Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely on quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance.

Interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations could damage our reputation and brand and substantially harm our business and results of operations.

The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technology systems, manufacturing processes and other operations are critical to our reputation and brand, and to our ability to effectively service product developers and engineers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costs seeking to remedy the problem and otherwise substantially harm our business and results of operations.

A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults, challenges associated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce-relatedworkforce-related issues, capacity constraints due to an unusually large number of product developers and engineers accessing our websites or ordering parts at the same time, and other similar events. These risks are augmented by the fact that our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to these product developers and engineers. We are dependent upon our facilities through which we satisfy all of our production demands and in which we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fully redundant systems in multiple locations. However, we have back-up computing systems for each of our United States, European and Japanese operations. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extent outside of our control.

Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our product lines as a result of system failures.

We depend on the continued growth of product developers’ and engineers’ e-commerce expectations when working with their custom parts manufacturers and their migration from 2D to 3D CAD software.

The business of selling custom parts over the Internet via an interactive web-based and automated user interface and quoting system is not widespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD software. Concerns about privacy and technological and other problems may discourage some product developers and engineers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers and engineers in industries not well suited to utilize our product lines, such as architecture. In order to expand ourWe store confidential customer base, we must appeal to and procure customers who historically have used more traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If product developers and engineers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely impacted.

Our business depends on the development and maintenance of the Internet infrastructure.

The success of our product lines will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing bandwidth requirements, or problems caused by “viruses,” “worms,” malware and similar programs may harm the performance of the Internet. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage generally as well as the level of usage of our product lines, which could adversely impact our business.

If the security of our customers’ confidential information stored in our systems isthat, if breached or otherwise subjected to unauthorized access, may harm our reputation or brand may be harmed, and we may be exposedor expose us to liability.

Our system stores, processes and transmits our customers’customers’ confidential information, including the intellectual property in their part designs credit card information and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure such confidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed the internal and external risks posed to the security of our company’s systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brand and could cause the loss of customers.

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 handling practices that may affect our ability to effectively market our services to current, past or prospective customers. In many jurisdictions consumers must be notified in the event 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 and elsewhere—including the General Data Protection Regulation (GDPR) in the European Union, which became effective May 25, 2018, and the California Consumer Privacy Act 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 adverse effect 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 as reduced access to capital for businesses may cause product developers and engineers to further delay or reduce the product development projects that our business supports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, product developers and engineers and other related risks to our business.

Political and economic uncertainty arising from the outcome of the United Kingdom’s recentKingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The outcomeUK'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 will apply 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 and legal complexities, including those relating to tax, trade, security and employees. In addition, Brexit vote triggered short-term financialcould lead to economic uncertainty, including significant volatility including a decline in global stock markets and currency exchange rates, which may adversely impact our business. To mitigate the value of the British Pound in comparison to both the United States dollar and the Euro. Thepotential impact of Brexit on the Brexit referendumimport and export of goods to and from the ongoing uncertainty associatedUK, the Company is establishing business processes with shipping entities, including obtaining Authorized Economic Operator certification. In addition, the outcome thereof may result in various long-term financial consequences for businesses operatingCompany is increasing inventory in the UK and EU in an effort to maintain inventory required to meet customer demand in the EU and beyond. As a resultevent of the referendum, it is expected that the British government will begin negotiating the terms of the UK’s relationship with the EU going forward, including the terms of trade between the UK and the EU.disruption in shipments. Although the specific terms and the timeframe in which they will be negotiatedof the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations.

We operate a global business that exposes us to additional risks.

We have established our operations in the United States, Europe and Japan and are seeking to further expand our international operations. As of December 31, 2016,2019, we had sold products into approximately 60 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our international revenue accounted for approximately 25%22%, 27%21% and 26%24% of our total revenue in the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the United States and may again in the future:

Our business depends on product developers’developers’ and engineers’ demand for our product lines, the general economic health of current and prospective customers, and companies’ desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce demand for our product lines, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.

If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.

We manufacture all of our products in 912 manufacturing facilities, located in Maple Plain, Minnesota; Rosemount, Minnesota; Plymouth, Minnesota; Raleigh,Brooklyn Park, Minnesota; Cary, North Carolina; Nashua, New Hampshire (3 facilities); Telford, United Kingdom; Feldkirchen, Germany; Eschenlohe, Germany; Rusko, Finland and Zama, Kanagawa, Japan. These facilities and the manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, hurricanes, tsunamis and nuclear disasters.

In the event any of our facilities are affected by a disaster, we may:

Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.

We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing operation and future growth of our business from just a fewseveral third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and materials for our products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on terms acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or increases in pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited source supplier could adversely affect our relationship with our customers and our results of operations and financial condition.

We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or gross margin, which would adversely affect our net income.

We may be subject to infringement claims.

We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patents in the fields of injection molding, CNC machining, injection molding3D printing, sheet metal fabrication or part production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted.

Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.

Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws,, treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property.

We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business and reputation and brand.

The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors that are not discovered until after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error.

We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.

The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and product lines. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.

Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.

We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic and abroad. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules, including those set forth in the Tax Cuts and Jobs Act enacted in 2017, and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.

In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position.

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating results and financial condition.

Our business and our customer base have been built primarily through organic growth. However, from time to time, we may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us to offer our customers 3D printing manufacturing processes andprocesses; in October 2015, we acquired Alphaform to enable us to expand our 3D printing capabilities in Europe.Europe, and in November 2017, we acquired RAPID to enable us to offer our customers Sheet Metal and expand our CNC Machining processes. We cannot forecast the number, timing or size of any future acquisitions or other similar strategic transactions, or the effect that any such transactions might have on our operating or financial results. We have limited experience engaging in these types of transactions. Such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including:

Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended resources on them, as well as divert our management’smanagement’s attention. Any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or stakeholders.

In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.

We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business is dependent in part on the availability of such licenses on commercially reasonable terms.

We currently, and will continue to, license certain technologies from third parties. While these licenses are not material to our financial results, their function in our business is integral to our operations. We cannot be certain that these third-party content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party licenses may expose us to increased risk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer.

Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed.

If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we manufacture, our business, financial condition or operating results could be harmed.

As a manufacturer of CNC-machined and injection-molded custom parts, we are requiredconform to meet certain regulatoryinternational standards, including International Organization for Standardization, or ISO, 9001:20082015 for our manufacturinginjection molding facilities and the AS9001D standard for our CNC-machined facilities in Minnesota. In North Carolina, we are requiredconform to meetthe ISO 9001:2008 standards2015 standard for our plastics manufacturing and AS9100 standardsthe AS9100D standard for our metals manufacturing. In New Hampshire, we conform to the ISO 9001:2015 and the AS9100D standards for our CNC-machined and sheet metal custom parts. We are also ableconform to meet regulatory standardsinternational standard ISO 9001:2008 at our manufacturing facilities in Feldkirchen, Germany and Eschenlohe, Germany and Rusko, Finland. We also meet regulatoryGermany. Additionally, we conform to international standard ISO 13485 at our manufacturing facility in Eschenlohe, Germany and international standard ISO 14001 at our manufacturing facility in Feldkirchen, Germany. Lastly, we conform to international standards ISO 9001, ISO 14001 and ISO 27001 at our facilities in Japan. If any regulatorysystem inspection reveals that we are not in compliance with applicable standards, regulatorsregistrars may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the parts we manufacturedcorrective action request or closingdiscontinuing our manufacturing facilities.certifications. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert management’s attention.

We are subject to payment-related risks.

We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.

Risks Relating to Ownership of Our Common Stock

Our stock price has been and may continue to be volatile.

In the year ended December 31, 2016,2019, our common stock traded as high as $82.06$130.60 and as low as $43.10.$88.75. The market for our common stock may become less active, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to fluctuate include:

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.

Our failure to maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 of the Sarbanes-Oxley Act or prevent or detect misstatements in our financial statements in the future could harm our business and cause a decrease in our stock priceprice..

Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we are not able to comply with the requirements of Section 404 in the future, or if we fail to prevent or detect misstatements in the financial statements we include in our reports filed with the SEC, our business could be harmed and the market price of our common stock could decline.

Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for us that you might consider favorable.

Our Third Amended and Restated Articles of Incorporation, as amended, and Amended and Restated By-Laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of the corporation’s voting shares within four years following the date the person became an interested shareholder, unless the business combination is approved by a committee composed solely of one or more disinterested members of the corporation’s board of directors before the date the person became an interested shareholder.

These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

We do not expect to pay any cash dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such cash dividends for the foreseeable future. We anticipate that we will retain all of our future earningsearnings for use in the business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties Properties

We believe that our facilities are well maintained and of sufficient capacity to support our current operations. We have facilities in the following regions:

United States

Our corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of office space. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We lease an additional facility on a property adjacent to our headquarters that encompasses approximately 40,000 square feet of manufacturing space. The lease for this facility expires in 2017. We own a facility in Rosemount, Minnesota that encompasses approximately 130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses approximately 170,000 square feet of manufacturing and office space. In 2018, we purchased a facility in Brooklyn Park, Minnesota that encompasses approximately 215,000 square feet of manufacturing and office space.

In April 2014, we purchased FineLine Prototyping, Inc. (FineLine) and assumed the leases of two facilities in Raleigh, North Carolina. The two facilities we lease are approximately 10,000 square feet each. We also purchasedown a facility in Cary, North Carolina in 2015 that encompasses approximately 77,000 square feet of manufacturing and office space. In 2016, we moved into the new facility in Cary, North Carolina and consolidated operations. As a result, we exited the lease for one of the Raleigh facilities and plan to exit the lease for the other Raleigh facility in 2017. 

In November 2017, we purchased RAPID and assumed the leases of three facilities in Nashua, New Hampshire. The three facilities we lease total approximately 146,000 square feet of manufacturing and office space. The leases expire at various times from 2020 to 2022.

Europe

Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing approximately 126,000178,000 square feet of office and manufacturing space.

We also lease office space in the United Kingdom; Mosbach, Germany,Germany; Le Bourget du Lac, FranceFrance; Novara, Italy and Novara, Italy,Nacka, Sweden, for sales, customer service and technical support staff. The leases expire at various times from 20172021 to 2023.2025. In October 2015, we purchased certain assets, including shares of select subsidiaries, of Alphaform, AG (Alphaform), headquartered in Feldkirchen (Munich), Germany. As a result of the acquisition, we lease manufacturing and office facilities encompassing approximately 60,000 square feet in Feldkirchen, Germany and approximately 16,00022,000 square feet in Eschenlohe, Germany and approximately 24,000 square feet in Rusko, Finland.Germany. The leases expire at various times from 20182021 to 2022.2028.

Japan

Our Japan operations are headquartered in Zama, Kanagawa, Japan (southwest of Tokyo). In 2016, we moved into a new leased facility encompassing approximately 96,000 square feet of office and manufacturing space. The lease expires in April 2023.

Item 3. Legal Proceedings

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we do not believe we are party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business.

Item 4. Mine Safety Disclosures

NotNot applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded on the New York Stock Exchange (NYSE) under the symbol “PRLB” since February 24, 2012. Prior to that date, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock as reported on the NYSE:

		Fiscal 2016								Fiscal 2015
		High				Low				High				Low
First Quarter		$	79.65			$	51.61			$	74.82			$	57.30
Second Quarter		$	82.06			$	55.07			$	79.00			$	65.84
Third Quarter		$	61.62			$	50.50			$	79.95			$	65.82
Fourth Quarter		$	59.65			$	43.10			$	69.48			$	58.84

On February 16, 2017, the last reported sale price of our common stock on the NYSE was $55.65 per share. As of February 16, 2017,14, 2020, we had 1310 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available fundsstock and any future earnings to support our operations and finance the growth and development of our business. Wewe do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

Outstanding Equity Awards

 

The following table summarizes, as of December 31, 2016,2019, information about shares of our common stock that may be issued under equity compensation plans approved by shareholders and plans not approved by shareholders:

 

Plan Category

Number of shares to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of shares remaining available for future issuance under equity compensation plans (excluding shares in first column)

Equity compensation plans approved by shareholders(1)

784,744

$32.66

6,778,872(2)

Equity compensation plans not approved by shareholders

None

N/A

None

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Plan Category		Number of shares to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights				Number of shares remaining available for future issuance under equity compensation plans (excluding shares in first column)
Equity compensation plans approved by shareholders(1)		656,011				$72.38			6,160,817(2)
Equity compensation plans not approved by shareholders		None				N/A			None

 

(1)		Includes the 2000 Stock Option Plan, the 2012 Long-Term Incentive Plan and our Employee Stock Purchase Plan.
(2)		Includes 1,285,3141,168,830 shares remaining available for issuance as of December 31, 20162019 under our Employee Stock Purchase Plan.

