,655 20.6 (10,462) (11.4) 91,655 20.6 74,435 21.6 17,220 23.1 Provision for income taxes 17,538 3.8 15,067 3.4 2,471 16.4 15,067 3.4 22,657 6.6 (7,590) (33.5)Net income $63,655 13.9% $76,588 17.2% $(12,933) (16.9%) $76,588 17.2% $51,778 15.0% $24,810 47.9% Stock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (dollars in thousands) 2019 2018 2017 Stock options and grants $9,591 $10,113 $7,954 Employee stock purchase plan 1,190 815 604 Total stock-based compensation expense $10,781 $10,928 $8,558 Cost of revenue $2,056 $1,543 $970 Operating expenses: Marketing and sales 2,632 1,942 1,429 Research and development 1,851 1,517 1,091 General and administrative 4,242 5,926 5,068 Total stock-based compensation expense $10,781 $10,928 $8,558 Comparison of Years Ended December 31, 2019 and 2018 Revenue Revenue by reportable segment and the related changes for 2019 and 2018 is summarized as follows: Year Ended December 31, 2019 2018 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $360,205 78.5% $350,535 78.7% $9,670 2.8%Europe 82,805 18.1 80,889 18.2 1,916 2.4 Japan 15,718 3.4 14,172 3.1 1,546 10.9 Total revenue $458,728 100.0% $445,596 100.0% $13,132 2.9% Our revenue increased $13.1 million, or 2.9%, for 2019 compared with 2018. By reportable segment, revenue in the United States increased $9.7 million, or 2.8%, for2019 compared with 2018. Revenue in Europe increased $1.9 million, or 2.4%, for 2019 compared with 2018. Revenue in Japan increased $1.5 million, or 10.9%, for 2019compared with 2018.35 Our revenue growth in 2019 was primarily driven by an increased volume of the product developers and engineers we served. During 2019, we served 47,774unique product developers and engineers, an increase of 3.9% over 2018. Our growth in product developers and engineers served increased at a greater rate than ourrevenue growth, resulting in a decrease of 1.0% in the average revenue per product developer and engineer during 2019 as compared to 2018. The decrease in averagespend per product developer and engineer was driven by a change in the mix of products, with 3D Printing and CNC Machining generally producing lower average orderrevenue than our other products. Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customeraccounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to generate thegreatest number of customer leads to support sales activity. International revenue was negatively impacted by $4.2 million in 2019 compared to 2018 as a result of foreigncurrency movements, primarily the weakening of the Euro relative to the United States dollar. Revenue by product line and the related changes for 2019 and 2018 is summarized as follows: Year Ended December 31, 2019 2018 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Injection Molding $217,415 47.4% $210,523 47.2% $6,892 3.3%CNC Machining 155,473 33.9 153,521 34.5 1,952 1.3 3D Printing 61,352 13.4 53,342 12.0 8,010 15.0 Sheet Metal 21,000 4.6 24,998 5.6 (3,998) (16.0)Other Revenue 3,488 0.7 3,212 0.7 276 8.6 Total revenue $458,728 100.0% $445,596 100.0% $13,132 2.9% By product line, our revenue growth was driven by a 3.3% increase in Injection Molding revenue, a 1.3% increase in CNC Machining revenue, a 15.0% increase in3D Printing revenue, as well as a $0.3 million increase in Other Revenue, which was partially offset by a 16.0% decrease in Sheet Metal revenue, in each case for 2019compared with 2018. The decrease in Sheet Metal revenue was driven by a decision to move away from certain business which was not scalable and did not fit into theenvelope of our revised Sheet Metal product offerings. Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $16.5 million, or 8.0%, for 2019 compared to 2018, which was faster than the rate of revenue increase of 2.9% for 2019compared to 2018. The increase in cost of revenue resulted from the growth of the business and investments to support future growth. Specifically, the increases weredriven by raw material and production cost increases of $2.6 million, an increase in direct labor headcount and wage inflation resulting in personnel and related costincreases of $7.8 million and equipment and facility-related cost increases of $6.1 million to support increased sales volumes and future growth of the business. Gross Profit and Gross Margin. Gross profit decreased from $238.7 million in 2018 to $235.3 million in 2019 primarily due to an increase in expenses associated withthe cost of revenue. Gross margin decreased from 53.6% of revenue in 2018 to 51.3% of revenue in 2019 due to investments in facilities and personnel to support futuregrowth and the timing and mix of revenue, with the lower volumes in Sheet Metal and certain CNC operations related to the RAPID acquisition being the primary driverof the mix related impact. Income from Operations Income from operations decreased $9.0 million, or 10.2%, for 2019 compared with 2018. By reportable segment, income from operations for the United States andEurope decreased 6.1% and 10.0%, respectively, and Corporate Unallocated and Japan increased 0.6% for 2019 compared with 2018. Operating Expenses Marketing and Sales. Marketing and sales expense increased $4.4 million, or 6.5%, for 2019 compared to 2018 due to an increase in headcount resulting inpersonnel and related cost increases of $3.3 million and marketing program cost increases of $1.1 million. The increase in marketing program costs is the result of ourfocus 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 $4.0 million, or 13.8%, for 2019 compared to 2018 due to an increase in headcountresulting in personnel and related cost increases of $3.5 million, as well as an increase in administrative and depreciation cost increases of $0.5 million.36 General and Administrative. Our general and administrative expense decreased $2.7 million, or 5.2%, for 2019 compared to 2018 due to stock- basedcompensation cost decreases of $1.7 million driven by lower performance-related compensation, amortization cost decreases of $1.0 million driven by allocations to otherexpense categories to appropriately reflect the nature of our intangible assets and professional service decreases of $0.4 million, which were partially offset byadministrative cost increases of $0.4 million. Other Income, Net and Provision for Income Taxes Other Income, Net. We recognized other income, net of $1.3 million in 2019, a decrease of $1.5 million compared to other income, net of $2.8 million for 2018. Otherincome, net for 2019 primarily consisted of $2.1 million in interest income on investments, which was partially offset by a $0.8 million loss on foreign currency. Otherincome, net for 2018 primarily consisted of $1.7 million in interest income on investments, a $0.7 million gain on our sale of RAPID Wire & Cable, LLC and a $0.4 milliongain on foreign currency. Provision for Income Taxes. Our income tax provision increased by $2.4 million for 2019 compared to 2018. The increase in the provision is primarily due to adecrease in tax benefits from the vesting of restricted stock and exercise of stock options. This increase was coupled with an increase in the state tax provision and anincrease in valuation allowances. Our effective tax rate of 21.6% for 2019 increased 5.2% compared to 16.4% for the same period in 2018. Comparison of Years Ended December 31, 2018 and 2017 Revenue Revenue by reportable segment and the related changes for 2018 and 2017 is summarized as follows: Year Ended December 31, 2018 2017 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $350,535 78.7% $263,086 76.4% $87,449 33.2%Europe 80,889 18.2 70,154 20.4 10,735 15.3 Japan 14,172 3.1 11,250 3.2 2,922 26.0 Total revenue $445,596 100.0% $344,490 100.0% $101,106 29.3% Our revenue increased $101.1 million, or 29.3%, for 2018 compared with 2017. By reportable segment, revenue in the United States increased $87.4 million, or33.2%, for 2018 compared with 2017. Revenue growth in the United States was partially attributable to the acquisition of RAPID in November 2017. Revenue in Europeincreased $10.7 million, or 15.3%, for 2018 compared with 2017. Revenue in Japan increased $2.9 million, or 26.0%, for 2018 compared with 2017. Our revenue growth in 2018 was primarily driven by an increased volume of the product developers and engineers we served. During 2018, we served 45,968unique product developers and engineers, an increase of 22.5% over 2017. Average revenue per product developer or engineer increased 6% during 2018 as compared to2017 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 customeraccounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to generate thegreatest number of customer leads to support sales activity. International revenue increased by $3.5 million in 2018 compared to 2017 as a result of foreign currencymovements, primarily the strengthening of the Euro relative to the United States dollar.37 Revenue by product line and the related changes for 2018 and 2017 is summarized as follows: Year Ended December 31, 2018 2017 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Injection Molding $210,523 47.2% $194,432 56.4% $16,091 8.3%CNC Machining 153,521 34.5 103,739 30.1 49,782 48.0 3D Printing 53,342 12.0 43,329 12.6 10,013 23.1 Sheet Metal 24,998 5.6 1,767 0.5 23,231 * Other Revenue 3,212 0.7 1,223 0.4 1,989 * Total revenue $445,596 100.0% $344,490 100.0% $101,106 29.3% * Percentage change not meaningful By product line, our revenue growth was driven by an 8.3% increase in Injection Molding revenue, a 48.0% increase in CNC Machining revenue and a 23.1%increase in 3D Printing revenue, as well as a $23.2 million increase in Sheet Metal revenue and a $2.0 million increase in Other Revenue, in each case for 2018 comparedwith 2017. Our November 2017 acquisition of RAPID added the Sheet Metal product line, expanded our CNC Machining product line and contributed to Other Revenue. Cost of Revenue, Gross Profit and Gross Margin Cost of Revenue. Cost of revenue increased $56.3 million, or 37.4%, for 2018 compared to 2017, which was faster than the rate of revenue increase of 29.3% forCost of Revenue. Cost of revenue increased $56.3 million, or 37.4%, for 2018 compared to 2017, which was faster than the rate of revenue increase of 29.3% for2018 compared to 2017. The increase in cost of revenue resulted from the growth of the business, including via the RAPID acquisition, and was due to raw material andproduction cost increases of $16.6 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of$30.8 million and equipment and facility-related cost increases of $8.9 million. Gross Profit and Gross Margin. Gross profit increased from $193.8 million in 2017 to $238.7 million in 2018 primarily due to an increase in revenue. Gross margindecreased from 56.3% of revenue in 2017 to 53.6% of revenue in 2018 primarily due to the timing and mix of revenue, with the RAPID acquisition and CNC facilityrelocation in the United States being the primary drivers of the reduction in gross margin. Income from Operations Income from operations increased $16.7 million, or 23.1%, for 2018 compared with 2017. By reportable segment, income from operations for the United States,Europe and Corporate Unallocated and Japan increased 17.0%, 30.8% and 10.9%, respectively, as a percentage of revenue for 2018 compared with 2017. Operating Expenses Marketing and Sales. Marketing and sales expense increased $11.7 million, or 20.5%, for 2018 compared to 2017 due to an increase in headcount resulting inpersonnel and related cost increases of $10.0 million and marketing program cost increases of $1.7 million. The increase in marketing program costs is the result of ourfocus 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 $5.2 million, or 22.0%, for 2018 compared to 2017 due to an increase in headcountresulting in personnel and related cost increases of $4.9 million and professional services cost increases of $0.6 million, which were partially offset by a decrease inoperating cost of $0.3 million. General and Administrative. Our general and administrative expense increased $11.3 million, or 27.5%, for 2018 compared to 2017 due to an increase in headcountresulting in personnel and related cost increases of $2.4 million, stock- based compensation cost increases of $0.9 million, administrative cost increases of $5.3 millionand amortization cost increases of $2.7 million. Other Income, Net and Provision for Income Taxes Other Income, Net. We recognized other income, net of $2.8 million in 2018, an increase of $0.6 million compared to other income, net of $2.2 million for 2017. Otherincome, net for 2018 primarily consisted of $1.7 million in interest income on investments, a $0.7 million gain on our sale of RAPID Wire & Cable, LLC and a $0.4 milliongain on foreign currency. Other income, net for 2017 primarily consisted of $1.5 million in interest income on investments, a $0.4 million favorable legal