 

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Performance Graph

 

The following graph shows a comparison from February 24, 2012 (the date our common stock commenced trading on the NYSE)December 31, 2014 through December 31, 20162019 of the cumulative total return for our common stock, the S&P 500 Index and the Russell 2000 Index. We have selected the Russell 2000 Index because the Russell 2000 Index measures the performance of the small market capitalization segment of U.S. equity instruments and we are a member company included in the Russell 2000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P 500 Index and the Russell 2000 Index assume reinvestment of dividends.

 

 

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				138.50

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		Period Ending
Index		02/23/12				06/30/12				12/31/12				06/30/13				12/31/13				06/30/14				12/31/14				06/30/15				12/31/15				06/30/16				12/31/16
Proto Labs, Inc.			100.00				179.75				246.38				406.06				444.88				512.00				419.75				421.75				398.06				359.75				320.94
S&P 500			100.00				99.90				104.60				117.81				135.56				143.77				151.01				151.31				149.91				153.94				164.20
Russell 2000			100.00				96.29				102.43				117.88				140.33				143.86				145.28				151.22				136.98				138.91				163.66

Unregistered Sales of Equity Securities and Issuer Purchases of Equity Securities

 

We did not sell any unregistered equity securities or purchase anyOn May 15, 2019 the Board of our securities during the year ended December 31, 2016. On February 9, 2017, we announced that our board of directors hadDirectors authorized the repurchase of shares of ourthe Company’s common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50$100 million. The timing and amount of any share repurchases will be determined by our management based on market conditions and other factors. The term of the program runs through December 31, 2021.2023. 

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 of comprehensive income data for the years ended December 31, 2016, 20152019, 2018 and 20142017 and selected consolidated balance sheets data as of December 31, 20162019 and 20152018 are derived from our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The selected consolidated statements of comprehensive income data for the years ended December 31, 20132016 and 20122015 and selected consolidated balance sheet data as of December 31, 2014, 20132017, 2016 and 20122015 are derived from our audited consolidated financial statements not included in this report.

 

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The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes appearing in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

 

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		Year Ended December 31,																				Year Ended December 31,
(in thousands, except share and per share amounts)		2016				2015				2014				2013				2012				2019				2018				2017				2016				2015
Consolidated Statements of Comprehensive Income Data
Revenue		$	298,055			$	264,106			$	209,583			$	163,112			$	125,991			$	458,728			$	445,596			$	344,490			$	298,055			$	264,106
Cost of revenue			131,118				109,703				81,182				61,410				49,853				223,438				206,917				150,648				131,118				109,703
Gross profit			166,937				154,403				128,401				101,702				76,138				235,290				238,679				193,842				166,937				154,403
Operating expenses:
Marketing and sales			46,131				39,188				29,144				22,386				18,098				72,976				68,533				56,856				46,131				39,188
Research and development			22,388				18,350				16,607				11,863				9,137				32,692				28,735				23,560				22,388				18,350
General and administrative			36,651				29,716				22,122				16,154				13,957				49,766				52,513				41,200				36,651				29,716
Total operating expenses			105,170				87,254				67,873				50,403				41,192				155,434				149,781				121,616				105,170				87,254
Income from operations			61,767				67,149				60,528				51,299				34,946				79,856				88,898				72,226				61,767				67,149
Other income, net			2,454				712				3				279				23				1,337				2,757				2,209				2,454				712
Income before income taxes			64,221				67,861				60,531				51,578				34,969				81,193				91,655				74,435				64,221				67,861
Provision for income taxes			21,514				21,347				18,896				16,301				10,944				17,538				15,067				22,657				21,514				21,347
Net income			42,707				46,514				41,635				35,277				24,025			$	63,655			$	76,588			$	51,778			$	42,707			$	46,514
Net income attributable to common shareholders(1)		$	42,707			$	46,514			$	41,635			$	35,277			$	24,025
Net income per share(1)
Net income per share(1)
Basic		$	1.62			$	1.79			$	1.62			$	1.40			$	1.03			$	2.37			$	2.84			$	1.94			$	1.62			$	1.79
Diluted		$	1.61			$	1.77			$	1.60			$	1.36			$	0.98			$	2.35			$	2.81			$	1.93			$	1.61			$	1.77
Weighted average shares outstanding(1)
Weighted average shares outstanding(1)
Basic			26,365,173				26,005,858				25,692,699				25,198,556				23,373,593				26,866,985				26,982,614				26,647,610				26,365,173				26,005,858
Diluted			26,564,639				26,320,284				26,100,320				25,859,741				24,443,665				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		$	(5,541	)		$	(2,283	)		$	(1,838	)		$	(163	)		$	(190	)		$	1,474			$	(3,258	)		$	5,519			$	(5,541	)		$	(2,283	)
Comprehensive income		$	37,166			$	44,231			$	39,797			$	35,114			$	23,835			$	65,129			$	73,330			$	57,297			$	37,166			$	44,231

 

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Stock-based compensation expense included in the statements of comprehensive income data above is as follows:

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		Year Ended December 31,
(in thousands)		2016				2015				2014				2013				2012
Stock options and grants		$	6,177			$	5,580			$	4,386			$	3,084			$	2,539
Employee stock purchase plan			598				502				423				377				500
Total stock-based compensation expense		$	6,775			$	6,082			$	4,809			$	3,461			$	3,039
Cost of revenue		$	691			$	513			$	386			$	316			$	335
Operating expenses:
Marketing and sales			977				1,074				927				610				418
Research and development			1,396				1,285				1,048				754				486
General and administrative			3,711				3,210				2,448				1,781				1,800
Total stock-based compensation expense		$	6,775			$	6,082			$	4,809			$	3,461			$	3,039

		Year Ended December 31,
(in thousands)		2016				2015				2014				2013				2012
Consolidated Balance Sheets Data
Cash and cash equivalents		$	68,795			$	47,653			$	43,329			$	43,039			$	36,759
Working capital			134,357				111,740				89,102				96,132				78,617
Total assets			414,241				361,036				287,031				230,175				172,722
Total liabilities			34,408				33,391				21,492				18,532				16,023
Total shareholders' equity		$	379,833			$	327,645			$	265,539			$	211,643			$	156,699

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(1)

See Note 3 of Notesnotes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share attributable to common shareholders and weighted average shares outstanding forof the years ended December 31, 2016, 20152019, 2018, and 2014,2017 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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

Overview

 

We are anan e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded, CNC-machined, 3D-printed and 3D printedsheet metal-fabricated custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast”custom parts to product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our product lines to the millions of product developers and engineers who use 3D CAD software to design products across a diverse range of end-markets.end markets. Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal.

 

We have experienced significant growth since our inception. Since we first introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can support. In 2014, we acquired FineLine Prototyping, Inc. (FineLine) to expand the number of process types we offer to include stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS). In 2017, we acquired RAPID to expand the number of process types we offer to include sheet metal fabrication and expand our CNC machining capability. In 2019, we added Carbon DLS to our 3D printing processes, introduced precision color matching on Injection Molding parts and launched production capabilities for metal 3D printing. We also continually seek to enhance other aspects of our technology and manufacturing processes, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly to enhance our technology and manufacturing processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set of product developers and engineers.customers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 67%92%, 85%91% and 87%89% of our revenue in 2016, 20152019, 2018 and 2014,2017, 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 product developers and engineers are located. We entered the European market in 2005, launched operations in Japan in late 2009 and2009. Our operations were further expanded intoin Europe through our acquisition of Alphaform in 2015.2015 and the United States through our acquisition of RAPID in November 2017. As of December 31, 2016,2019, we had sold products into approximately 60 countries. Our revenue outside of the United States accounted for approximately 25%22%, 27%21% and 26%24% of our consolidated revenue in the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions.

 

We have grown our total revenue from $126.0$264.1 million in 20122015 to $298.1$458.7 million in 2016.2019. During this period, our operating expenses increased from $41.2$87.3 million in 20122015 to $105.2$155.4 million in 2016.2019. We have grown our income from operations from $34.9$67.1 million in 20122015 to $61.8$79.9 million in 2016.2019. Our recent growth in revenue and income from operations has been accompanied by increased cost of revenues and operating expenses. We expect to increasingly investincrease investment in our operations to support anticipated future growth as discussed more fully below.

 

In addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target product developer and engineer customers have increasing e-commerce expectations,are facing three mega trends, which are disrupting long-term product growth models. We believe our customers are facing increased pressure to accelerateshorten product life-cycles, to embed products with connectivity driven by the timeinternet of things technology, and to market for theirdeliver products that are personalized and continuecustomized to migrate from using 2D CAD to using 3D CAD for their design needs.unique customer specifications. We believe we continue to be well positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom parts, starting with our elegant web interface through which a product developer or engineer submits a 3D CAD part design.parts. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts in low volumes, including, among others, economic conditions, changes in product developer and engineer preferences or needs, developments in our industry and among our competitors, and factors impacting new product development volume such as economic conditions.developments in our customers' industries. For a more complete discussion of the risks facing our business, see Part 1I, Item 1A. “Risk Factors.”Factors” of this Annual Report on Form 10-K.

 

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Key Financial Measures and Trends

 

Revenue

 

Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, and 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of custom 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our revenue is generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2016.2019. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, offering additional product lines such as the introduction of our CNC Machining product line in 2007 and 3D Printing through our acquisition of FineLine in 2014, expanding internationally such as the opening of our Japanese office in 2009 and through our acquisition of Alphaform in October 2015, improving the usability of our product lines such as our web-centric applications, and expanding the breadth and scope of our products by adding more sizes and materials to our offerings.including:

 

	•	the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;
	•	expanding 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 2016,

During 2019, we served 31,45747,774 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 15.5%3.9% over the same period in 2015. Of those product developers and engineers2018.

During 2018, we served in 2016, 16,149 were existing45,968 unique product developers and engineers who had ordered from us in the past,purchased our products through our web-based customer interface, an increase of 20%22.5% over the comparablesame period in 2015, and 15,308 were new2017.

During 2017, we served 37,538 unique product developers and engineers who ordered from us for the first time in 2016,purchased our products through our web-based customer interface, an increase of 12% over the comparable period in 2015.

During 2015, we served 27,235 unique product developers and engineers, an increase of 26%19.3% over the same period in 2014. Of those product developers and engineers served in 2015, 13,504 were existing product developers and engineers who had ordered from us in the past, an increase of 37% over the comparable period in 2014, and 13,731 were new product developers and engineers who ordered from us for the first time in 2015, an increase of 17% over the comparable period in 2014.2016.

 

During 2014, we served 21,552 unique product developers and engineers, an increase of 34% over the same period in 2013. Of those product developers and engineers served in 2014, 9,839 were existing product developers and engineers who had ordered from us in the past, an increase of 26% over the comparable period in 2013, and 11,713 were new product developers and engineers who ordered from us for the first time in 2014, an increase of 41% over the comparable period in 2013. We experienced strong growth in the number of unique product developers and engineers served in 2014, partially as a result of our acquisition of FineLine in April 2014.

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation including benefits and stock-based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and custom parts. We expect our personnel-related costs to increase in order to retain 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 a percentage of total revenue.

 

Our business model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the expectations for quick delivery of our products to our customers. Therefore, during each of 2016, 20152019, 2018 and 20142017 we made significant investments in additional factory space, equipment, and infrastructure in the United States. We also made significant investments in infrastructure in Europe in 2017 and significant investments in additional factory space in Japan in 2019 and 2016. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that these additional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins 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 profit and gross margin are affected by many factors, including our mix of revenue by product line, pricing, sales volume, and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.

 

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Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories, available capacity and our operating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent through all our markets.

Operating Expenses

 

Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs are the most significant component in each of these categories.

 

Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn,, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and 3D printedsheet metal custom parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.

 

Marketing and sales.sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade shows and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base.base and grow revenue.

 

Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation, depreciation on equipmentpersonnel and otheroutside service costs related overhead. Allto the development of our researchnew processes and development costs have been expensed as incurred.product lines, enhancement of existing product lines, software developed for internal use, maintenance of internally developed software, quality assurance 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 line offerings.lines.

 

General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.

 

Other Income, NetIncome, Net

 

Other income,, net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates.

 

Provision for Income TaxesIncome Taxes

 

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxesOn December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. As a result, many provisions will affect our tax rate in future years. Some provisions, such as the reduction to increase as our taxable income increases and we expectthe U.S. corporate tax rate from 35% to 21%, which began in 2018, reduced our effective tax rate toin 2018 and subsequent years. Overall, our effective tax rate for 2018 and beyond will remain relatively constant.consistent based on the current tax laws.

 

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Results of Operations

 

The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.

 

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																																																		Year Ended																								Year Ended
		Year Ended December 31,																Change								Year Ended December 31,																Change								December 31,																Change								December 31,																Change
(dollars in thousands)		2016								2015								$				%				2015								2014								$				%				2019								2018								$				%				2018								2017								$				%
Revenue		$	298,055				100.0	%		$	264,106				100.0	%		$	33,949				12.9			$	264,106				100.0	%		$	209,583				100.0	%		$	54,523				26.0	%		$	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			131,118				44.0				109,703				41.5				21,415				19.5				109,703				41.5				81,182				38.7				28,521				35.1				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			166,937				56.0				154,403				58.5				12,534				8.1				154,403				58.5				128,401				61.3				26,002				20.3				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			46,131				15.5				39,188				14.8				6,943				17.7				39,188				14.8				29,144				13.9				10,044				34.5				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			22,388				7.5				18,350				6.9				4,038				22.0				18,350				6.9				16,607				7.9				1,743				10.5				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			36,651				12.3				29,716				11.3				6,935				23.3				29,716				11.3				22,122				10.6				7,594				34.3				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			105,170				35.3				87,254				33.0				17,916				20.5				87,254				33.0				67,873				32.4				19,381				28.6				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			61,767				20.7				67,149				25.5				(5,382	)			(8.0	)			67,149				25.5				60,528				28.9				6,621				10.9				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			2,454				0.8				712				0.2				1,742				*				712				0.2				3				0.0				709				*				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			64,221				21.5				67,861				25.7				(3,640	)			(5.4	)			67,861				25.7				60,531				28.9				7,330				12.1				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			21,514				7.2				21,347				8.1				167				0.8				21,347				8.1				18,896				9.0				2,451				13.0				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		$	42,707				14.3	%		$	46,514				17.6	%		$	(3,807	)			-8.2	%		$	46,514				17.6	%		$	41,635				19.9	%		$	4,879				11.7	%		$	63,655				13.9	%		$	76,588				17.2	%		$	(12,933	)			(16.9	%)		$	76,588				17.2	%		$	51,778				15.0	%		$	24,810				47.9	%

 

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*

Percentage change not meaningful

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Stock-based compensation expense included in the statements of comprehensive income data above is as follows:

 

		Year Ended December 31,
(dollars in thousands)		2016				2015				2014
Stock options and grants		$	6,177			$	5,580			$	4,386
Employee stock purchase plan			598				502				423
Total stock-based compensation expense		$	6,775			$	6,082			$	4,809
Cost of revenue		$	691			$	513			$	386
Operating expenses:
Marketing and sales			977				1,074				927
Research and development			1,396				1,285				1,048
General and administrative			3,711				3,210				2,448
Total stock-based compensation expense		$	6,775			$	6,082			$	4,809

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		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

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Comparison of Years Ended December 31, 20192016and 20182015

 

Revenue

 

Revenue by reportable segment and the related changes for 20162019 and 20152018 is summarized as follows:

 

		Year Ended December 31,
		2016								2015								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
United States		$	223,930				75.1	%		$	208,018				78.7	%		$	15,912				7.6	%
Europe			63,365				21.3				47,433				18.0				15,932				33.6
Japan			10,760				3.6				8,655				3.3				2,105				24.3
Total revenue		$	298,055				100.0	%		$	264,106				100.0	%		$	33,949				12.9	%

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		Year Ended December 31,
		2019								2018								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
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	%

 

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Our revenue increased $34.0$13.1 million, or 12.9%2.9%, for 20162019 compared with 2015.2018. By reportable segment, revenue in the United States increased $15.9$9.7 million, or 7.6%2.8%, for 20162019 compared with 2015.2018. Revenue in Europe increased $15.9$1.9 million, or 33.6%2.4%, for 20162019 compared with 2015, partially driven by the acquisition of Alphaform in the fourth quarter of 2015.2018. Revenue in Japan increased $2.1$1.5 million, or 24.3%10.9%, for 20162019 compared with 2015.2018.

35

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Our revenue growth in 20162019 was the result ofprimarily driven by an increased volume of the product developers and engineers we served. During 2016,2019, we served 31,45747,774 unique product developers and engineers, an increase of 15.5%3.9% over 2015. Average2018. Our growth in product developers and engineers served increased at a greater rate than our revenue growth, resulting in a decrease of 1.0% in the average revenue per product developer orand engineer decreased 6% during 20162019 as compared to 2015.

Our revenue increases were primarily driven by increases2018. The decrease in sales personnelaverage spend per product developer and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue decreased by $1.3 million in 2016 compared to 2015 as a result of foreign currency movements, primarily the strengthening of the United States dollar relative to the British pound.

Revenue by product line and the related changes for 2016 and 2015 is summarized as follows:

	Year Ended December 31,
	2016					2015					Change
(dollars in thousands)		$		% of Total Revenue			$		% of Total Revenue			$		%
Revenue
Injection Molding	$	175,974		59.0	%	$	163,387		61.8	%	$	12,587		7.7	%
CNC Machining		81,407		27.3			74,368		28.2			7,039		9.5
3D Printing		37,847		12.7			25,132		9.5			12,715		50.6
Other Product		2,827		1.0			1,219		0.5			1,608		131.9
Total revenue	$	298,055		100.0	%	$	264,106		100.0	%	$	33,949		12.9	%

By product line, our revenue growthengineer was driven by a 7.7% increasechange in Injection Molding revenue, a 9.5% increase in CNC Machining revenue and a 50.6% increase in 3D Printing revenue, in each case for 2016 compared with 2015, as well as a $1.6 million increase in Other Product revenue through our acquisition of Alphaform.

During the second quarter, we made the decision to discontinue offering two manufacturing processes within our Injection Molding product lines, Metal Injection Molding (MIM) and Magnesium Thixomolding (Thixo). In addition, in the second quarter, we decided to exit our non-core resin resale business, which was acquired from Alphaform in October 2015. Revenue from resin resale was included in Other Product revenue in 2015 and 2016. MIM, Thixo and resin resale in aggregate represented approximately 1.6% of revenue during 2016.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $21.4 million, or 19.5%, for 2016 compared to 2015, which was greater than the rate of revenue increase of 12.9% for 2016 compared to 2015. The increase in cost of revenue resulted from the growth of the business, including via the Alphaform acquisition. Additional increase in the cost of revenue was due to raw material and production cost increases of $5.9 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $10.4 million and equipment and facility-related cost increases of $5.1 million. Equipment and facility-related cost increases included $0.6 million of accelerated depreciation of leasehold assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016.

Gross Profit and Gross Margin. Gross profit increased from $154.4 million in 2015 to $166.9 million in 2016 primarily due to increasing revenue growth as noted above. Gross margin decreased from 58.5% of revenue in 2015 to 56.0% of revenue in 2016 primarily as a result of lower margins from the acquired Alphaform business, as well as increases in investments of additional manufacturing capacity, accelerated depreciation of leasehold assets and the impact of fluctuations in foreign currency exchange rates.

Income from Operations

         Income from operations decreased $5.4 million, or 8.0%, for 2016 compared with 2015. By reportable segment, income from operations for the United States and Corporate Unallocated and Japan increased 3.3% and 20.2%, respectively, as a percentage of revenue for 2016 compared with 2015. Income from operations for Europe decreased 12.4% as a percentage of revenue for 2016 compared with 2015.

Operating Expenses, Other Income (Expense), Net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expense increased $6.9 million, or 17.7%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $6.2 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs 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 22.0%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $3.1 million, operating cost increases of $0.8 million and professional services cost increases of $0.1 million.

General and Administrative. Our general and administrative expense increased $6.9 million, or 23.3%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.2 million, facility and administrative cost increases of $3.6 million, professional service cost increases of $0.6 million for outside legal and accounting services, and stock-based compensation cost increases of $0.5 million. The increase in administrative costs for 2016 includes accelerated depreciation and facilities-related charges of $0.8 million resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016.

Other Income, Net. We recognized other income, net of $2.5 million in 2016, an increase of $1.8 million compared to other income, net of $0.7 million for 2015. Other income, net included $1.4 million in foreign currency exchange gains for 2016 compared to $0.5 million in foreign currency exchange losses in 2015. The increase was primarily due to the amount of foreign-currency denominated cash balances abroad and movements in underlying exchange rates at the end of the period.

Provision for Income Taxes. Our income tax provision increased $0.2 million for 2016 compared to 2015 due to an increase of taxable income. Our effective tax rate increased to 33.4% in 2016 from 31.5% in 2015 due primarily to the mix of products, with 3D Printing and CNC Machining generally producing lower average order revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current year.

Comparison of Years Ended December 31, 2015 and 2014

Revenue

 Revenue by reportable segment and the related changes for 2015 and 2014 is summarized as follows:

		Year Ended December 31,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
United States		$	208,018				78.7	%		$	165,117				78.8	%		$	42,901				26.0	%
Europe			47,433				18.0				37,491				17.9				9,942				26.5
Japan			8,655				3.3				6,975				3.3				1,680				24.1
Total revenue		$	264,106				100.0	%		$	209,583				100.0	%		$	54,523				26.0	%

Our revenue increased $54.5 million, or 26.0%, for 2015 compared with 2014, driven primarily by an increase in the product developers and engineers we served. By reportable segment, revenue in the United States increased $42.9 million, or 26.0%, for 2015 compared with 2014. Revenue in Europe increased $9.9 million, or 26.5%, for 2015 compared with 2014. Revenue in Japan increased $1.7 million, or 24.1%, for 2015 compared with 2014.

Our revenue growth in 2015 was the result of increased volume of the product developers and engineers we served. During 2015, we served 27,235 unique product developers and engineers, an increase of 26% over 2014. Average revenue per product developer or engineer remained consistent during 2015 as compared to 2014.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 customer accounts and expanding the depth and breadth intoof existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result ingenerate the greatest number of customer leads to support sales activity. International revenue decreasedwas negatively impacted by $7.5$4.2 million in 20152019 compared to 2014 due2018 as a result of foreign currency movements, primarily the weakening of the Euro relative to strengthening of the United States dollar relative to the British Pound and Japanese Yen, as well as the strengthening of the British Pound relative to the Euro. The effect of pricing changes on international revenue was immaterial for 2015 compared to 2014.dollar.

 

Revenue by product line and the related changes for 20152019 and 20142018 is summarized as follows:

 

		Year Ended December 31,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
Injection Molding		$	163,387				61.8	%		$	140,282				66.9	%		$	23,105				16.5	%
CNC Machining			74,368				28.2				59,914				28.6				14,454				24.1
3D Printing			25,132				9.5				9,387				4.5				15,745				167.7
Other Product			1,219				0.5				-				-				1,219				100.0
Total revenue		$	264,106				100.0	%		$	209,583				100.0	%		$	54,523				26.0	%

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		Year Ended December 31,
		2019								2018								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
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	%

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By product line, our revenue growth was driven by a 16.5%3.3% increase in Injection Molding revenue, and a 24.1%1.3% increase in CNC Machining revenue, a 15.0% increase in 3D 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 20152019 compared with 2014, as well as $15.7 million increase2018. The decrease in Sheet Metal revenue was driven by a decision to move away from 3D Printingcertain business which was not scalable and $1.2 million in Other Product revenue throughdid not fit into the envelope of our acquisition of Alphaform.revised Sheet Metal product offerings.

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $28.5$16.5 million, or 35.1%8.0%, for 20152019 compared to 2014,2018, which was greaterfaster than the rate of revenue increase of 26.0%2.9% for 20152019 compared to 2014.2018. The increase in cost of revenue resulted from the growth of the business and investments to support future growth. Specifically, the increases were driven 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 cost increases 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 with the 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 future growth 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 driver of 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 and Europe 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 in personnel 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 our focus on funding those programs that have proven to be the most effective in growing our business.

Research and Development. Our research and development expense increased $4.0 million, or 13.8%, for 2019 compared to 2018 due to an increase in headcount resulting 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.