settlement and a$0.3 million gain on foreign currency.38 Provision for Income Taxes. Our income tax provision decreased by $7.6 million for 2018 compared to 2017. The decrease in the provision is primarily due to theTax Cuts and Jobs Act that went into effect in 2018 and benefits from the vesting of restricted stock and the exercise of stock options. Our effective tax rate of 16.4% for2018 decreased 14.0% compared to 30.4% for the same period in 2017. Selected Quarterly Results of Operations Data The following tables set forth selected unaudited quarterly results of operations data for 2019 and 2018. This unaudited quarterly information has been preparedon 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 quarterlydata should be read in conjunction with our selected financial data and consolidated financial statements and the related notes appearing elsewhere in this AnnualReport on Form 10-K. Operating results for any quarter are not necessarily indicative of results for a full-year period, and the historical results presented below are notnecessarily indicative of the results to be expected in any future period. Three Months Ended (in thousands, except share and per share amounts) Dec. 31,2019 Sep. 30,2019 Jun. 30,2019 Mar. 31,2019 Dec. 31,2018 Sep. 30,2018 Jun. 30,2018 Mar. 31,2018 (unaudited) Consolidated Statements of ComprehensiveIncome Data: Revenue $111,889 $117,455 $115,932 $113,452 $112,769 $115,430 $109,652 $107,745 Cost of revenue 55,311 57,839 55,696 54,592 53,614 53,027 50,439 49,837 Gross profit 56,578 59,616 60,236 58,860 59,155 62,403 59,213 57,908 Operating expenses: Marketing and sales 17,510 17,604 19,285 18,577 17,586 16,818 17,557 16,572 Research and development 8,151 8,359 8,169 8,013 7,580 7,458 7,032 6,665 General and administrative 11,355 12,380 13,209 12,822 13,834 13,096 12,640 12,943 Total operating expenses 37,016 38,343 40,663 39,412 39,000 37,372 37,229 36,180 Income from operations 19,562 21,273 19,573 19,448 20,155 25,031 21,984 21,728 Other income (expense), net (229) 228 1,125 213 1,381 390 808 178 Income before income taxes 19,333 21,501 20,698 19,661 21,536 25,421 22,792 21,906 Provision for income taxes 4,147 4,709 4,532 4,150 2,250 4,484 4,478 3,855 Net income $15,186 $16,792 $16,166 $15,511 $19,286 $20,937 $18,314 $18,051 Net income per share: Basic $0.57 $0.63 $0.60 $0.58 $0.71 $0.77 $0.68 $0.67 Diluted $0.56 $0.62 $0.60 $0.57 $0.71 $0.77 $0.67 $0.66 Shares used to compute net income per share: Basic 26,777,536 26,846,030 26,875,153 26,963,366 27,040,207 27,038,585 26,972,990 26,879,388 Diluted 26,945,927 27,005,341 27,041,422 27,177,039 27,311,988 27,337,886 27,274,882 27,197,099 39 Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows for the years ended December 31, 2019, 2018 and 2017: Year Ended December 31, (dollars in thousands) 2019 2018 2017 Net cash provided by operating activities $116,052 $122,929 $81,748 Net cash used in investing activities (44,303) (63,281) (123,975)Net cash (used in) provided by financing activities (31,617) (10,438) 9,192 Effect of exchange rates on cash and cash equivalents 47 (871) 947 Net increase (decrease) in cash and cash equivalents $40,179 $48,339 $(32,088) Sources of Liquidity We finance our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $125.2 million as of December 31,2019, an increase of $40.2 million from December 31, 2018. The increase in our cash was due primarily to cash generated through operations, partially offset by investingactivity and repurchases of common stock. We had cash and cash equivalents of $85.0 million as of December 31, 2018, an increase of $48.3 million from December 31,2017. The increase in our cash was due primarily to cash generated through operations. We had cash and cash equivalents of $36.7 million as of December 31, 2017, adecrease of $32.1 million from December 31, 2016. The decrease in our cash was due primarily to the acquisition of RAPID in November 2017. As of December 31, 2019, the amount of cash and cash equivalents held by foreign subsidiaries was $21.6 million. Our intent is to continue to permanentlyreinvest 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 existingcash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the next 12months. Cash Flows from Operating Activities Cash flow from operating activities of $116.1 million during 2019 primarily consisted of net income of $63.7 million, adjusted for certain non-cash items, includingdepreciation and amortization of $30.9 million, stock-based compensation expense of $10.8 million and deferred taxes of $6.1 million and changes in operating assets andliabilities and other items totaling $4.3 million. The cash flow from operating activities during 2019 compared to 2018 decreased $6.8 million due to decreases in netincome of $12.9 million and deferred taxes of $5.8 million, which were partially offset by increases in depreciation and amortization of $4.1 million driven by an increase incapital investments and changes in operating assets and liabilities and other items of $7.8 million. Cash flow from operating activities of $122.9 million during 2018 primarily consisted of net income of $76.6 million, adjusted for certain non-cash items, includingdepreciation and amortization of $26.8 million, stock-based compensation expense of $10.9 million and deferred taxes of $11.9 million, which were partially offset bychanges in operating assets and liabilities and other items totaling $3.3 million. The cash flow from operating activities during 2018 compared to 2017 increased $41.2million due to increases in net income of $24.8 million, increases in stock-based compensation expense of $2.4 million driven by an increased level of equity grants toemployees, increases in depreciation and amortization of $8.3 million driven by an increase in capital investments and increases in deferred taxes of $10.8 million. Theseincreases were partially offset by changes in operating assets and liabilities and other items of $5.1 million. 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, includingdepreciation 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 milliondriven by an increase in capital investments. These increases were partially offset by decreases to deferred taxes of $1.6 million, amortization of held-to-maturitysecurities of $0.1 million and changes in operating assets and liabilities of $5.9 million.40 Cash Flows from Investing Activities Cash used in investing activities was $44.3 million for the year ended December 31, 2019, consisting of $62.2 million for the purchase of property, equipment andother capital assets, $46.4 million for the purchase of marketable securities and $4.0 in other investing activities, which were partially offset by $68.3 million in proceedsfrom maturities of marketable securities. Cash used in investing activities was $63.3 million for the year ended December 31, 2018, consisting of $87.1 million for the purchase of property, equipment andother capital assets primarily to expand our production capacity and $41.4 million for the purchase of marketable securities, which were partially offset by $65.1 million inproceeds from maturities of marketable securities and $0.1 million in other 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 forthe purchase of property, equipment and other capital assets primarily to expand our production capacity, $20.0 million for the purchase of marketable securities and $8.8million for the purchases of other assets and investments, which were partially offset by $48.0 million in proceeds from maturities and call redemption of marketablesecurities. Cash Flows from Financing Activities Cash used in financing activities was $31.6 million for the year ended December 31, 2019, consisting of $33.5 million in repurchases of common stock, and $2.5million in purchases of shares withheld for tax obligations associated with equity transactions, partially offset by $4.4 million in proceeds from exercises of stockoptions. Cash used in financing activities was $10.4 million for the year ended December 31, 2018, consisting of $12.2 million in repurchases of common stock, paymentson short-term debt obligations of $5.0 million, and $2.1 million in purchases of shares withheld for tax obligations associated with equity transactions, partially offset by$8.9 million in proceeds from exercises of stock options. 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 $8.6million in proceeds from the exercise of stock options, partially offset by $4.4 million for repurchases of common stock. 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 ouranticipated 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 creditfacilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertibledebt 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 containcovenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may notbe 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-relatedactivities; and •the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types oftransactions. Our recent annual capital expenditures have varied between 10% and 20% of annual revenue. We believe future growth capital expenditures, excluding anyexpenditures for buildings and maintenance capital we might purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue.41 Contractual Obligations As of December 31, 2019, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future periods wereas follows: Payment Due by Period (in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More than 5Years Operating leases $12,678 $4,034 $6,533 $1,406 $705 Total $12,678 $4,034 $6,533 $1,406 $705 The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate to three of our United Statesmanufacturing facilities; our European sales, customer service and technical support offices; manufacturing and office facilities located in Germany; and our Japanfacility. Financing Arrangements We had no financing arrangements as of December 31, 2019 and 2018. Inflation We experience normal inflation and changing prices, primarily on our production materials and labor. In 2019 and 2018, wage inflation contributed to our lowergross margin. In 2017, we do not believe inflation and changing prices had a material effect on our financial condition. 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 variableinterest 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 preparedin 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 ourestimates, including those related to revenue recognition, goodwill, other intangible assets, stock-based compensation, and income taxes. We base our estimates of thecarrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Inmany cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely tooccur 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. Seethe Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additionalinformation about these critical accounting policies, as well as a description of our other accounting policies.42 Revenue Recognition On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. We manufacture custom parts tospecific customer orders that have no alternative use to us, and we believe there is a legally enforceable right to payment for performance completed to date on thesemanufactured parts. For manufactured parts that meet these two criteria, we will recognize revenue over time. Prior to 2018, we recognized revenue in accordance with ASC 605, Revenue Recognition, which states that revenue is realized or realizable and earned when all ofthe 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 isfixed or determinable, and (4) collectability is reasonably assured. Revenue was recognized upon transfer of title and risk of loss, which was generally upon the shipmentof parts in our Injection Molding, CNC Machining, 3D Printing, Sheet Metal and Other product lines. Goodwill We recognize goodwill in accordance with ASC 350, Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amountsassigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarterof 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. Animpairment 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 December31, 2019 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 software technology,customer relationships and other intangible assets acquired from independent parties. Other intangible assets with a definite life are amortized over a period rangingfrom two to 10 years on a straight line basis, and 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, 2019 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 andrecognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grant date fair value of theaward. 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 iscalculated using our best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include our expected termand stock price volatility. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related stock-basedcompensation 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 basethe 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 ofthe 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 stockoptions 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 donot 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 accountfor forfeitures as they occur.43 The fair value of each new employee option awarded was estimated on the date of grant for the periods below using the Black-Scholes option pricing model withthe following assumptions: Year Ended December 31, 2019 2018 2017 Risk-free interest rate 2.35 - 2.58% 2.52 - 3.07% 2.24 - 2.36% Expected life (years) 6.25 6.25 6.50 Expected volatility 42.52 - 42.74% 41.68 - 42.22% 42.68 - 44.68% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $47.84 $50.08 $32.26 Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of our common stock during each offeringperiod at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offeringperiods with a single purchase period. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of ourcommon 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 compensationrelated 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, 2019 2018 2017 Risk-free interest rate 1.59 - 2.35% 2.06 - 2.33% 0.97 - 1.48% Expected life (months) 6.00 6.00 6.00 Expected volatility 42.63 - 53.57% 31.50 - 37.36% 24.49 - 34.51% Expected dividend yield 0% 0% 0% There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that 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 differentvaluation 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 haverecorded 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 expenserelating to stock options, restricted stock awards, performance stock units and our ESPP of $10.8 million, $10.9 million and $8.6 million during the years endedDecember 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we had $3.6 million of unrecognized stock-based compensation costs related to unvestedstock options that are expected to be recognized over a weighted average period of 2.6 years. We issued options to purchase 53,708, 36,600 and 60,100 shares of ourcommon stock in 2019, 2018 and 2017, respectively. As of December 31, 2019, we had $21.1 million of unrecognized stock-based compensation costs related to non-vested restricted stock, which is expected to be recognized over a weighted average period of 2.6 years. We issued restricted stock awards of 115,471, 106,855 and210,744 shares of our common stock in 2019, 2018 and 2017, respectively. As of December 31, 2019, we had $0.1 million of unrecognized stock-based compensation costsrelated to non-vested performance stock, which is expected to be recognized over a weighted average period of 0.1 years. The decrease in unrecognized stock-basedcompensation costs related to non-vested performance stock in 2019 when compared to 2018 is driven by a decrease in the number of shares expected to vest at the endof future performance periods. We issued performance stock awards of 21,434, 20,006 and 25,707 shares of our common stock in 2019, 2018 and 2017, respectively. In future periods, our stock-based compensation expense is expected to increase due to our existing unrecognized stock-based compensation and the issuance ofadditional 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 thedifferences 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 thedifferences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determiningincome taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities andequity, 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 ofassets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered andsettled, 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 amountin 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 establisha valuation allowance for any portion of our deferred tax assets that we believe will not be recognized.44 ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that an individualtax 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 onmeasurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Including interest and penalties, we haveestablished a liability for uncertain tax positions of $5.4 million as of December 31, 2019. The effective tax rate increased by 5.2% for the year ended December 31, 2019 when compared to 2018 primarily due to a decrease in tax benefits from the vestingof restricted stock and exercise of stock options, an increase in the state tax provision, and an increase to valuation allowances for unrealizable deferred tax assets. The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, requiredcompanies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourcedearnings. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outsidebasis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. Recently adopted accounting pronouncements During the fourth quarter of 2019, we early adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-04, Intangibles– Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. The adoption of this guidance had no material impact on ourconsolidated financial statements. During the first quarter of 2019, we adopted the FASB ASU 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assets and leaseliabilities by lessees for those leases classified as operating leases under previous guidance. We have adopted the new lease standard using the new transition optionissued under the amendments in ASU 2018-11, Leases, which allowed us to continue to apply the legacy guidance in Accounting Standards Codification (ASC)840, Leases, in the comparative periods presented in the year of adoption. We elected the package of practical expedients permitted under the transition guidance withinthe new standard, which among other things, allowed us to carry forward the historical lease classification. We made an accounting policy election to keep leases withan initial term of 12 months or less off of the balance sheet. We will recognize those lease payments in the Consolidated Statements of Comprehensive Income on astraight-line basis over the lease term. The impact of the adoption was an increase to our operating lease assets and liabilities on January 1, 2019 of $13.1 million. During the first quarter of 2018, we adopted the FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU is a comprehensive newrevenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects theconsideration that the entity expects to receive in exchange for those goods or services. We adopted the new revenue standard using the modified retrospectiveapproach. We manufacture custom parts to specific customer orders that have no alternative use to us, and we believe there is a legally enforceable right to payment forperformance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, we will recognize revenue over time. The transitionadjustment recorded was an increase of $1.5 million to our retained earnings balance as of January 1, 2018. During the first quarter of 2018, we adopted ASU 2017-09, Compensation – Stock Compensation, which is intended to provide clarity and reduce diversity inpractice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. The adoption of thisguidance did not have a material impact on our consolidated financial statements. Recently issued accounting pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes, which is intended to simplify the accounting for income taxes. This guidance will beeffective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. We are evaluating theimpact of future adoption of this guidance on our consolidated financial statements, but we do not expect the impact to be material. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscalyears beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The impact of this guidance will not have a materialimpact on our consolidated financial statements.45 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 ofcapital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income from our investments withoutassuming 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 ofour 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 evaluateour investment policy in order to continue our overall goals. Foreign Currency Risk As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incurproduction 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, ouroperating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operationsand cash flows will become increasingly subject to changes in foreign currency 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 estimatingthe change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change wouldgenerally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency losses of$0.8 million for the year ended December 31, 2019 and foreign currency gains of $0.3 million and $0.4 million for the years ended December 31, 2018 and 2017,respectively.46 Item 8. Financial Statements and Supplementary Data Proto Labs, Inc.Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm on Consolidated Financial Statements 48Report of Independent Registered Public Accounting Firm 50Consolidated Balance Sheets at December 31, 2019 and 2018 51Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 52Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017 53Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 54Notes to Consolidated Financial Statements 5547 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, 2019 and 2018, the related consolidatedstatements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, 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, thefinancial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019, 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 controlover financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) and our report dated February 26, 2020 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 statementsbased 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 theU.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 assuranceabout whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks ofmaterial misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide areasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated orrequired to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2)involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on theconsolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical auditmatters or on the accounts or disclosures to which they relate. Revenue Recognition – Revenue Recognized Over Time Description ofthe Matter As discussed in Notes 2 and 3 to the consolidated financial statements, the Company provides quality, quick-turn prototyping and on-demandmanufacturing services. The majority of revenue recognized in a reporting period is based on completed, invoiced contracts. The Companymanufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders and the Companybelieves that there is a legally enforceable right to payment for performance completed to date on these manufactured parts. Revenue is recognizedover time for manufactured parts which meet these two criteria. For revenue recognized over time, management uses the input method to measureprogress toward the complete satisfaction of performance obligations, based on production time incurred to date as a percentage of total estimatedproduction time.48 Auditing revenue recognized over time was challenging because the relevant accounting standard requires the Company to estimate the progresstowards satisfaction of performance obligations, applying a single appropriate method to measure progress. The input method requires an analysisof the incurred time in production and an estimate of the total time necessary to complete the total parts per the customer’s order. The Companyalso estimates a reasonable profit margin. These estimates are based on management’s assessment of the current status of production as well ashistorical results. How WeAddressed theMatter in OurAudit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process forrecognizing revenue over time. This included testing controls over management’s evaluation of contract terms, the estimation of production timeincurred to date and total production time used in the input method, estimation of a reasonable profit margin and the completeness and accuracy ofthe data used in the input method. To test the Company’s revenue recognition over time, we performed audit procedures that included, among others, inspecting a sample ofcontracts to evaluate the existence of an enforceable right to payment for performance completed to date, evaluating the progress towardscompletion of orders in process through examination of a sample of product shipments subsequent to the end of the reporting period, evaluatingthe reasonableness of management’s