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General and Administrative. Our general and administrative expense decreased $2.7 million, or 5.2%, for 2019 compared to 2018 due to stock- based compensation cost decreases of $1.7 million driven by lower performance-related compensation, amortization cost decreases of $1.0 million driven by allocations to other expense categories to appropriately reflect the nature of our intangible assets and professional service decreases of $0.4 million, which were partially offset by administrative 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. Other income, 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. Other income, 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 million gain 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 a decrease 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 an increase 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:

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		Year Ended December 31,
		2018								2017								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
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	%

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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, or 33.2%, for 2018 compared with 2017. Revenue growth in the United States was partially attributable to the acquisition of RAPID in November 2017. Revenue in Europe increased $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 45,968 unique product developers and engineers, an increase of 22.5% over 2017. Average revenue per product developer or engineer increased 6% during 2018 as compared to 2017 due to changes in the mix of products purchased by our customers.

Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to generate the greatest 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 currency movements, primarily the strengthening of the Euro relative to the United States dollar.

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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 Total Revenue				$				% of Total Revenue				$				%
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	%

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* 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 compared with 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% for 2018 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 and production cost increases of $10.8$16.6 million to support increased sales volumes, equipment and facility-related cost increases of $3.1 million and an increase in direct labor headcount resulting in personnel and related cost increases of $14.6$30.8 million and equipment and facility-related cost increases of $8.9 million.

 

Gross Profit and Gross Margin. Gross profit increased from $128.4$193.8 million in 20142017 to $154.4$238.7 million in 20152018 primarily due to increasing revenue growth as noted above.an increase in revenue. Gross margin decreased from 61.3%56.3% of revenue in 20142017 to 58.5%53.6% of revenue in 20152018 primarily as a resultdue to the timing and mix of our 3D Printing product line having a lowerrevenue, with the RAPID acquisition and CNC facility relocation in the United States being the primary drivers of the reduction in gross margin than our CNC Machining and Injection Molding product lines, revenue earned through our acquisition of Alphaform having lower gross margins than our legacy operations, the cost of increased capacity, which has not been fully leveraged, and the impact of fluctuations in foreign currency exchange rates.margin.

 

Income from Operations

Income from operations increased $6.6$16.7 million, or 10.9%23.1%, for 20152018 compared with 2014.2017. By reportable segment, income from operations for the United States, increased 16.1% as a percentage of revenue for 2015 compared with 2014. Income from operations for Europe and Corporate Unallocated and Japan decreased 9.7%increased 17.0%, 30.8% and 13.8%10.9%, respectively, as a percentage of revenue for 20152018 compared with 2014.2017.

Operating Expenses Other Expense, Net and Provision for Income Taxes

 

Marketing and Sales. Marketing and sales expense increased $10.0$11.7 million, or 34.5%20.5%, for 20152018 compared to 20142017 due to an increase in headcount resulting in personnel and related cost increases of $8.2$10.0 million and marketing program cost increases of $1.8$1.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs whichthat have proven to be the most effective in growing our business.

 

Research and Development. Our research and development expense increased $1.7$5.2 million, or 10.5%22.0%, for 20152018 compared to 20142017 due to an increase in headcount resulting in personnel and related cost increases of $3.4$4.9 million and other operatingprofessional services cost increases of $0.2$0.6 million, which were partially offset by decreasesa decrease in professional service costsoperating cost of $1.9$0.3 million.

 

General and Administrative. Our general and administrative expense increased $7.6$11.3 million, or 34.3%27.5%, for 20152018 compared to 20142017 due to an increase in headcount resulting in personnel and related cost increases of $4.4$2.4 million, facility andstock- based compensation cost increases of $0.9 million, administrative cost increases of $1.5$5.3 million professional serviceand amortization cost increases of $0.7 million for outside legal and accounting services, stock-based compensation cost increases of $0.8 million and intangible amortization expenses of $0.2$2.7 million.

 

Other Income, (Expense),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. Other income, net increasedfor 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 million gain on foreign currency. Other income, net for 2015 compared with 2014 due to2017 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 the bargain purchaseforeign currency.

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Table of Alphaform, $0.2 million increase in interest income and $0.2 million in other non-operating activity.

Contents

 

Provision for Income Taxes. Our income tax provision increased $2.4decreased by $7.6 million for 20152018 compared to 20142017. The decrease in the provision is primarily due to an increasethe Tax Cuts and Jobs Act that went into effect in 2018 and benefits from the vesting of taxable income.restricted stock and the exercise of stock options. Our effective tax rate increased marginallyof 16.4% for 2018 decreased 14.0% compared to 31.5%30.4% for the same period in 2015 from 31.2% in 2014 due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current year.2017.

 

Selected Quarterly Results of Operations Data

 

The following tables set forth selected unaudited quarterly results of operations data for 20162019 and 2015.2018. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in conjunction with our selected financial data and consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Operating results for any quarter are not necessarily indicative of results for a full-year period, and the historical results presented below are not necessarily indicative of the results to be expected in any future period.

 

		Three Months Ended
(in thousands, except share and per share amounts)		Dec. 31, 2016				Sep. 30, 2016				Jun. 30, 2016				Mar. 31, 2016				Dec. 31, 2015				Sep. 30, 2015				Jun. 30, 2015				Mar. 31, 2015
		(unaudited)
Consolidated Statements of Comprehensive Income Data:
Revenue		$	72,353			$	78,173			$	74,961			$	72,568			$	73,759			$	67,842			$	63,969			$	58,536
Cost of revenue			32,041				33,448				32,715				32,914				32,485				27,517				26,419				23,282
Gross profit			40,312				44,725				42,246				39,654				41,274				40,325				37,550				35,254
Operating expenses:
Marketing and sales			11,949				11,787				11,453				10,942				10,805				10,027				9,502				8,854
Research and development			5,278				5,976				5,816				5,318				4,879				4,760				4,397				4,314
General and administrative			8,254				10,020				10,126				8,251				9,033				8,134				6,304				6,245
Total operating expenses			25,481				27,783				27,395				24,511				24,717				22,921				20,203				19,413
Income from operations			14,831				16,942				14,851				15,143				16,557				17,404				17,347				15,841
Other income (expense), net			112				625				1,092				625				612				593				(36	)			(457	)
Income before income taxes			14,943				17,567				15,943				15,768				17,169				17,997				17,311				15,384
Provision for income taxes			5,571				5,585				5,252				5,106				5,176				5,615				5,625				4,931
Net income		$	9,372			$	11,982			$	10,691			$	10,662			$	11,993			$	12,382			$	11,686			$	10,453
Net income per share:
Basic		$	0.35			$	0.45			$	0.41			$	0.41			$	0.46			$	0.47			$	0.45			$	0.40
Diluted		$	0.35			$	0.45			$	0.40			$	0.40			$	0.45			$	0.47			$	0.44			$	0.40
Shares used to compute net income per share:
Basic			26,457,302				26,416,041				26,368,001				26,222,148				26,164,340				26,083,405				25,921,111				25,850,274
Diluted			26,609,929				26,609,878				26,561,148				26,442,357				26,465,043				26,381,313				26,277,503				26,214,204

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		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 Comprehensive Income 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

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Table of Contents

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes our cash flows for the yearsyears ended December 31, 2016, 20152019, 2018 and 2014:2017:

 

		Year Ended December 31,
(dollars in thousands)		2016				2015				2014
Net cash provided by operating activities		$	74,967			$	58,557			$	57,210
Net cash used in investing activities			(60,755	)			(63,594	)			(63,499	)
Net cash provided by financing activities			7,847				10,238				7,036
Effect of exchange rates on cash and cash equivalents			(917	)			(877	)			(457	)
Net increase in cash and cash equivalents		$	21,142			$	4,324			$	290

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		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	)

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Sources of Liquidity

 

We finance our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $68.8$125.2 million as of December 31, 2016,2019, an increase of $21.1$40.2 million from December 31, 2015. The increase in our cash was primarily due to cash generated through operations and, to a lesser extent, proceeds from exercises of stock options and purchases through our employee stock purchase plan, which were partially offset by investing activity. We had cash and cash equivalents of $47.7 million as of December 31, 2015, an increase of $4.3 million from December 31, 2014.2018. The increase in our cash was due primarily to cash generated through operations, partially offset by investing activity and exercisesrepurchases of stock options, which were partially reduced by investment activity.common stock. We had cash and cash equivalents of $43.3$85.0 million as of December 31, 2014,2018, an increase of $0.3$48.3 million from December 31, 2013.2017. The increase in our cash was due primarily to cash generated through operationsoperations. We had cash and exercisescash equivalents of stock options, which were partially reduced by investment activity.$36.7 million as of December 31, 2017, a decrease of $32.1 million from December 31, 2016. The decrease in our cash was due primarily to the acquisition of RAPID in November 2017.

 

As of December 31, 2016,2019, the amount of cash and cash equivalents held by foreign subsidiaries was $18.7$21.6 million. If these funds are needed for our domestic operations, we would be requiredOur intent is to accrue and pay U.S. taxes to repatriate these funds. However, our intent iscontinue to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the next 12 months.

 

Cash Flows from Operating Activities

 

Cash flow from operating activities of $116.1 million during 20162019 primarily consisted of net income of $42.7$63.7 million, adjusted for certain non-cash items, including depreciation and amortization of $17.5$30.9 million, stock-based compensation expense of $6.8$10.8 million and deferred taxes of $2.8 million, loss on impairment of assets of $0.5$6.1 million and amortization of held-to-maturity securities of $1.2 million, which were partially offset by excess tax benefit from stock-based compensation expense of $2.5changes in operating assets and liabilities and other items totaling $4.3 million. The cash flow from operating activities during 20162019 compared to 2015 increased $16.42018 decreased $6.8 million due to changesdecreases in operating assetsnet income of $12.9 million and liabilitiesdeferred taxes of $14.0$5.8 million, which were partially offset by increases in depreciation and amortization of $3.4$4.1 million driven by an increase in capital 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, including depreciation and amortization of $26.8 million, stock-based compensation expense of $0.7$10.9 million and deferred taxes of $11.9 million, which were partially offset by changes in operating assets and liabilities and other items totaling $3.3 million. The cash flow from operating activities during 2018 compared to 2017 increased $41.2 million 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 to employees, loss on impairmentincreases in depreciation and amortization of assets of $0.5$8.3 million driven by the decision to exit certain product lines, an increase in excess tax benefitscapital investments and increases in deferred taxes of $3.0 million, $0.3 million of gain from the Alphaform acquisition in 2015 that did not recur and$10.8 million. These increases were partially offset by changes in operating assets and liabilities and other items of $14.0 million driven by general growth of the business. These increases were partially offset by a decrease in net income of $3.8 million, a decrease in deferred taxes of $0.1 million, a decrease in amortization of held-to-maturity securities of $0.1 million, as well as other adjustments of $1.5 million primarily related to unrealized gains on the translation of foreign currency denominated cash.$5.1 million.

 

Cash flow from operating activities of $81.8 million during 20152017 primarily consisted of net income of $46.5$51.8 million, adjusted for certain non-cash items, including depreciation and amortization of $14.1$18.5 million, and stock-based compensation expense of $6.1$8.6 million partially offset by excess tax benefit from stock-based compensation expense of $5.5and changes in operating assets and liabilities and other items totaling $2.9 million. The cash flow from operating activities during 20152017 compared to 20142016 increased $1.3$4.2 million due to increases in net income of $4.9$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 $3.0$1.0 million deferred taxes of $4.7 million and stock-based compensation expense of $1.3 million, whichdriven by an increase in capital investments. These increases were partially offset by a gain on acquisitiondecreases to deferred taxes of $0.3$1.6 million,an increase in excess tax benefit from stock-based compensation of $1.1 million, and decreases in amortization of held-to-maturity securities of $0.3$0.1 million and changes in operating assets and liabilities of $10.9$5.9 million.

 

Cash flow from operating activities during 2014 primarily consisted

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Table of net income of $41.6 million, adjusted for certain non-cash items, including depreciation and amortization of $11.1 million and stock-based compensation expense of $4.8 million, partially offset by excess tax benefit from stock-based compensation expense of $4.5 million. The cash flow from operating activities during 2014 compared to 2013 increased $8.8 million due to increases in net income of $6.4 million, depreciation and amortization of $3.5 million, stock-based compensation expense of $1.3 million and a decrease in excess tax benefit from stock-based compensation of $5.4 million, which were partially offset by decreases in deferred taxes of $2.3 million and changes in operating assets and liabilities of $5.5 million.

Contents

 

Cash Flows from Investing Activities

 

Cash used in investing activitiesactivities was $60.8$44.3 million for the year ended December 31, 2016,2019, consisting of $33.6$62.2 million for the purchase of property, equipment and other 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 proceeds from 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 and other capital assets primarily to expand our production capacity and $89.3$41.4 million for the purchase of marketable securities, which were partially offset by $62.1$65.1 million in proceeds from maturities and call redemption of marketable securities.securities and $0.1 million in other investing activities.

 

Cash used in investing activities was $63.6$123.9 million for the year ended December 31, 2015,2017, consisting of $44.4$110.5 million for the purchase of RAPID, $32.6 million for the purchase of property, equipment and equipmentother capital assets primarily to expand our production capacity, $5.0 million for the payments on business acquisitions and $66.4$20.0 million for the purchase of marketable securities and $8.8 million for the purchases of other assets and investments, which were partially offset by $52.2$48.0 million in proceeds from maturities and call redemption of marketable securities.

 

Cash used in investing activities was $63.5 million for the year ended December 31, 2014, consisting of $43.5 million for the purchase of property and equipment primarily to expand our production capacity, $33.9 million for payments on business acquisitions and $60.2 million for the purchases of marketable securities, which were partially offset by $74.1 million in proceeds from maturities and call redemption of marketable securities.

Cash Flows from Financing Activities

 

Cash provided byused in financing activities was $7.8$31.6 million for the year ended December 31, 2016,2019, consisting of excess tax benefit on stock-based compensation$33.5 million in repurchases of common stock, and $2.5 million and $5.7in purchases of shares withheld for tax obligations associated with equity transactions, partially offset by $4.4 million in proceeds from exercises of stock options,options.

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, payments on 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 $0.4$8.9 million for paymentsin proceeds from exercises of acquisition-related contingent consideration.stock options.

 

Cash provided by financing activities was $10.2$9.2 million for the year ended December 31, 2015,2017, consisting of excess tax benefit on stock-based compensation of $5.5$5.0 million in short-term debt obligations and $6.3$8.6 million in proceeds from exercisesthe exercise of stock options, partially offset by $0.2$4.4 million for paymentsrepurchases of debt and $1.4 million for payments of acquisition-related contingent consideration.

Cash provided by financing activities was $7.0 million for the year ended December 31, 2014, consisting of excess tax benefit on stock-based compensation of $4.5 million and $4.8 million in proceeds from exercises of stock options, partially offset by $1.1 million for payments of debt and $1.2 million for payments of acquisition-related contingent consideration.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 our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell equity or convertible debt securities or enter into credit facilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all.

 

Our future capital requirements will depend on many factors, including the following:

 

•

the revenue growth in Injection Molding, CNC Machining, and 3D Printing and Sheet Metal product lines;

		•
	•	costs of operations, including costs relating to expansion and growth;

		•
	•	the emergence of competing or complementary technological developments;

		•
	•	the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in litigation-related activities; and

	•		the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

 

Our recent annual capital expenditures generally have varied between approximately 8%10% and 19%20% of annual revenue. We believe future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue.

 

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Contractual Obligations

 

As of December 31, 2016,2019, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future periods were as follows:

 

						Payment Due by Period
(in thousands)		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Operating leases		$	13,851			$	3,531			$	4,905			$	3,267			$	2,148
Total		$	13,851			$	3,531			$	4,905			$	3,267			$	2,148

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						Payment Due by Period
(in thousands)		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Operating leases		$	12,678			$	4,034			$	6,533			$	1,406			$	705
Total		$	12,678			$	4,034			$	6,533			$	1,406			$	705

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The table above reflects only payment obligations that are fixed and determinable. Our commitments forfor operating leases relate to twothree of our United States manufacturing facilities:facilities; our European sales, customer service and technical support offices; three former Alphaform manufacturing and office facilities located in Germany and Finland;Germany; and our Japan facility.

 

Financing Arrangements

  

We havehad no financing arrangements as of December 31, 2016 or 2015.2019 and 2018.

 

Inflation

 

We believe thatexperience normal inflation and changing prices, haveprimarily on our production materials and labor. In 2019 and 2018, wage inflation contributed to our lower gross margin. In 2017, we do not believe inflation and changing prices had a material effect on our financial condition during the three most recent fiscal years.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 variable interest entities.

 

Critical Accounting Policies and Use of Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill, other intangible assets, stock-based compensation, and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. See the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about these critical accounting policies, as well as a description of our other accounting policies.

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Revenue Recognition

 

On January 1, 2018, we adopted ASC 606, Revenue Recognitionfrom Contracts with Customers, using the modified retrospective approach. 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 for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, we will recognize revenue over time.

 

We recognizePrior to 2018, we recognized revenue in accordance with ASC 605, Revenue Recognition, which states that revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.

Revenue iswas recognized upon transfer of title and risk of loss, which iswas generally upon the shipment of parts in our Injection Molding, CNC Machining, 3D Printing, Sheet Metal and Other product lines.

 

Goodwill

Goodwill

We recognize goodwill in accordance with ASC 350, Intangibles—Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. As of December 31, 20162019 no impairment charges for goodwill have been recognized.

Other Intangible Assets

We recognize other intangibles assets in accordance with ASC 350, Intangibles—Intangibles—Goodwill and Other. Other intangible assets include internally developed software technology, customer relationships and other intangible assets acquired from an independent party.parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite lifebasis, 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, 20162019 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 CompensationCompensation (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grant date fair value of the award.

 

Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’smanagement’s judgment. Significant estimates include our expected term and stock price volatility and forfeiture rates.volatility. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related stock-based compensation expense may be materially impacted.

 

The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base the risk-free interest rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. We estimated the volatility of our stock price based on the historic volatility of our common stock. We have never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vestingWe account for forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what has been recorded.as they occur.

 

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The fair value of each new employee and non-employee director option awarded was estimated on the date of grant for the periods below using the Black-Scholes option pricing model with the following assumptions:

 

		Year Ended December 31,
		2016				2015				2014
Risk-free interest rate			1.53 - 2.68%				1.69 - 1.77%				0.43 - 2.14%
Expected life (years)			6.50				5.50 - 6.50				2.00 - 6.50
Expected volatility			44.38 - 45.93%				46.80 - 47.23%				47.29 - 49.30%
Expected dividend yield			0%				0%				0%
Weighted average grant date fair value			$26.61				$32.42				$32.65

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		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

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Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of our common stock during each offering period at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period, and atperiod. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the last trading day of the offering period. We determine the fair value stock-based compensation related to our ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.

 

The fair value of each offering period was estimated using the Black-Scholes option pricing model with the following assumptions:

 

		Year ended December 31,
		2016				2015				2014
Risk-free interest rate			0.56 - 0.59%				0.08 - 0.39%				0.01 - 0.11%
Expected life (months)			6.00				6.00				6.00
Expected volatility			39.51 - 49.13%				29.41 - 37.64%				37.64 - 39.80%
Expected dividend yield			0%				0%				0%

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		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%

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There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods, or if we decide to use a different valuation model, such as a lattice model, the stock-based compensation expense that we record in the future under ASC 718 may differ significantly from what we have recorded using the Black-Scholes option pricing model and could materially affect our operating results.

 

We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded stock-based compensation expense relating to stock options, restricted stock awards, performance stock units and our ESPP of $6.8$10.8 million, $6.1$10.9 million and $4.8$8.6 million during the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. As of December 31, 2016,2019, we had $5.3$3.6 million of unrecognized stock-based compensation costs related to unvested stock options net of estimated forfeitures, that are expected to be recognized over a weighted average period of 3.02.6 years. We issued options to purchase 117,480, 110,33553,708, 36,600 and 116,05060,100 shares of our common stock in 2016, 20152019, 2018 and 2014,2017, 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 and 210,744 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 costs related 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-based compensation 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 end of 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 of additional stock-based awards to continue to attract and retain employees and non-employee directors.

 

Income Taxes

 

We account for income taxes in accordance with ASC 740, Income TaxesTaxes (ASC 740). Under this method, we determine tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. We establish a valuation allowance for any portion of our deferred tax assets that we believe will not be recognized.

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ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’senterprise’s financial statements by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Including interest and penalties, we have established a liability for uncertain tax positions of $4.0$5.4 million as of December 31, 2016.2019.

 

Recent Accounting PronouncementsThe 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 vesting of 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. 

 

In May 2014,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%, required companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.

Recently adopted accounting pronouncements

During the fourth quarter of 2019, we early adopted the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) No.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 our consolidated 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 lease liabilities by lessees for those leases classified as operating leases under previous guidance. We have adopted the new lease standard using the new transition option issued 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 within the new standard, which among other things, allowed us to carry forward the historical lease classification. We made an accounting policy election to keep leases with an 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 a straight-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 new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application methods.

        On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. The Company expects to adoptWe adopted the new revenue standard using the modified retrospective approachapproach. We manufacture custom parts to specific customer orders that have no alternative use to us, and expectswe believe there is a legally enforceable right to quantifypayment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, we will recognize revenue over time. The transition adjustment 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 disclosereduce diversity in practice as well as cost and complexity when applying the expectedguidance to a change to the terms or conditions of a share-based payment award. The adoption of this guidance did not have a material impact if any, of adopting this amendedon 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 in the third quarter Form 10-Q. While the Company is stillwill be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the amendedfuture adoption of this guidance it doeson our consolidated financial statements, but we do not expect the impact to be material.

 

In FebruaryJune 2016, the FASB issued ASU 2016-02,2016-13, LeasesFinancial Instruments – Credit Losses, , which introducesis intended to provide financial statement users with more decision-useful information about the balance sheet recognition of lease assets and lease liabilitiesexpected credit losses on financial instruments held by lessees for those leases classified as operating leases under previous guidance. Thea reporting entity at each reporting date. This guidance will be effective for annual reporting periodsfiscal years beginning after December 15, 20182019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its consolidated financial statements, as well as the timing of such adoption.

In March 2016, the FASB issued ASU 2016-09, Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company will adopt this standard on January 1, 2017. The Company expects the impact on its effective tax rate to be less than 0.2%.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which is intended to reduce diversity in how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance will not have a material impact on itsour consolidated financial statements as well as the timingstatements.

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Contents

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Quantitative and Qualitative Disclosure of Market Risks

 

Our exposure to market risk is confined to our cash and cash equivalent balances and investments. The primary goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of debt securities with various maturities ranging from one to three years. Due to the nature of our investment portfolio, we are subject to interest rate risks, which we mitigate by holding our investments to maturity. In future periods, we will continue to evaluate our investment policy in order to continue our overall goals.

 

Foreign Currency Risk

 

As a result of our foreign operations, we have revenue,, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incur production costs and operating expenses in British Pound, Euro and Japanese Yen.

 

Our operating results and cash flows are adversely impacted when the United States dollar appreciates relative to other foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign 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 estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized a foreign currency gainlosses of $1.4$0.8 million for the year ended December 31, 20162019 and foreign currency lossesgains of $0.5$0.3 million and $0.4 million for the two years ended December 31, 20152018 and 2014,2017, respectively.