estimate of profit margins based on a comparison to historical margins, testing the appropriateness of thetiming and amount of revenue recognized over time based on the underlying inputs, and performing an independent sensitivity analysis toevaluate the impact on revenues of changes in significant assumptions. Capitalized Software Costs Description ofthe Matter As discussed in Note 2 to the consolidated financial statements, the Company follows ASC 350-40, Internal-Use Software, in accounting forinternally developed software. The Company capitalized $16.1 million of internal-use software costs during the year ended December 31, 2019. Auditing capitalized internal-use software development costs was challenging due to the degree of subjectivity involved in management’sassessment of what development activities and related costs met the capitalization criteria, as only those costs incurred in certain stages ofsoftware development and certain types of costs qualify for capitalization in accordance with the applicable accounting standard. How WeAddressed theMatter in OurAudit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s internal-use softwarecosts process. This included testing controls over management’s determination of which costs qualify for capitalization in accordance with theapplicable accounting standard and Company policy. To test the Company’s capitalization of internal-use software costs, we performed audit procedures that included, among others, inspectingunderlying documentation to evaluate whether the costs were capitalizable in accordance with the Company’s capitalization policy and theapplicable accounting standard. We also assessed the Company’s determination of costs that qualified for capitalization through inspection of asample of vendor contracts and invoices, inquiries of project personnel to assess the nature of the costs and review of payroll data to evaluate theinternal payroll costs capitalized. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2011. Minneapolis, MinnesotaFebruary 26, 202049 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, 2019, based on criteria established in Internal Control—IntegratedFramework 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, 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsof Proto Labs, Inc. as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of thethree years in the period ended December 31, 2019, and the related notes and our report dated February 26, 2020 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is toexpress 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 arerequired 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 andExchange Commission and the PCAOB. 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 assuranceabout 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 thedesign and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. 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 thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations 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 effectivenessto 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 orprocedures may deteriorate. /s/ Ernst & Young LLP Minneapolis, MinnesotaFebruary 26, 202050 Proto Labs, Inc.Consolidated Balance Sheets(In thousands, except share and per share amounts) December 31, 2019 2018 Assets Current assets Cash and cash equivalents $125,225 $85,046 Short-term marketable securities 35,437 46,750 Accounts receivable, net of allowance for doubtful accounts of $952 and $919 as of December 31, 2019 andDecember 31, 2018, respectively 57,450 59,155 Inventory 10,075 10,087 Prepaid expenses and other current assets 8,232 8,567 Income taxes receivable - 5,757 Total current assets 236,419 215,362 Property and equipment, net 263,712 228,001 Goodwill 128,752 128,752 Other intangible assets, net 17,369 19,850 Long-term marketable securities 12,960 23,579 Operating lease assets 11,425 - Other long-term assets 3,030 3,441 Total assets $673,667 $618,985 Liabilities and shareholders' equity Current liabilities Accounts payable $16,804 $17,411 Accrued compensation 15,058 18,130 Accrued liabilities and other 11,057 16,702 Current operating lease liabilities 3,340 - Income taxes payable 1,322 491 Total current liabilities 47,581 52,734 Long-term operating lease liabilities 8,565 - Long-term deferred tax liabilities 26,283 20,162 Other long-term liabilities 5,448 4,592 Total liabilities 87,877 77,488 Shareholders' equity Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of December31, 2019 and December 31, 2018, respectively - - Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,786,459 and 26,984,747shares as of December 31, 2019 and December 31, 2018, respectively 27 27 Additional paid-in capital 268,059 258,502 Retained earnings 324,722 291,460 Accumulated other comprehensive loss (7,018) (8,492)Total shareholders' equity 585,790 541,497 Total liabilities and shareholders' equity $673,667 $618,985 The accompanying notes are an integral part of these consolidated financial statements.51 Proto Labs, Inc.Consolidated Statements of Comprehensive Income(In thousands, except share and per share amounts) Year Ended December 31, 2019 2018 2017 Statements of Operations: Revenue $458,728 $445,596 $344,490 Cost of revenue 223,438 206,917 150,648 Gross profit 235,290 238,679 193,842 Operating expenses Marketing and sales 72,976 68,533 56,856 Research and development 32,692 28,735 23,560 General and administrative 49,766 52,513 41,200 Total operating expenses 155,434 149,781 121,616 Income from operations 79,856 88,898 72,226 Other income, net 1,337 2,757 2,209 Income before income taxes 81,193 91,655 74,435 Provision for income taxes 17,538 15,067 22,657 Net income $63,655 $76,588 $51,778 Net income per share: Basic $2.37 $2.84 $1.94 Diluted $2.35 $2.81 $1.93 Shares used to compute net income per share: Basic 26,866,985 26,982,614 26,647,610 Diluted 27,049,423 27,278,816 26,845,071 Other Comprehensive (Loss) Income, net of tax Foreign currency translation adjustments $1,474 $(3,258) $5,519 Comprehensive income $65,129 $73,330 $57,297 The accompanying notes are an integral part of these consolidated financial statements.52 Proto Labs, Inc.Consolidated Statements of Shareholders' Equity(In thousands, except share amounts) Common Stock Additional Accumulated Other Paid-In Retained Comprehensive Shares Amount Capital Earnings Loss Total Balance at January 1, 2017 26,504,868 26 213,857 176,703 (10,753) 379,833 Common shares issued on exercise of options and other 283,449 1 8,603 - - 8,604 Common shares issued for RAPID acquisition 118,140 1 11,335 - - 11,336 Stock-based compensation expense - - 8,558 - - 8,558 Repurchases of Common Stock (77,806) (1) (628) (3,784) - (4,413)Net income - - - 51,778 - 51,778 Other comprehensive income Foreign currency translation adjustment - - - - 5,519 5,519 Comprehensive income 57,297 Balance at December 31, 2017 26,828,651 $27 $241,725 $224,697 $(5,234) $461,215 Common shares issued on exercise of options and other 260,694 - 6,791 - - 6,791 Stock-based compensation expense - - 10,928 - - 10,928 Repurchases of Common Stock (104,598) - (942) (11,287) - (12,229)Revenue recognition transition adjustment - - - 1,462 - 1,462 Net income - - - 76,588 - 76,588 Other comprehensive income Foreign currency translation adjustment - - - - (3,258) (3,258)Comprehensive income 73,330 Balance at December 31, 2018 26,984,747 $27 $258,502 $291,460 $(8,492) $541,497 Common shares issued on exercise of options and other 128,174 - 1,904 - - 1,904 Stock-based compensation expense - - 10,781 - - 10,781 Repurchases of Common Stock (326,462) - (3,128) (30,393) - (33,521)Net income - - - 63,655 - 63,655 Other comprehensive income Foreign currency translation adjustment - - - - 1,474 1,474 Comprehensive income 65,129 Balance at December 31, 2019 26,786,459 $27 $268,059 $324,722 $(7,018) $585,790 The accompanying notes are an integral part of these consolidated financial statements.53 Proto Labs, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2019 2018 2017 Operating activities Net income $63,655 $76,588 $51,778 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,864 26,754 18,474 Stock-based compensation expense 10,781 10,928 8,558 Deferred taxes 6,106 11,936 1,174 Loss on impairment of assets - - 513 Gain on sale of businesses - (671) - Amortization of held-to-maturity securities 5 374 1,063 Other 391 (619) (153)Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 1,848 (6,098) (9,933)Inventories 60 (189) (985)Prepaid expenses and other 545 (2,098) (691)Income taxes 6,555 (6,652) 1,646 Accounts payable (719) 1,942 3,176 Accrued liabilities and other (4,039) 10,734 7,128 Net cash provided by operating activities 116,052 122,929 81,748 Investing activities Purchases of property, equipment and other capital assets (62,230) (87,104) (32,635)Cash used for acquisitions, net of cash acquired - (90) (110,533)Proceeds from sale of businesses - 284 - Purchases of other assets and investments (4,000) (126) (8,742)Purchases of marketable securities (46,403) (41,384) (20,037)Proceeds from maturities of marketable securities 68,330 65,139 47,972 Net cash used in investing activities (44,303) (63,281) (123,975) Financing activities Payments on debt - (5,000) - Proceeds from issuance of debt - - 5,000 Proceeds from exercises of stock options 4,391 8,935 8,602 Purchases of shares withheld for tax obligations (2,487) (2,144) - Repurchases of common stock (33,521) (12,229) (4,410)Net cash used in financing activities (31,617) (10,438) 9,192 Effect of exchange rate changes on cash and cash equivalents 47 (871) 947 Net increase (decrease) in cash and cash equivalents 40,179 48,339 (32,088)Cash and cash equivalents, beginning of period 85,046 36,707 68,795 Cash and cash equivalents, end of period $125,225 $85,046 $36,707 Supplemental cash flow disclosure Cash paid for interest $14 $39 $19 Cash paid for taxes $4,002 $9,966 $19,113 The accompanying notes are an integral part of these consolidated financial statements.54 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 1 — Nature of Business Organization and business Proto Labs, Inc. and its subsidiaries (Proto Labs, the Company, we, us, or our) is an 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’scustomers are product developers and engineers throughout the world who require a faster and less expensive way to obtain low volumes of parts. The Company’sproprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, andits 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 andengineers who use three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company hasestablished operations in the United States, Europe and Japan, which the Company believes are among the largest geographic markets where these product developersand 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 headquartered in Maple Plain, Minnesota. The Company’s subsidiaries are: Name Location PL-US International LLC United States Rapid Management Group LLC United States Rapid Sheet Metal LLC (RSM) United States Rapid Manufacturing LLC (RM) United States Proto Labs Ltd. United Kingdom PL International Holdings, UK, Ltd. United Kingdom PL Euro Services Limited United Kingdom Proto Labs GmbH Germany Proto Labs Tooling GmbH Germany Proto Labs, G.K. Japan Note 2 — Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, 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 theaccompanying consolidated statements of comprehensive income and consolidated statements of shareholders’ equity.55 Proto Labs, Inc.Notes to Consolidated Financial Statements Accounting estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statementsand 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 suchaccounts. Marketable securities Marketable securities include held-to-maturity debt securities recorded at amortized cost. Management determines the appropriate classification of debt securitiesat 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 thepositive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretionof discounts to maturity computed under the effective interest method. Such amortization is included in other income, net. Interest on securities classified as held tomaturity is included in other income, net. The classification of marketable securities as current or non-current is dependent upon the security’s maturity date. Securitieswith maturities of three months or less at the time of purchase are categorized as cash equivalents as described above. The Company reviews impairments associatedwith its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments – Debt and Equity Securities, when determining theclassification of impairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-temporary includeassessment 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 itsaccounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking intoaccount the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon 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 itemsidentified 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 undercapital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturingequipment 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 to5 years, building costs are depreciated over 39 years, leasehold improvements are depreciated over the estimated lives of the related assets or the life of the lease,whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the asset is put into use. The Company follows ASC 350-40, Internal-Use Software, in accounting for internally developed software. As of December 31, 2019 and 2018, respectively, $32.7million and $16.6 million of software development costs were capitalized. Capitalized software development costs for the year ended December 31, 2019 were $16.1million.56 Proto Labs, Inc.Notes to Consolidated Financial Statements Goodwill The Company recognizes goodwill in accordance with ASC 350, Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over theamounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in thefourth 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 maybe impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. Other Intangible Assets Other intangible assets include software technology, customer relationships and other intangible assets acquired from other independent parties. Other intangibleassets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis, and are tested for impairment whenever events orcircumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of anasset 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’scarrying 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 animpairment or if depreciation periods should be modified. If facts or circumstances indicate that an impairment may exist, the Company will prepare a projection of theundiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an adjustment will bemade to reduce the carrying amount of the specific assets to fair value. Revenue recognition On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. The Companymanufactures custom parts to specific customer orders that have no alternative use to the Company, and the Company believes there is a legally enforceable right topayment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the Company will recognize revenue overtime. Revenue is recognized over time using the input method based on time in production as a percentage of total estimated production time to measure progresstoward satisfying performance obligations. Prior to 2018, the Company recognized revenue when it was realized or realizable and earned when all of the following criteria were met: persuasive evidence of anarrangement existed, delivery had occurred or services had been rendered, the price to the buyer was fixed or determinable and collectability was reasonably assured.Revenue was recognized upon transfer of title and risk of loss, which was generally upon the shipment of parts in the Company’s Injection Molding, CNC Machining,3D Printing and Sheet Metal product lines. Leases On January 1, 2019, the Company adopted ASC 842, Leases, which introduced the balance sheet recognition of lease assets and lease liabilities by lessees forthose leases classified as operating leases under previous guidance. The Company determines if an arrangement is a lease at inception. Operating leases are includedin operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on thepresent value of lease payments over the lease term at commencement date.57 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 andliabilities 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 theyear in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the financial statements are included indetermining 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 betweenthe tax basis of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets andliabilities 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 ataxable 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 deferredtax 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 positionsare recorded only when they meet a more-likely-than-not criterion. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest andpenalties, 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 valuerecognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes the compensation expense overthe requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense recognized during aperiod 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 expenserecognized 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, theawards 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-Scholesoption-pricing model. Advertising costs Advertising is expensed as incurred and was approximately $13.0 million, $11.8 million and $10.7 million for the years ended December 31, 2019, 2018 and 2017,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,enhancements of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. Costs forinternal use software are evaluated by project and capitalized where appropriate under ASC 350-40, Intangibles - Goodwill and Other, Internal-Use Software. Researchand development costs were approximately $32.7 million, $28.7 million and $23.6 million for the years ended December 31, 2019, 2018 and 2017, 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 ineffect throughout the period. The Company has recorded the translation adjustment as a separate component of consolidated shareholders’ equity. Foreign currencytransaction gains and losses are recognized in the consolidated statements of comprehensive income. Business combinations The Company accounts for business combinations in accordance with ASC 805, Business Combinations (ASC 805). On November 30, 2017, the Companyacquired RAPID Manufacturing Group, LLC (RAPID) for $122.0 million, consisting of $110.6 million in cash and $11.3 million in the Company’s common stock.58 Proto Labs, Inc.Notes to Consolidated Financial Statements Recently adopted accounting pronouncements During the fourth quarter of 2019, the Company early adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-04,Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. The adoption of this guidance had no material impact on theCompany's consolidated financial statements. During the first quarter of 2019, the Company adopted the FASB ASU 2016-02, Leases (ASC 842), which introduces the balance sheet recognition of lease assetsand lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the newtransition option issued under the amendments in ASU 2018-11, Leases, which allowed the Company to continue to apply the legacy guidance in Accounting StandardsCodification (ASC) 840, Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted underthe transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company madean accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in theConsolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operatinglease assets and liabilities on January 1, 2019 of $13.1 million. During the first quarter of 2018, the Company adopted the FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU is a comprehensivenew revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects theconsideration that the entity expects to receive in exchange for those goods or services. The Company adopted the new revenue standard using the modifiedretrospective approach. The Company manufactures custom parts to specific customer orders that have no alternative use to the Company, and the Company believesthere is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, theCompany will recognize revenue over time. The transition adjustment recorded was an increase of $1.5 million to the Company's retained earnings balance as of January1, 2018. During the first quarter of 2018, the Company adopted ASU 2017-09, Compensation – Stock Compensation, which is intended to provide clarity and reducediversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. The adoption ofthis guidance did not have a material impact on the Company's consolidated financial statements. Recently issued accounting pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes, which is intended to simplify the accounting for income taxes. This guidance will beeffective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. The Company is evaluatingthe impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for fiscalyears beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The impact of this guidance will not have a materialimpact on the Company's consolidated financial statements.59 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 3 – Revenue The Company provides quality, quick-turn prototyping and on-demand manufacturing services. As a result, the majority of revenue recognized in a reportingperiod is based on completed, invoiced contracts. The Company accounts for revenue in accordance with ASC 606, which the Company adopted on January 1, 2018,using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are notadjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. The Company recorded a net increase of $1.5 million to itsretained earnings balance on January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact of adopting ASC 606 was to increase revenue by $0.3million and increase cost of revenue by $0.2 million for the year ended December 31, 2018, and to increase accounts receivable by $2.9 million and decrease inventory by$1.3 million as of December 31, 2018, which includes the transition adjustment of $1.5 million noted above. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. The majority ofthe Company’s CNC machining, 3D printing, and sheet metal contracts have a single performance obligation. The majority of the Company’s injection molding contractshave multiple performance obligations including one obligation to produce the mold and a second obligation to produce parts. For injection molding contracts withmultiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standaloneselling price based on the price charged to customers. The Company manufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders, and the Companybelieves there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these twocriteria, the Company will recognize revenue over time. Revenue is recognized over time using the input method based on time in production as a percentage of totalestimated production time to measure progress toward satisfying performance obligations. Revenue by geographic region for the years ended December 31, 2019, 2018 and 2017 was as follows: Year Ended December 31, (in thousands) 2019 2018 2017 Revenue: United States $360,205 $350,535 $263,086 Europe 82,805 80,889 70,154 Japan 15,718 14,172 11,250 Total revenue $458,728 $445,596 $344,490 Revenue by product line for the years ended December 31, 2019, 2018 and 2017 was as follows: Year Ended December 31, (in thousands) 2019 2018 2017 Revenue: Injection Molding $217,415 $210,523 $194,432 CNC Machining 155,473 153,521 103,739 3D Printing 61,352 53,342 43,329 Sheet Metal 21,000 24,998 1,767 Other Revenue 3,488 3,212 1,223 Total revenue $458,728 $445,596 $344,490 The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recordedwithin marketing and sales expenses. The value of unsatisfied performance obligations for contracts with an original expected length of one year or less is not material.60 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 4 – 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 basedon the weighted average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had the potentiallydilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentiallydilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans andshares committed to be purchased under the employee stock purchase plan. The following table presents the calculation of net income per basic and diluted share attributable to common shareholders: Year Ended December 31, (in thousands, except share and per share amounts) 2019 2018 2017 Net Income $63,655 $76,588 $51,778 Basic - weighted-average shares outstanding: 26,866,985 26,982,614 26,647,610 Effect of dilutive securities: Employee stock options and other 182,438 296,202 197,461 Diluted - weighted-average shares outstanding: 27,049,423 27,278,816 26,845,071 Net income per share attributable to common shareholders: Basic $2.37 $2.84 $1.94 Diluted $2.35 $2.81 $1.93 Note 5 – Business Combinations On November 30, 2017, the Company acquired RAPID for $122.0 million, consisting of $110.6 million in cash (net of cash acquired) and $11.3 million in theCompany’s common stock. The operations of RAPID are 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 Companyoffers 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 paidexceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill of $99.8 million. The goodwill primarily relates to synergies resultingfrom 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. Thecustomer 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 theDiscounted 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 $6,720 Goodwill 99,836 Other intangible assets 8,700 Other long-term assets 8,855 Total assets acquired 124,111 Liabilities assumed: Current liabilities 2,067 Other long-term liabilities 85 Total liabilities assumed 2,152 Net assets acquired $121,959 Cash paid $115,378 Cash acquired (4,755)Net cash consideration 110,623 Equity portion of purchase price 11,336 Total purchase consideration $121,959 The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2017 acquisition of RAPID had occurred at thebeginning of fiscal 2016. These performance results may not be indicative of the actual results that would have occurred under the ownership and management of theCompany. Year Ended December 31, (in thousands) 2017 2016 (unaudited) Revenue $386,677 $336,634 Net income 55,070 41,805 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 inestimated depreciation expense of approximately $0.9 million and the increase in estimated amortization expense of approximately $3.0 million. The unaudited pro formanet 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 millionin connection with the acquisition, an increase in estimated depreciation expense of approximately $0.6 million and the increase in estimated amortization expense ofapproximately $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 formainformation has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates and actual amounts maydiffer 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 RAPIDacquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the RAPID acquisitionoccurred 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 relatedto 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 Note 6 – Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows: (in thousands) Dec. 31, 2017 Goodwill acquiredduring 2018 Dec. 31, 2018 Goodwill acquiredduring 2019 Dec. 31, 2019 United States $123,635 $248 $123,883 $- $123,883 Europe 4,239 - 4,239 - 4,239 Japan 630 - 630 - 630 Total goodwill $128,504 $248 $128,752 $- $128,752 As described in Note 5 – Business Combinations, the Company acquired RAPID in November 2017. The fair value of the consideration paid exceeded the fairvalue of the assets acquired and liabilities assumed, which resulted in goodwill in the United States of $99.6 million for the year ended December 31, 2017 and a relatedworking capital adjustment of $0.2 million for the year ended December 31, 2018. Intangible assets other than goodwill for the years ended December 31, 2019 and 2018 were as follows: Year Ended December 31, 2019 Year Ended December 31, 2018 WeightedAverageUseful Life (in thousands) Gross AccumulatedAmortization Net Gross AccumulatedAmortization Net Useful Life(in years) Remaining(in years) Intangible Assets with finite lives: Marketing assets $930 $(527) $403 $930 $(434) $496 10.0 4.3 Non-compete agreement 270 (222) 48 270 (206) 64 2.0 - 5.0 3.0 Trade secrets 250 (250) - 250 (233) 17 5.0 0.0 Trade names 1,080 (1,080) - 1,080 (540) 540 2.0 0.0 Software technology 13,229 (2,275) 10,954 12,229 (997) 11,232 10.0 8.0 Customer relationships 10,070 (4,106) 5,964 10,070 (2,569) 7,501 6.0 - 9.0 3.8 Total intangible assets $25,829 $(8,460) $17,369 $24,829 $(4,979) $19,850 Amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 was $3.5 million, $3.2 million and $0.5 million, 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 softwaretechnology intangible asset for the year ended December 31, 2017. The acquisition did not meet the definition of a business under ASC 805. The asset acquisitionincluded an additional $5.0 million in contingent consideration to be recognized and paid upon completion of certain milestones over a 24-month period. The completionof each milestone resulted in additional value to the software technology intangible asset. We recognized $1.0 million of the contingent consideration for the year endedDecember 31, 2019. We recognized $4.0 million of the contingent consideration for the year ended December 31, 2018. Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows: (in thousands) EstimatedAmortization Expense 2020 $3,016 2021 3,016 2022 3,016 2023 2,813 2024 1,400 Thereafter 4,108 Total estimated amortization expense $17,369 63 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 7 – 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 exitprice) 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 alsoestablishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputsthat 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; orother 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, 2019 and 2018, respectively, consist of money market mutual funds. The Companydetermines the fair value of these financial assets using Level 1 inputs. The following tables summarizes financial assets as of December 31, 2019 and 2018 measured at fair value on a recurring basis: December 31, 2019 December 31, 2018 (in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial Assets: Cash and cash equivalents Money market mutual funds $68,962 $- $- $8,943 $- $- Total $68,962 $- $- $8,943 $- $- 64 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 8 – 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 andare 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 regardingthe Company’s short-term and long-term marketable securities as of December 31, 2019 and 2018 is as follows: December 31, 2019 (in thousands) Amortized Cost Unrealized Gains UnrealizedLosses Fair Value U.S. government agency securities $6,274 $1 $(7) $6,268 Corporate debt securities 26,944 80 (12) 27,012 U.S. municipal securities 10,204 9 (3) 10,210 Commercial paper 3,491 - - 3,491 Certificates of deposit/time deposits 1,484 22 - 1,506 Total marketable securities $48,397 $112 $(22) $48,487 December 31, 2018 (in thousands) Amortized Cost Unrealized Gains UnrealizedLosses Fair Value U.S. government agency securities $16,843 $- $(88) $16,755 Corporate debt securities 31,769 - (96) 31,673 U.S. municipal securities 17,509 1 (33) 17,477 Certificates of deposit/time deposits 4,208 - (25) 4,183 Total marketable securities $70,329 $1 $(242) $70,088 Fair values for the U.S. government agency securities and corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair valuesfor the U.S. municipal securities, commercial paper 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. Theinvestment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Those unrealized losses displayedabove 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 Companyintends, 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.65 Proto Labs, Inc.Notes to Consolidated Financial Statements The December 31, 2019 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities maydiffer from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. December 31, (in thousands) 2019 Due in one year or less $35,437 Due after one year through five years 12,960 Total marketable securities $48,397 Note 9 – Property and Equipment Property and equipment consists of the following: December 31, (in thousands) 2019 2018 Land $14,098 $10,566 Buildings and improvements 75,843 72,819 Machinery and equipment 208,954 185,416 Computer hardware and software 24,953 22,323 Leasehold improvements 7,341 7,330 Construction in progress 54,313 25,279 Total 385,502 323,733 Accumulated depreciation and amortization (121,790) (95,732)Property and equipment, net $263,712 $228,001 Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $27.4 million, $23.5 million and $18.0 million, respectively. Note 10 – 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 itemsidentified to their recoverable amounts. The Company’s inventory consists of the following: December 31, (in thousands) 2019 2018 Raw materials $9,818 $9,560 Work in process 501 792 Total inventory 10,319 10,352 Allowance for obsolescence (244) (265)Inventory, net of allowance $10,075 $10,087 66 Proto Labs, Inc.Notes to Consolidated Financial Statements Note 11 – Financing Obligations The Company had no financing obligations as of December 31, 2019 and 2018. Note 12 – 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 tofederal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions andmay make a discretionary contribution to the plan. Total employer contributions were approximately $3.1 million, $2.7 million and $1.9 million for the years endedDecember 31, 2019, 2018 and 2017, respectively. The Company also sponsors a defined contribution retirement plan that covers the employees in the United Kingdom. Total employer contributions wereapproximately $0.3 million in each of the years ended December 31, 2019, 2018 and 2017. Note 13 – 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 ofthe 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 awards will be issuedunder 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. Thecompensation committee of the board of directors may provide that the vesting or payment of any award will be subject to the attainment of specified performancemeasures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have beenachieved. 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 ourcommon stock on the date of the grant. Restricted stock is valued at fair market value on the date of grant. 67 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 ata discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periodswith 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 theCompany’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 41,615 and 33,562 shares of common stock under the ESPP at an average exercise price of $86.70 and $85.61 during 2019 and 2018,respectively. As of December 31, 2019, 1,168,830 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 expensefor 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 Companyuses 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 and stock price volatility. 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 stockoptions 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 basesthe 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 awardbeing valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expecteddividend yield of zero in the option pricing model. The Company accounts for forfeitures as they occur. The Company allocates stock-based compensation expense on astraight-line basis over the requisite service period. The following table summarizes stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively: Year Ended December 31, (in thousands) 2019 2018 2017 Stock options and other $9,591 $10,113 $7,954 Employee stock purchase plan 1,190 815 604 Total stock-based compensation expense $10,781 $10,928 $8,558 Cost of revenue $2,056 $1,543 $970 Operating expenses: Marketing and sales 2,632 1,942 1,429 Research and development 1,851 1,517 1,091 General and administrative 4,242 5,926 5,068 Total stock-based compensation expense $10,781 $10,928 $8,558 68 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, 2019, 2018 and 2017: Year Ended December 31, 2019 2018 2017 Risk-free interest rate 2.35 - 2.58% 2.52 - 3.07% 2.24 - 2.36% Expected life (years) 6.25 6.25 6.5 Expected volatility 42.52 - 42.74% 41.68 - 42.22% 42.68 - 44.68% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $47.84 $50.08 $32.26 The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31, 2019, 2018 and 2017: Weighted- Average Stock Options Exercise Price Options outstanding at January 1, 2017 569,639 $45.00 Granted 60,100 69.06 Exercised (187,313) 35.93 Cancelled (43,371) 61.02 Options outstanding at December 31, 2017 399,055 51.13 Granted 36,600 110.59 Exercised (155,765) 38.92 Cancelled (27,274) 74.35 Options outstanding at December 31, 2018 252,616 64.71 Granted 53,708 105.81 Exercised (16,079) 48.67 Cancelled (13,979) 89.50 Options outstanding at December 31, 2019 276,266 $72.38 Exercisable at December 31, 2019 152,423 $59.26 The outstanding options have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vesting period, which isgenerally a four- or 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, 2019, 2018 and 2017, was $0.9 million, $13.0 million and $7.0 million,respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exerciseprices. For options outstanding at December 31, 2019, the weighted-average remaining contractual term was 5.5 years and the aggregate intrinsic value was $8.6 million.For options exercisable at December 31, 2019, the weighted-average remaining contractual term was 3.6 years and the aggregate intrinsic value was $6.5 million. Refer tothe table below for additional information. 