 

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Item 8. Financial Statements and Supplementary Data

 

Proto Labs, Inc. Index to Consolidated Financial Statements Page Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements 4948 Report of Independent Registered Public Accounting Firm 50 Consolidated Balance Sheets at December 31, 20162019 and 20152018 51 Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 20152019, 2018 and 20142017 52 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2016, 20152019, 2018 and 20142017 53 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 20152019, 2018 and 20142017 54 Notes to Consolidated Financial Statements 55   47 Table of Contents   Report of Independent Registered Public Accounting Firm   TheTo the Shareholders and the Board of Directors and Shareholders 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, 20162019 and 2015, and2018, the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. 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, the financial 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 ended December 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 control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 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 thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable 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 or required 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 the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Revenue Recognized Over Time Description of the Matter As discussed in Notes 2 and 3 to the consolidated financial statements, the Company provides quality, quick-turn prototyping and on-demand manufacturing services.  The majority of revenue recognized in a reporting period is based on completed, invoiced contracts.  The Company manufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders and the Company believes that there is a legally enforceable right to payment for performance completed to date on these manufactured parts.  Revenue is recognized over time for manufactured parts which meet these two criteria.  For revenue recognized over time, management uses the input method to measure progress toward the complete satisfaction of performance obligations, based on production time incurred to date as a percentage of total estimated production time. 48 Table of Contents Auditing revenue recognized over time was challenging because the relevant accounting standard requires the Company to estimate the progress towards satisfaction of performance obligations, applying a single appropriate method to measure progress.  The input method requires an analysis of the incurred time in production and an estimate of the total time necessary to complete the total parts per the customer’s order.  The Company also estimates a reasonable profit margin. These estimates are based on management’s assessment of the current status of production as well as historical results. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for recognizing revenue over time. This included testing controls over management’s evaluation of contract terms, the estimation of production time incurred to date and total production time used in the input method, estimation of a reasonable profit margin and the completeness and accuracy of the 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 of contracts to evaluate the existence of an enforceable right to payment for performance completed to date, evaluating the progress towards completion of orders in process through examination of a sample of product shipments subsequent to the end of the reporting period, evaluating the reasonableness of management’s estimate of profit margins based on a comparison to historical margins, testing the appropriateness of the timing and amount of revenue recognized over time based on the underlying inputs, and performing an independent sensitivity analysis to evaluate the impact on revenues of changes in significant assumptions. Capitalized Software Costs Description of the Matter As discussed in Note 2 to the consolidated financial statements, the Company follows ASC 350-40, Internal-Use Software, in accounting for internally 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’s assessment of what development activities and related costs met the capitalization criteria, as only those costs incurred in certain stages of software development and certain types of costs qualify for capitalization in accordance with the applicable accounting standard. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s internal-use software costs process. This included testing controls over management’s determination of which costs qualify for capitalization in accordance with the applicable accounting standard and Company policy. To test the Company’s capitalization of internal-use software costs, we performed audit procedures that included, among others, inspecting underlying documentation to evaluate whether the costs were capitalizable in accordance with the Company’s capitalization policy and the applicable accounting standard. We also assessed the Company’s determination of costs that qualified for capitalization through inspection of a sample of vendor contracts and invoices, inquiries of project personnel to assess the nature of the costs and review of payroll data to evaluate the internal payroll costs capitalized. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2011. Minneapolis, Minnesota February 26, 2020 49 Table of Contents 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—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the financial statements referred to above present fairly,Proto Labs, Inc. (the Company) maintained, in all material respects, the consolidatedeffective internal control over financial positionreporting as of Proto Labs, Inc. at December 31, 2016 and 2015, and2019, based on the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.COSO criteria.   We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Proto Labs, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by2019 and 2018, the Committeerelated consolidated statements of Sponsoring Organizationscomprehensive income, shareholders' equity and cash flows for each of the Treadway Commission (2013 framework) three years in the period ended December 31, 2019, and the related notesand our report dated February 22, 201726, 2020 expressed an unqualified opinion thereon.   /s/ Ernst & Young LLP Minneapolis, Minnesota February 22, 2017 Report of Independent Registered Public Accounting Firm Basis for Opinion   The Board of Directors and Shareholders Proto Labs, Inc. We have audited Proto Labs, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Proto Labs, Inc.’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting   A company’scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.   In our opinion, Proto Labs, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of December 31, 2016 and December 31, 2015, related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for the three years in the period ended December 31, 2016, and our report dated February 22, 2017, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP   Minneapolis, Minnesota February 22, 201726, 2020   50 Table of Contents   Proto Labs, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts)     December 31,       2016     2015                     Assets                 Current assets                 Cash and cash equivalents   $ 68,795     $ 47,653   Short-term marketable securities     39,477       33,201   Accounts receivable, net of allowance for doubtful accounts of $442 and $330 as of December 31, 2016 and December 31, 2015, respectively     34,060       36,125   Inventory     9,310       9,771   Prepaid expenses and other current assets     5,697       5,224   Income taxes receivable     445       6,028   Total current assets     157,784       138,002   Property and equipment, net     139,474       125,475   Goodwill     28,916       28,916   Other intangible assets, net     2,655       3,337   Long-term marketable securities     84,479       64,789   Other long-term assets     933       517   Total assets   $ 414,241     $ 361,036                     Liabilities and shareholders' equity                 Current liabilities                 Accounts payable   $ 11,322     $ 13,643   Accrued compensation     7,670       9,993   Accrued liabilities and other     4,435       2,626   Total current liabilities     23,427       26,262   Long-term deferred tax liabilities     7,003       4,240   Other long-term liabilities     3,978       2,889   Total liabilities     34,408       33,391                     Shareholders' equity                 Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of December 31, 2016 and December 31, 2015, respectively     -       -   Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,504,868 and 26,200,718 shares as of December 31, 2016 and December 31, 2015, respectively     26       26   Additional paid-in capital     213,857       198,835   Retained earnings     176,703       133,996   Accumulated other comprehensive loss     (10,753 )     (5,212 ) Total shareholders' equity     379,833       327,645   Total liabilities and shareholders' equity   $ 414,241     $ 361,036