69 Proto Labs, Inc.Notes to Consolidated Financial Statements The following table summarizes information about stock options outstanding at December 31, 2019: Options Outstanding, Vested and Expected to Vest Options Exercisable Range of Exercise Prices NumberOutstanding Weighted AverageRemainingContractual Life Weighted AverageExercise Price ($) NumberExercisable Weighted AverageExercise Price ($) $7.76 to $31.43 23,883 1.98 25.04 23,883 25.04 $31.44 to $66.87 125,022 4.42 58.67 85,656 58.81 $66.88 to $96.20 45,255 4.49 70.98 33,445 70.41 $96.21 to $123.10 82,106 8.68 107.79 9,439 110.36 The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive income. As of December 31, 2019, there was$3.6 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years.The total fair value of options vested was $1.5 million, $1.5 million and $2.8 million for the years ended December 31, 2019, 2018 and 2017, 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 thevesting period, which is generally a four- or five-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to theCompany. 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, 2019, 2018 and 2017: Weighted- Average Grant Date Restricted Fair Value Stock Awards Per Share Restricted stock at January 1, 2017 215,105 $62.78 Granted 210,744 63.70 Restrictions lapsed (60,102) 63.60 Forfeited (30,916) 61.99 Restricted stock at December 31, 2017 334,831 63.29 Granted 106,855 115.41 Restrictions lapsed (86,191) 63.64 Forfeited (31,574) 68.67 Restricted stock at December 31, 2018 323,921 79.85 Granted 115,471 106.35 Restrictions lapsed (92,597) 77.25 Forfeited (31,822) 87.58 Restricted stock at December 31, 2019 314,973 $89.55 70Proto Labs, Inc.Notes to Consolidated Financial StatementsAs of December 31, 2019, there was $21.1 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to berecognized over a weighted-average period of 2.6 years.Performance StockPerformance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target numbercapable 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 periodand the award recipient’s continued employment.The following table summarizes performance stock activity for the years ended December 31, 2019, 2018 and 2017: Weighted-AverageGrant DatePerformanceFair ValueStock AwardsPer SharePerformance stock at January 1, 2017- $- Granted25,707 58.35 Restrictions lapsed- - Forfeited- - Performance stock at December 31, 201725,707 58.35 Granted20,006 105.75 Restrictions lapsed- - Performance change6,427 58.35 Forfeited- - Performance stock at December 31, 201852,140 76.54 Granted21,434 104.99 Restrictions lapsed- - Performance change(61,816)88.06 Forfeited(2,375)105.37 Performance stock at December 31, 20199,383 $58.35 As of December 31, 2019, there was $0.1 million of unrecognized compensation expense related to non-vested performance stock, which is expected to berecognized over a weighted-average period of 0.1 years. The decrease in unrecognized stock-based compensation costs related to non-vested performance stock in 2019when compared to 2018 is driven by a decrease in the number of shares expected to vest at the end of future performance periods.Employee Stock Purchase PlanThe following table presents the assumptions used to estimate the fair value of the ESPP during the years ended December 31, 2019, 2018 and 2017:Year Ended December 31,201920182017Risk-free interest rate1.59 - 2.35%2.06 - 2.33%0.97 - 1.48%Expected life (months)6.006.006.00Expected volatility42.63 - 53.57%31.50 - 37.36%24.49 - 34.51%Expected dividend yield0%0%0%7172 Note 14 – LeasesThe Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K forthe year ended December 31, 2019. Significant changes to the Company’s accounting policies as a result of adopting ASC 842 are discussed below.The Company accounts for leases in accordance with ASC 842. The Company adopted the standard as of January 1, 2019, using the alternative transition methodprovided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date (the "effective date method"). Under the effectivedate method, comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments to reflect the adoption of ASC 842. TheCompany elected the package of practical expedients permitted under the transition guidance within the new standard. The Company did not elect the hindsightpractical expedient. The Company recorded a net increase of $13.1 million to its operating lease assets and liabilities on January 1, 2019. The adoption did not result in acumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 did not have a material impact on the Company's consolidatedstatements of comprehensive income, shareholders' equity or cash flows as of the adoption date.The Company has operating leases for office space, manufacturing facilities and certain company vehicles and equipment. The leases have remaining lease termsof one year to 10 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease whenit is reasonably certain that the Company will exercise that option. As of December 31, 2019, the operating lease liability does not include any options to extend orterminate leases. The Company currently has no finance leases.The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities andlong-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term atcommencement date. The majority of the Company’s leases do not provide an implicit rate of return, therefore, the Company uses its incremental borrowing rate basedon the information available at commencement date in determining the present value of lease payments. Lease agreements that contain non-lease components, with theexception of certain real estate leases, are accounted for as a single lease component.Supplemental balance sheet information related to leases was as follows:(in thousands)December 31, 2019Operating lease assets$11,425 Current operating lease liabilities$3,340 Long-term operating lease liabilities8,565 Total operating lease liabilities$11,905 Lease expense is recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred. Thecomponents of lease expense for the periods reported were as follows:Three Months EndedTwelve Months Ended (in thousands)December 31, 2019December 31, 2019Operating lease cost$976 $3,960 Variable lease cost228 1,039 Total lease cost$1,204 $4,999 Maturities of operating lease liabilities as of December 31, 2019 (in accordance with ASC 842) were as follows:(in thousands)Operating LeasesYear Ending December 31,2020$4,034 20212,835 20222,634 20231,064 2024498 After 20241,613 Total future minimum lease payments12,678 Less interest(773)Present value of lease liabilities$11,905 As of December 31, 2019, we have no operating leases that have not yet commenced.Weighted average remaining lease term and discount rate was as follows: December 31, 2019Weighted Average Remaining Lease Term (Years)4.8Weighted Average Discount Rate2.6%Supplemental cash flow information related to leases was as follows:Twelve Months Ended (in thousands)December 31, 2019 Cash paid for amounts included in the measurement of operating lease liabilities:Operating cash flows from operating leases$5,020 Lease assets obtained in exchange for new operating lease liabilities1,921 73Proto Labs, Inc.Notes to Consolidated Financial StatementsNote 15 – Accumulated Other Comprehensive LossOther comprehensive loss is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated othercomprehensive loss balances for the years ending December 31, 2019, 2018 and 2017, respectively:Year Ended December 31,(in thousands)201920182017Foreign currency translation adjustmentsBalance at beginning of period$(8,492)$(5,234)$(10,753)Other comprehensive (loss) income before reclassifications1,474 (3,258)5,519 Amounts reclassified from accumulated other comprehensive income (loss)- - - Net current-period other comprehensive (loss) income1,474 (3,258)5,519 Balance at end of period$(7,018)$(8,492)$(5,234)Note 16 – Income TaxesThe 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 yearsended December 31, 2019, 2018 and 2017, the Company recorded an income tax provision of $17.5 million, $15.1 million and $22.7 million, respectively. The effectiveincome tax rate for the years ended December 31, 2019, 2018 and 2017 was 21.6 percent, 16.4 percent and 30.4 percent, respectively.74Proto Labs, Inc.Notes to Consolidated Financial StatementsThe effective tax rate increased by 5.2% for the year ended December 31, 2019 when compared to 2018 primarily due to a decrease in tax benefits from the vestingof restricted stock and exercise of stock options, an increase in the state tax provision, and an increase to valuation allowances for unrealizable deferred tax assets. The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, requiredcompanies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourcedearnings. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outsidebasis 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 taxesare as follows:Year Ended December 31,(in thousands)201920182017Domestic$74,841 $81,893 $69,929 Foreign6,352 9,762 4,506 Total$81,193 $91,655 $74,435 Significant components of the provision for income taxes for the following periods are as follows:Year Ended December 31,(in thousands)201920182017Current:Federal$6,991 $(782)$17,808 State2,882 2,078 1,367 Foreign1,544 1,810 2,215 DeferredFederal5,121 11,325 865 State269 538 193 Foreign(809)(430)(1,918)Valuation Allowance1,540 528 2,127 Total$17,538 $15,067 $22,657 75A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:Year Ended December 31,201920182017Federal tax statutory rate21.0% 21.0% 35.0%State tax (net of federal benefit)2.1 2.0 1.7 Share based compensation(0.5)(2.8)(0.8)Valuation allowance against deferred tax assets1.4 0.7 2.9 Research and development credit(2.8)(2.5)(2.2)Foreign rate differential(0.3)(0.1)(1.9)Tax reserves1.1 (0.1)0.9 Domestic manufacturing deduction- - (2.5)Miscellaneous(0.4)(0.5)(0.2)Transition tax- (0.8)3.2 Revaluation of deferred tax liability- (0.5)(5.7)Total21.6% 16.4% 30.4%Significant components of deferred tax assets and liabilities are as follows:December 31,(in thousands)20192018Deferred tax assets:Accrued expenses$1,362 $931 Leases3,337 - Warrants and stock options3,325 2,908 Intangible assets1,171 748 Inventories169 154 Other assets1,765 666 Net operating loss6,513 6,605 Less valuation allowance(8,248)(6,900)Total deferred tax assets9,394 5,112 Deferred tax liabilities:Depreciation(26,750)(21,788)Goodwill(5,590)(3,486)Leases(3,337)- Total deferred tax liabilities(35,677)(25,274)Net deferred tax liability$(26,283)$(20,162)The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2019. Such amounts areintended 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 foreignearnings. As of December 31, 2019, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $9.3 million.As of December 31, 2019, the Company had estimated net operating loss carry forwards of $6.5 million for tax purposes. The net operating losses relate tooperations in Japan and Germany. Japan losses can be carried forward for up to ten years. The remaining Japan net operating losses begin to expire at various datesbetween 2020 and 2026. The Company’s Japan operations are taxed both by local authorities and in the U.S. Germany net operating losses may be carried forwardwithout any time limitations but are limited to €1 million, plus 60 percent of taxable income exceeding €1 million.76Proto Labs, Inc.Notes to Consolidated Financial StatementsThe 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 $8.2 million and $6.9 million at December 31, 2019 and2018, respectively, reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient positiveevidence for recognition. The increase in the valuation allowance is primarily attributable to fluctuations in foreign currency and the net operating losses incurred inGermany in 2019.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 nolonger subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2016.The Company has liabilities related to unrecognized tax benefits totaling $4.6 million and $4.1 million at December 31, 2019 and 2018, respectively, that ifrecognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidatedbalance sheets. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-termincome taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2019, 2018 and 2017.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:December 31,20192018Balance at beginning of period$4,096 $4,233 Additions for tax positions of current year592 593 Additions for tax positions of prior years- 309 Decrease related to expiration of statutes of limitations(90)(1,039)Balance at period end$4,598 $4,096 Note 17 – LitigationFrom 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 oflitigation 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, wouldindividually or in the aggregate be reasonably expected to have a material adverse effect on its business.Note 18 – Segment ReportingThe Company’s reportable segments are based on the internal reporting used by the Company’s CEO, who is the chief operating decision maker (CODM), toassess operating performance and make decisions about the allocation of resources. The Company’s reportable segments are based upon geographic region, consistingof the United States and Europe. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and generaland 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 fromInjection Molding, CNC Machining, and 3D Printing product lines. Revenue in Japan is derived from Injection Molding and CNC Machining product lines. InjectionMolding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined and lathe-turnedcustomer parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal parts.77Proto Labs, Inc.Notes to Consolidated Financial StatementsThe accounting policies of the reportable segments are the same as those described in Note 2 – Summary of Significant Accounting Policies. Intercompanytransactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income fromoperations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated tobusiness segments.Beginning in 2019, the Company's CODM made a decision to view certain research and development costs by geographic region. As a result, costs previouslyincluded in the Corporate Unallocated and Japan category have been included in the respective geographic regions. All periods presented have been restated to reflectthis change.Revenue and income from operations by reportable segment are as follows:Year Ended December 31,(in thousands)201920182017Revenue:United States$360,205 $350,535 $263,086 Europe82,805 80,889 70,154 Japan15,718 14,172 11,250 Total revenue$458,728 $445,596 $344,490 Year Ended December 31,(in thousands)201920182017Income from Operations:United States$108,594 $115,710 $99,561 Europe15,077 16,747 12,796 Corporate Unallocated and Japan(43,815)(43,557)(40,131)Total income from operations$79,856 $88,898 $72,226 Total long-lived assets, expenditures for additions to long-lived assets and depreciation and amortization expense are as follows:December 31,December 31,December 31,(in thousands)201920182017Long-lived assets:United States$210,171 $185,979 $125,308 Europe45,019 34,577 33,691 Japan8,522 7,445 7,441 Total long-lived assets$263,712 $228,001 $166,440 Year Ended December 31,(in thousands)201920182017Expenditures for additions to long-lived assets:United States$45,123 $78,762 $20,370 Europe14,743 7,576 11,704 Japan2,364 766 561 Total expenditures for additions to long-lived assets$62,230 $87,104 $32,635 78Proto Labs, Inc.Notes to Consolidated Financial StatementsYear Ended December 31,(in thousands)201920182017Depreciation and Amortization:United States$24,767 $21,117 $13,267 Europe4,746 4,679 4,174 Japan1,351 958 1,033 Total depreciation and amortization$30,864 $26,754 $18,474 Note 19 – Subsequent EventsNone.79Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation ofour 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 bythis 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 AnnualReport on Form 10-K, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in thereports 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 rulesand forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.Management’s Annual Report on Internal Control Over Financial ReportingThe Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in theExchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established bythe 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, 2019, the Company’s internal control over financial reporting is effective. The Company’s registered public accountingfirm’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.Changes in Internal Control over Financial ReportingThere 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 periodcovered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other InformationNone.80PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe 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 theheading “Executive Officers of the Registrant” and with respect to other information relating to our directors will be set forth in our 2020 Proxy Statement under thecaption “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, andis 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 — Section16(a) Beneficial Ownership Reporting Compliance” of our 2020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by thisAnnual 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 thesection 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 AnnualReport 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 andprincipal 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 topost to our website at the address described above any future amendments or waivers of our Code of Ethics and Business Conduct.Item 11. Executive CompensationInformation 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 2020 Proxy Statement, which will be filed no later than 120days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and ManagementInformation related to security ownership required by this item is incorporated herein by reference to the section titled “Security Ownership of Certain BeneficialOwners and Management” of our 2020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form10-K. Information related to our equity compensation plans required by this item is incorporated herein by reference to the section titled “Compensation Discussion andAnalysis – Information Regarding Equity-Based Compensation Plans” of our 2020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.Item 13. Certain Relationships and Related Transactions, and Director IndependenceInformation required by this item is incorporated herein by reference to the sections titled “Corporate Governance — Certain Relationships and Related PartyTransactions,” and “Corporate Governance — Director Independence” of our 2020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscalyear covered by this Annual Report on Form 10-K.Item 14. Principal Accountant Fees and ServicesInformation required by this item is incorporated herein by reference to the section titled “Fees Paid to Independent Registered Public Accounting Firm” of our2020 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.81PART IVItem 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this report:1. Consolidated Financial StatementsSee Index to Consolidated Financial Statement at Item 8 herein.2. Financial Statement SchedulesSchedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financialstatement or notes herein.3. ExhibitsSee the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.82Exhibit Number Description of Exhibit2.1(29)Membership Interest Purchase Agreement, dated November 16, 2017, by and among Proto Labs, Inc., Rapid Manufacturing Group, LLC and themembers listed therein. (Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of anyomitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.)3.1(1)Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.3.2(27)Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 20153.3(2)Second Amended and Restated By-Laws of Proto Labs, Inc, as amended through November 8, 2016.4.1(3)Form of certificate representing common shares of Proto Labs, Inc.4.2(31)Description of Securities of Registrant10.1(4)#2012 Long-Term Incentive Plan, as amended as of August 5, 201510.2(5)#Form of Incentive Stock Option Agreement under 2012 Long-Term Incentive Plan10.3(6)#Form of Non-Statutory Stock Option Agreement (Directors) under 2012 Long-Term Incentive Plan10.4(7)#Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2012 Long-Term Incentive Plan10.5(8)#Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2012 Long-Term Incentive Plan10.6(9)#Employee Stock Purchase Plan10.7(10)Stock Subscription Warrant issued to John B. Tumelty10.8(11)#2000 Stock Option Plan, as amended10.9(12)#Form of Incentive Stock Option Agreement under 2000 Stock Option Plan10.10(13)#Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan10.11(14)#Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.12(15)#Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.13(16)#Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan10.14(17)#Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and Wells Fargo Bank, N.A.10.15(18)#Credit Agreement, dated November 27, 2017, by and among Proto Labs and Wells Fargo Bank, National Association10.16(19)#Form of U.S. Severance Agreement10.17(20)#Form of UK Severance Agreement10.18(21)#Amended and Restated Executive Employment Agreement, dated August 1, 2019, by and between Proto Labs, Inc. and Victoria M. Holt10.19(22)#Form of Restricted Stock Agreement under 2012 Long-Term Incentive Plan for the initial grant to Victoria M. Holt10.20(23)#Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.S. Employees)10.21(24)#Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.K. Employees)10.22(25)#Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (Directors)10.23(26)#Amended and Restated Severance Agreement, dated August 1, 2019, by and between Proto Labs, Inc. and John A. Way10.24(28)#Form of Performance Stock Unit Agreement under 2012 Long-Term Incentive Plan10.25(30)#Form of Deferred Stock Unit Agreement under 2012 Long-Term Incentive Plan10.26(32)#Transition and Separation Agreement, dated May 8, 2019 by and between Proto Labs, Inc. and David M. Fein10.27(33)#Form of Executive Severance Agreement21.1Subsidiaries of Proto Labs, Inc.23.1Consent of Ernst & Young LLP24.1Powers of Attorney31.1Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1*Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act101.INS**XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the InlineXBRL document.101.SCH**Inline XBRL Taxonomy Extension Schema Document101.CAL**Inline XBRL Taxonomy Extension Calculation Linkbase Document101.DEF**Inline XBRL Taxonomy Extension Definition Linkbase Document101.LAB**Inline XBRL Taxonomy Extension Label Linkbase Document101.PRE**Inline XBRL Taxonomy Extension Presentation Linkbase Document104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)83(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 February13, 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 February13, 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 onFebruary 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 onFebruary 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 onFebruary 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 onFebruary 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 onFebruary 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 February23, 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 onOctober 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 August 2, 2019.(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.(25)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.(26)Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the Commission on August 2, 2019.(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 February 17, 2017.(29)Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, filed with the Commission on November 21, 2017.(30)Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed with the Commission on August 1, 2018.(31)Filed herewith.(32)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, filed with the Commission on May 14, 2019.(33)Incorporated by reference to Exhibit 99.2 to the Company's Form 8-K, filed with the Commission on August 2, 2019.#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 ofSection 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates itby 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 statementor 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 notsubject to liability under these sections.84SIGNATUREPursuant 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 behalfby the undersigned thereunto duly authorized.Proto Labs, Inc.Date: February 26, 2020/s/ Victoria M. HoltVictoria M. HoltPresident and Chief Executive Officer(Principal Executive Officer)Date: February 26, 2020/s/ John A. WayJohn A. WayChief 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 inthe capacities and on the dates indicated.Date: February 26, 2020/s/ Victoria M. HoltVictoria M. HoltPresident and Chief Executive Officer and Director(Principal Executive Officer)Date: February 26, 2020/s/ John A. WayJohn A WayChief Financial Officer(Principal Financial and Accounting Officer)Chairman of the Board of Directors:Sven A. Wehrwein*Directors:Archie C. Black*Sujeet Chand*Moonhie Chin*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 registrantpursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto.Date: February 26, 2020/s/ Victoria M. HoltVictoria M. HoltPresident and Chief Executive Officer(Principal Executive Officer)85[This page intentionally left blank]

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