The accompanying notes are an integral part of these consolidated financial statements.       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 and December 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 December 31, 2019 and December 31, 2018, respectively     -       -   Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,786,459 and 26,984,747 shares 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 Table of Contents   Proto Labs, Inc. Consolidated Statements of Comprehensive Income (In thousands, except share and per share amounts)     Year Ended December 31,       2016     2015     2014                             Statements of Operations:                         Revenue   $ 298,055     $ 264,106     $ 209,583   Cost of revenue     131,118       109,703       81,182   Gross profit     166,937       154,403       128,401   Operating expenses                         Marketing and sales     46,131       39,188       29,144   Research and development     22,388       18,350       16,607   General and administrative     36,651       29,716       22,122   Total operating expenses     105,170       87,254       67,873   Income from operations     61,767       67,149       60,528   Other income, net     2,454       712       3   Income before income taxes     64,221       67,861       60,531   Provision for income taxes     21,514       21,347       18,896   Net income   $ 42,707     $ 46,514     $ 41,635                             Net income per share:                         Basic   $ 1.62     $ 1.79     $ 1.62   Diluted   $ 1.61     $ 1.77     $ 1.60                             Shares used to compute net income per share:                         Basic     26,365,173       26,005,858       25,692,699   Diluted     26,564,639       26,320,284       26,100,320                             Other Comprehensive Loss, net of tax                         Foreign currency translation adjustments   $ (5,541 )   $ (2,283 )   $ (1,838 ) Comprehensive income   $ 37,166     $ 44,231     $ 39,797     The accompanying notes are an integral part of these consolidated financial statements.       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 Table of Contents   Proto Labs, Inc. Consolidated Statements of Shareholders' Equity (In thousands, except share and per share amounts)     Common Stock                   Accumulated                           Additional           Other                         Paid-In     Retained     Comprehensive             Shares     Amount      Capital      Earnings      Loss     Total                                                     Balance at January 1, 2014     25,546,107       26       166,861       45,847       (1,091 )     211,643   Common shares issued on exercise of options and other     292,003       -       4,820       -       -       4,820   Excess tax benefit from stock option exercises     -       -       4,470       -       -       4,470   Stock-based compensation expense     -       -       4,809       -       -       4,809   Net income     -       -       -       41,635       -       41,635   Other comprehensive income                                                 Foreign currency translation adjustment     -       -       -       -       (1,838 )     (1,838 ) Comprehensive income                                             39,797   Balance at December 31, 2014     25,838,110     $ 26     $ 180,960     $ 87,482     $ (2,929 )   $ 265,539   Common shares issued on exercise of options and other     362,608       -       6,254       -       -       6,254   Excess tax benefit from stock option exercises     -       -       5,539       -       -       5,539   Stock-based compensation expense     -       -       6,082       -       -       6,082   Net income     -       -       -       46,514       -       46,514   Other comprehensive income                                                 Foreign currency translation adjustment     -       -       -       -       (2,283 )     (2,283 ) Comprehensive income                                             44,231   Balance at December 31, 2015     26,200,718     $ 26     $ 198,835     $ 133,996     $ (5,212 )   $ 327,645   Common shares issued on exercise of options and other     304,150       -       5,715       -       -       5,715   Excess tax benefit from stock option exercises     -       -       2,532       -       -       2,532   Stock-based compensation expense     -       -       6,775       -       -       6,775   Net income     -       -       -       42,707       -       42,707   Other comprehensive income                                                 Foreign currency translation adjustment     -       -       -       -       (5,541 )     (5,541 ) Comprehensive income                                             37,166   Balance at December 31, 2016     26,504,868     $ 26     $ 213,857     $ 176,703     $ (10,753 )   $ 379,833     The accompanying notes are an integral part of these consolidated financial statements.       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 Table of Contents   Proto Labs, Inc. Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (In thousands)       Year Ended December 31,     Year Ended December 31,     2016     2015     2014     2019     2018     2017                             Operating activities                                           Net income   $ 42,707     $ 46,514     $ 41,635     $ 63,655     $ 76,588     $ 51,778   Adjustments to reconcile net income to net cash provided by operating activities:                                       Depreciation and amortization     17,485       14,126       11,138     30,864     26,754     18,474   Stock-based compensation expense     6,775       6,082       4,809     10,781     10,928     8,558   Deferred taxes     2,780       2,837       (1,875 )   6,106     11,936     1,174   Excess tax benefit from stock-based compensation     (2,532 )     (5,539 )     (4,470 ) Loss on impairment of assets     455       -       -     -     -     513   Gain on acquisition     -       (344 )     -   Gain on sale of businesses   -     (671 )   -   Amortization of held-to-maturity securities     1,173       1,234       1,517     5     374     1,063   Other     (1,541 )                   391     (619 )   (153 ) Changes in operating assets and liabilities, net of acquisitions:                                       Accounts receivable     900       (11,371 )     (5,304 )   1,848     (6,098 )   (9,933 ) Inventories     136       (2,097 )     (896 )   60     (189 )   (985 ) Prepaid expenses and other     (1,312 )     (2,047 )     107     545     (2,098 )   (691 ) Income taxes     8,207       (2,310 )     9,373     6,555     (6,652 )   1,646   Accounts payable     (1,116 )     5,781       1,435     (719 )   1,942     3,176   Accrued liabilities and other     850       5,691       (259 )     (4,039 )     10,734       7,128   Net cash provided by operating activities     74,967       58,557       57,210       116,052       122,929       81,748                             Investing activities                                           Purchases of property and equipment     (33,616 )     (44,362 )     (43,507 ) Purchases of property, equipment and other capital assets   (62,230 )   (87,104 )   (32,635 ) Cash used for acquisitions, net of cash acquired     -       (5,032 )     (33,864 )   -     (90 )   (110,533 ) Proceeds from sale of businesses   -     284     -   Purchases of other assets and investments   (4,000 )   (126 )   (8,742 ) Purchases of marketable securities     (89,315 )     (66,393 )     (60,186 )   (46,403 )   (41,384 )   (20,037 ) Proceeds from maturities of marketable securities     62,176       52,193       74,058       68,330       65,139       47,972   Net cash used in investing activities     (60,755 )     (63,594 )     (63,499 )     (44,303 )     (63,281 )     (123,975 )                           Financing activities                                           Payments on debt     -       (152 )     (1,054 )   -     (5,000 )   -   Acquisition-related contingent consideration     (400 )     (1,400 )     (1,200 ) Proceeds from exercises of stock options and other     5,715       6,251       4,820   Excess tax benefit from stock-based compensation     2,532       5,539       4,470   Net cash provided by financing activities     7,847       10,238       7,036   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     (917 )     (877 )     (457 )     47       (871 )     947   Net increase in cash and cash equivalents     21,142       4,324       290   Net increase (decrease) in cash and cash equivalents   40,179     48,339     (32,088 ) Cash and cash equivalents, beginning of period     47,653       43,329       43,039       85,046       36,707       68,795   Cash and cash equivalents, end of period   $ 68,795     $ 47,653     $ 43,329     $ 125,225     $ 85,046     $ 36,707                             Supplemental cash flow disclosure                                           Cash paid for interest   $ 1     $ 5     $ 19     $ 14   $ 39   $ 19   Cash paid for taxes   $ 9,802     $ 20,330     $ 11,549     $ 4,002   $ 9,966   $ 19,113     The accompanying notes are an integral part of these consolidated financial statements.   54 Table of Contents   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 3D printed,injection-molded, computer numerical control (CNC) machined, 3D-printed and injection-moldedsheet metal-fabricated custom parts for prototyping and short-run production. The Company’s customers are product developers and engineers throughout the world who require a faster and less expensive way to obtain low volumes of parts. The Company’s proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and its customers conduct nearly all of their business with the Company over the Internet. The Company targets its product lines to the millions of product developers and engineers who use three-dimensional (3D)three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has established operations in the United States, Europe and Japan, which the Company believes are among the largest geographic markets where these product developers and engineers are located. The Company’s primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and 3D Printing.Sheet Metal. Proto Labs, Inc. is locatedheadquartered 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 Ltd.Limited United Kingdom PL International UK LLP United Kingdom PL International Holding UK Ltd. United Kingdom PLJ Ltd.   United Kingdom   Proto Labs Distribution Ltd. United Kingdom PL DE Holding GmbH   Germany   Proto Labs Tooling GmbH   Germany   Proto Labs, Eschenlohe GmbH Germany PL Finland Oy Finland Proto Labs AB Sweden Proto Labs, G.K.   Japan     Note 2— Summary of Significant Accounting Policies   Principles of consolidation   The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,, as listed within organization“Organization and businessbusiness” above. All intercompany accounts and transactions have been eliminated in consolidation.   Comprehensive income   Components of comprehensive income include net income and foreign currency translation adjustments. Comprehensive income is disclosed in the accompanying consolidated statements of comprehensive income and consolidated statements of shareholders’shareholders’ equity.   55 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   Accounting estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Cash and cash equivalents   Cash and cash equivalents include cash and other investments,, including marketable securities, with maturities of three months or less at the date of purchase. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses on such accounts.   Marketable securities   Marketable securities include held-to-maturity debt securities recorded at amortized cost. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in other income, net. Interest on securities classified as held to maturity is included in other income, net. The classification of marketable securities as current or non-current is dependent upon the security’s maturity date. Securities with maturities of three months or less at the time of purchase are categorized as cash equivalents as described above. The Company reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by Accounting Standards Codification (ASC) ASC 320, Investments – Debt and Equity Securities, when determining the classification of impairment as “temporary” or “other-than-temporary.” The factors used to differentiate between temporary and other-than-temporary include assessment of the quality of the security, credit ratings actions and management’s intent to hold the security to maturity as well as other factors.   Accounts receivable and allowance for doubtful accounts   Accounts receivable are reported at the invoiced amount less an allowance for doubtful accounts. As of each balance sheet date, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received.   Inventory   Inventory consists primarily of raw materials, which are recorded at the lower of costcost or market, using the average cost method, which approximates first-in, first-outfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.   Property, equipment and leasehold improvements   Property, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an asset’sasset’s useful life are capitalized. Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including amortization of leasehold improvements and assets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to 39 years. Manufacturing equipment is depreciated over 3 to 15 years, office furniture and equipment are depreciated over 3 to 7 years, computer hardware and software are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold improvements are depreciated over the estimated lives of the related assets or the life of the lease, whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service are not depreciated until the asset is put into use.   The Company follows ASC 350-40, Internal-Use Software, in accounting for internally developed software. As of December 31, 2019 and 2018, respectively, $32.7 million and $16.6 million of software development costs were capitalized. Capitalized software development costs for the year ended December 31, 2019 were $16.1 million. 56 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   In August 2015, the Company adjusted the useful lives of its primary production equipment based on experience and condition of current equipment. This change in accounting estimate was accounted for prospectively, and therefore had no effect on property and equipment, net as previously reported. This change was not material. Goodwill   The Company recognizes goodwill in accordance with ASC 350, Intangibles—Intangibles—Goodwill and Other. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount.    During the fourth quarter of 2016, the Company changed the date of the annual impairment test from December 31 to October 1. The change was made to more closely align the impairment testing date with the Company’s forecasting process. The annual impairment test was performed as of December 31, 2015 and was performed as of October 1, 2016. This change in method of applying an accounting principal was not material. Other Intangible Assets   Other intangible assets include internally developed software technology, customer relationships and other intangible assets acquired from another independent party.parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite lifebasis, 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. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value.   Accounting for long-lived assets   The Company periodically reviews the carrying amount of its property, equipment and leasehold improvements to determine if circumstances exist indicating an impairment or if depreciation periods should be modified. If facts or circumstances support the possibility ofindicate that an impairmentmay exist, the Company will prepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an adjustment will be made to reduce the carrying amount of the specific assets to fair value.   Revenue recognition   On January 1, 2018, the Company adopted ASC 606,Revenue from Contracts with Customers, using the modified retrospective approach. The Company recognizesmanufactures custom parts to specific customer orders that have no alternative use to the Company, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, 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 total estimated production time to measure progress toward satisfying performance obligations. Prior to 2018, the Company recognized revenue when it iswas realized or realizable and earned when all of the following criteria arewere met: persuasive evidence of an arrangement exists,existed, delivery hashad occurred or services havehad been rendered, the price to the buyer iswas fixed or determinable and collectability iswas reasonably assured. Revenue iswas recognized upon transfer of title and risk of loss, which iswas generally upon the shipment of parts in ourthe Company’s Injection Molding, CNC Machining, 3D Printing and 3D PrintingSheet Metal product lines. Freight billed to customers 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 for those leases classified as operating leases under previous guidance. The Company determines if an arrangement is included in revenues, and all freight expenses paid by the Companya lease at inception. Operating leases are included in costoperating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of revenue.lease payments over the lease term at commencement date.   57 Table of Contents   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)740). Under this method, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. The Company establishes a valuation allowance for any portion of its deferred tax assets that the Company believes will may not be recognized.   ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’senterprise’s financial statements by requiring that individual tax positions are recorded only when they meet a more-likely-than-notmore-likely-than-not criterion. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.   Stock-based compensation   The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718)718). Under the fair value recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes the compensation expense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting awardaccounts for forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.as they occur. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the awards vest early in the event of a change in control.   In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the date of grant using the Black-Scholes option-pricing model.   Advertising costs   Advertising is expensed as incurred and was approximately $10.5$13.0 million, $10.0$11.8 million and $8.5$10.7 million for the years ended December 31, 2016, 20152019,2018 and 2014,2017, 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, enhancementenhancements of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. The Company follows ASC 350-40,Internal-Use Software, in accountingCosts for internally developed software. As of December 31, 2016, 2015 and 2014, all internal use software projects were in the post-implementation/operation stageare evaluated by project and therefore, no software development costs were capitalized.capitalized where appropriate under ASC 350-40,Intangibles - Goodwill and Other, Internal-Use Software. Research and development costs were approximately $22.4$32.7 million, $18.4$28.7 million and $16.6$23.6 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, 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 in effect throughout the period. The Company has recorded the translation adjustment as a separate component of consolidatedconsolidated shareholders’ equity. Foreign currency transaction 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 Company acquired 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 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   RecentRecently adopted accounting pronouncements   In May 2014,During the fourth quarter of 2019, the Company early adopted the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) No. 2014-09,2017-04,Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. The adoption of this guidance had no material impact on the Company'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 assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU 2018-11,Leases, which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification (ASC) 840,Leases, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an 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 the Consolidated 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 operating lease 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 comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application methods.         On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. The Company expects to adoptadopted the new revenue standard using the modified retrospective approach and expectsapproach. The Company manufactures custom parts to quantify and disclose the expected impact, if any, of adopting this amended guidance in the third quarter Form 10-Q. Whilespecific customer orders that have no alternative use to the Company, and the Company believes there is still evaluatinga legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the impactCompany will recognize revenue over time. The transition adjustment recorded was an increase of $1.5 million to the amended guidance, it does not expect the impact to be material.Company's retained earnings balance as of January 1, 2018.   During the first quarter of 2018, the Company adopted ASU 2017-09,Compensation – Stock Compensation, which is intended to provide clarity and reduce diversity 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 of this guidance did not have a material impact on the Company's consolidated financial statements. Recently issued accounting pronouncements In February 2016, December 2019, the FASB issued ASU 2016-02,2019-12, LeasesIncome Taxes, which introducesis intended to simplify the balance sheet recognition of lease assets and lease liabilities by lesseesaccounting for those leases classified as operating leases under previous guidance. Theincome taxes. This guidance will be effective for annual reporting periodsfiscal years beginning after December 15, 2018 2020 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standardguidance on its consolidated financial statements, as well asbut does not expect the timing of such adoption.impact to be material.   In MarchJune 2016, the FASB issued ASU 2016-09,2016-13, Employee Share-Based Payment AccountingFinancial Instruments – Credit Losses, , which is intended to simplify several aspects ofprovide financial statement users with more decision-useful information about the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows.expected credit losses on financial instruments held by a reporting entity at each reporting date. This guidance will be effective for annual reporting periodsfiscal years beginning after December 15, 2016 2019 and interim periods within those fiscal years with early adoption permitted. The Companyimpact of this guidance will adopt this standardnot have a material impact on January 1, 2017. The Company does not expect the impactCompany's consolidated financial statements. 59 Table of Contents Proto Labs, Inc. Notes to be material.Consolidated Financial Statements    In August 2016, Note 3 – Revenue The Company provides quality, quick-turn prototyping and on-demand manufacturing services. As a result, the FASB issued ASU 2016-15, Statementmajority of Cash Flows,revenue recognized in a reporting period is based on completed, invoiced contracts. The Company accounts for revenue in accordance with ASC 606, which is intended to reduce diversity in how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance will be effectiveCompany adopted on January 1, 2018, using the modified retrospective method. Results for annual reporting periods beginning after December 15, 2017January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and interim periods within those fiscal yearscontinue to be reported in accordance with early adoption permitted.the Company’s historic accounting under ASC 605. The Company is evaluatingrecorded a net increase of $1.5 million to its retained 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 $0.3 million and increase cost of revenue by $0.2 million for the future adoptionyear ended December 31, 2018, and to increase accounts receivable by $2.9 million and decrease inventory by $1.3 million as of this guidanceDecember 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 of the Company’s CNC machining, 3D printing, and sheet metal contracts have a single performance obligation. The majority of the Company’s injection molding contracts have multiple performance obligations including one obligation to produce the mold and a second obligation to produce parts. For injection molding contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its consolidated financial statements as well asrelative standalone selling price. We generally determine standalone selling price based on the timing of such adoption, but does not expect the impactprice charged to be material.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 Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, 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 total estimated 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 recorded within 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 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements Note 3 4– Net Income Per Common ShareIncome Per Common Share   Basic net income per share is computed based on the weighted average number of common shares outstanding. Diluted net income per share is computed based on the weighted average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.    Proto Labs, Inc. Notes to Consolidated Financial Statements 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)   2016     2015     2014                             Net Income   $ 42,707     $ 46,514     $ 41,635                             Basic - weighted-average shares outstanding:     26,365,173       26,005,858       25,692,699   Effect of dilutive securities:                         Employee stock options and other     199,466       314,426       407,621   Diluted - weighted-average shares outstanding:     26,564,639       26,320,284       26,100,320   Net income per share attributable to common shareholders:                         Basic   $ 1.62     $ 1.79     $ 1.62   Diluted   $ 1.61     $ 1.77     $ 1.60                                 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 45 –Business Combinations   On October 1, 2015, November 30, 2017, the Company acquired certain assets, including sharesRAPID for $122.0 million, consisting of select subsidiaries,$110.6 million in cash (net of Alphaform AG (Alphaform) through insolvency proceedings administered through the Insolvency Court of Munich, Germany. Includedcash acquired) and $11.3 million in the acquisition were select assets of Alphaform AG and Alphaform Claho GmbH and shares of Alphaform RPI Oy and Alphaform Ltd., for $5.0 million net cash consideration, which was funded with cash available in the United States and Europe. As of December 2016, theCompany’s common stock. The operations of Alphaform have beenRAPID are integrated into the operations of the Company.   Alphaform wasRAPID is a leading service bureau headquarteredNew Hampshire-based custom parts supplier specializing in Feldkirchen (Munich), Germanyquick-turn sheet metal fabrication and also had locations in Eschenlohe, Germany; Rusko, Finland and Reading, UK. Alphaform produces high-quality parts using stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies as well as injection molding capabilities and other production processes. The revenue associated with these processes is reported underCNC machining. With the 3D Printing, Injection Molding and Other product lines. In the second quarter of 2016,acquisition, the Company made the decision to exit the resin resale business.offers its customers another quick-turn manufacturing service while expanding its CNC machining capabilities.    The resultsacquisition has been accounted for under the acquisition method of Alphaform sinceaccounting in accordance with ASC 805. The fair value of the dateconsideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill of $99.8 million. The goodwill primarily relates to synergies resulting from the acquisition and pro forma disclosures of the consolidated results of the Company with the full year effects of Alphaform have not been separately presented since the impact to the Company's results of operations was not material.is deductible for tax purposes over a 15-year period.   61 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   The acquisition was accounted for underRAPID amortizable intangible assets were valued as of the acquisition date and were deemed to have a weighted-average useful life of 5.5 years. The customer relationships were valued at $7.5 million based on the Multi-Period Excess Earnings Method and are amortized over 6.0 years. The trade names were valued at $1.1 million based on the Relief-from-Royalty Method and are amortized over 2.0 years. The non-competition agreement was valued at $0.1 million based on the Discounted Cash Flow method of accounting in accordance with ASC 805. Because Alphaform was insolvent, the fair value of the assets purchased and liabilities assumed exceeded the fair value of consideration paid, which resulted in a bargain purchase gain of $0.3 million.will be amortized over 5 years. The bargain purchase gain was recorded in Other Income, Net in the Consolidated Statement of Comprehensive Income for the year ended December 31, 2015. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows:             (in thousands)         Assets acquired:         Current assets   $ 2,766   Other long-term assets     3,876   Total assets acquired     6,642             Liabilities assumed:         Current liabilities     1,266   Total liabilities assumed     1,266   Net assets acquired   $ 5,376             Cash paid   $ 5,570   Cash acquired     (538 ) Total purchase consideration   $ 5,032   Gain recognized on bargain purchase   $ 344             (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     On April 23, 2014,The following unaudited pro forma information represents the Company acquired 100%Company’s results of operations as if the fiscal 2017 acquisition of RAPID had occurred at the beginning of fiscal 2016. These performance results may not be indicative of the outstanding shares of FineLine Prototyping, Inc. (FineLine) for $33.9 million net cash consideration, which was funded with cash available in the United States and the sale of $15.5 million of held-to-maturity securities. The shares of FineLine acquired through the Stock Purchase Agreement (the Agreement) were purchased in a private transaction exempt from registrationactual results that would have occurred under the Securities Act of 1933ownership and the operations of FineLine have been integrated into the operationsmanagement of the Company. Under     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 termsyear ended December 31, 2017 excludes transaction costs of approximately $1.9 million and includes the increase in estimated depreciation expense of approximately $0.9 million and the increase in estimated amortization expense of approximately $3.0 million. The unaudited pro forma net income for the year ended December 31,2016 includes the impact of new stock options and restricted stock units granted to employees of approximately $0.2 million in connection with the acquisition, an increase in estimated depreciation expense of approximately $0.6 million and the increase in estimated amortization expense of approximately $3.1 million. The pro forma net income for the years ended December 31, 2017 and 2016 include the related tax effects of the Agreement,adjustments. The pro forma information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates and actual amounts may differ materially from these estimates. They do not reflect the Company was obligatedeffect of costs or synergies that would have been expected to make additional cash payments totaling up to $3.0 million, contingent upon both the achievement of 2014 revenue goals and certain milestones relating toresult from the integration of FineLine’s operations with the Company. As of December 31, 2016, the Company had made payments of $3.0 million relatedRAPID acquisition. The pro forma information does not purport to the attainment of milestones and as of December 31, 2016 the Company had no remaining contingent consideration. FineLine was based in Raleigh, North Carolina and was a leading producer of parts using additive manufacturing technologies, often times referred to as 3D printing. FineLine produced high-quality parts using stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies to customers in a wide variety of industries, including medical, aerospace, computer/electronics, consumer products and industrial machinery, among others. Consistent with the provisions of ASC 805, Business Combinations(ASC 805), the Company accrued the contingent payment on the date of acquisition after determining its fair value of $3.0 million in arriving at $36.9 million of total consideration, net of cash acquired. The fair valuebe indicative of the contingent consideration was determined by using Level 3 inputs basedresults of operations that actually would have resulted had the RAPID acquisition occurred on the present value of various payout scenarios, weighted on the basis of probability. January 1, 2016. The contingent payment continues to be remeasured to fair value at each reporting period with changes in fair value reflected in theCompany’s 2017 Consolidated Statements of Comprehensive Income.Income include $3.6 million of revenue and $0.7 million of net loss related to RAPID. The net loss was primarily driven by $1.1 million of bonus payments to RAPID employees as a result of the acquisition.   The fair value 62 Table of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill. The goodwill associated with the acquisition is deductible for tax purposes and represents the strategic and growth opportunities from strengthening the Company’s portfolio of rapid prototyping product offerings. The addition of additive manufacturing expands Proto Labs’ products to address a wider spectrum of needs for the product developer and engineer. From concept models, to form and fit testing, to functional testing and short-run production, the acquisition of FineLine allows the Company to offer a broader range of quick-turn, on-demand custom parts with speed, reliability and consistency. Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   The results of FineLine since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the full year effects of FineLine have not been separately presented since the impact to the Company's results of operations was not material. The FineLine acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows:           (in thousands)         Assets acquired:         Current assets   $ 1,248   Intangible assets     4,580   Goodwill     28,916   Other long-term assets     3,849   Total assets acquired     38,593             Liabilities assumed:         Current liabilities     1,729   Total liabilities assumed     1,729   Net assets acquired     36,864             Cash paid     34,468   Cash acquired     (604 ) Net cash consideration     33,864   Contingent consideration     3,000   Total purchase consideration   $ 36,864             Note 5 6– Goodwill and Other Intangible Assets   The changes in the carrying amount of goodwill for the years ended December 31, 2016 2019 and 20152018 were as follows:                                               (in thousands)   Dec. 31, 2014     Goodwill acquired during 2015     2015 Other     Dec. 31, 2015     Goodwill acquired during 2016     2016 Other     Dec. 31, 2016                                                             United States   $ 28,916     $ -     $ -     $ 28,916     $ -     $ (4,869 )   $ 24,047   Europe     -       -       -       -       -       4,239       4,239   Other     -       -       -       -       -       630       630   Total goodwill   $ 28,916     $ -     $ -     $ 28,916     $ -     $ -     $ 28,916                                                             (in thousands)   Dec. 31, 2017     Goodwill acquired during 2018     Dec. 31, 2018     Goodwill acquired during 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 175 – Segment Reporting, effectiveBusiness Combinations, the Company acquired RAPID in November 2017. The fair value of the consideration paid exceeded the fair value of the assets acquired and liabilities assumed, which resulted in goodwill in the fourth quarterUnited States of 2016,$99.6 million for the Company changed its reportable segments to be based upon geographic regions, which also resulted inyear ended December 31, 2017 and a related working capital adjustment of $0.2 million for the revision of reporting units. The Company has three reporting units and applied the relative fair value method to allocate goodwill to each of the reporting units. During the fourth quarter of 2016, the Company completed its annual assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. Proto Labs, Inc. Notes to Consolidated Financial Statementsyear ended December 31, 2018.   Intangible assets other than goodwill for the years ended December 31, 2016 2019 and 20152018 were as follows:                                   Year Ended December 31, 2016     Year Ended December 31, 2015             Weighted   (in thousands)   Gross     Accumulated Amortization     Net     Gross     Accumulated Amortization     Net     Useful Life (in years)     Average Useful Life Remaining (in years)   Intangible Assets with finite lives:                                                                 Marketing assets   $ 930     $ (248 )   $ 682     $ 930     $ (155 )   $ 775       10.0       7.3   Non-compete agreement     190       (190 )     -       190       (158 )   $ 32       2.0       0   Trade secrets     250       (133 )     117       250       (83 )   $ 167       5.0       2.3   Internally developed software     680       (604 )     76       680       (378 )   $ 302       3.0       0.3   Customer relationships     2,530       (750 )     1,780       2,530       (469 )   $ 2,061       9.0       6.3   Total intangible assets   $ 4,580     $ (1,925 )   $ 2,655     $ 4,580     $ (1,243 )   $ 3,337                                                                                         Year Ended December 31, 2019     Year Ended December 31, 2018             Weighted Average Useful Life   (in thousands)   Gross     Accumulated Amortization     Net     Gross     Accumulated Amortization     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 was $0.7 million for each of the years ended December 31, 20162019, 2018 and 2015, respectively,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 software technology intangible asset for the year ended December 31, 2014.2017. The acquisition did not meet the definition of a business under ASC 805. The asset acquisition included an additional $5.0 million in contingent consideration to be recognized and paid upon completion of certain milestones over a 24-month period. The completion of each milestone resulted in additional value to the software technology intangible asset. We recognized $1.0 million of the contingent consideration for the year ended December 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)   Estimated Amortization Expense   2017   $ 500   2018     424   2019     391   2020     374   2021     374   Thereafter     592   Total estimated amortization expense   $ 2,655               (in thousands)   Estimated Amortization 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 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements Note 67 – Fair Value MeasurementsValue Measurements   ASC 820, Fair Value Measurement (ASC 820)820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:   Level 1—1—Quoted prices in active markets for identical assets or liabilities.   Level 2—2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.   Level 3—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’sCompany’s cash equivalents measured at fair value as of December 31, 20162019 and 2015,2018, respectively, consist of money market mutual funds. The Company determines the fair value of these financial assets using Level I1 inputs.   The following tables summarizes financial assets as of December 31, 2016 2019 and 20152018 measured at fair value on a recurring basis:                     December 31, 2016     December 31, 2015   (in thousands)   Level 1     Level 2     Level 3     Level 1     Level 2     Level 3                                                     Financial Assets:                                                 Cash and cash equivalents                                                 Money market mutual funds   $ 11,771     $ -     $ -     $ 11,896     $ -     $ -   Total   $ 11,771     $ -     $ -     $ 11,896     $ -     $ -                                                           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 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   Note 78 – Marketable Securities   The Company invests in short-term and long-term agency, municipal, corporate, commercial paper and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of December 31, 20162019 and 20152018 is as follows:               December 31, 2016   (in thousands)   Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value                                     U.S. government agency securities   $ 31,706     $ 1     $ (141 )   $ 31,566   Corporate debt securities     38,490       2       (147 )     38,345   U.S. municipal securities     46,578       1       (187 )     46,392   Certificates of deposit/time deposits     7,182       12       (22 )     7,172   Total marketable securities   $ 123,956     $ 16     $ (497 )   $ 123,475                                         December 31, 2019   (in thousands)   Amortized Cost     Unrealized Gains     Unrealized Losses     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, 2015   (in thousands)   Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value                                     U.S. government agency securities   $ 26,784     $ 2     $ (99 )   $ 26,687   Corporate debt securities     28,133       -       (114 )     28,019   Commercial paper     1,497       -       (2 )     1,495   U.S. municipal securities     35,667       8       (56 )     35,619   Certificates of deposit/time deposits     5,909       2       (11 )     5,900   Total marketable securities   $ 97,990     $ 12     $ (282 )   $ 97,720                                           December 31, 2018   (in thousands)   Amortized Cost     Unrealized Gains     Unrealized Losses     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)1). Fair values for the U.S. municipal securities, U.S. government agency securities commercial paper and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2)2).   The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The investment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Those unrealized losses displayed above are the result of macroeconomic factors and are indicative of neither the quality of the underlying security nor the issuer’s ability to pay its debt. The Company intends, and has the ability, to hold the investments to maturity and recover the full principal.   Classification of marketable securities as current or non-current is based upon the security’ssecurity’s maturity date as of the date of these financial statements.   65 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   The December 31, 2016 2019 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.               December 31,       2016             Due in one year or less   $ 39,477   Due after one year through five years     84,479   Total marketable securities   $ 123,956                 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 89–Property and Equipment   Property and equipment consists of the following:               December 31,   (in thousands)   2016     2015                     Land   $ 8,805     $ 8,301   Buildings and improvements     48,467       37,297   Machinery and equipment     114,729       103,205   Computer hardware and software     15,053       13,273   Leasehold improvements     6,688       3,404   Construction in progress     3,491       6,712   Total     197,233       172,192   Accumulated depreciation and amortization     (57,759 )     (46,717 ) Property and equipment, net   $ 139,474     $ 125,475                         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 December31, 2016, 20152019,2018 and 20142017 was $16.8$27.4 million, $13.4$23.5 million and $10.6$18.0 million, respectively.   Note 910– 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-outfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.   The Company’sCompany’s inventory consists of the following:       December 31,   (in thousands)   2016     2015                     Raw materials   $ 8,057     $ 8,589   Work in process     1,531       1,529   Total inventory     9,588       10,118   Allowance for obsolescence     (278 )     (347 ) Inventory, net of allowance   $ 9,310     $ 9,771         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 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   Note 1011 – Financing Obligations   The Company has no debthad 0 financing obligations as of December 31, 2016 2019 and 2015.2018.   Note 1112 – Employee Benefit Plans   The Company maintains a 401(k)401(k) retirement plan that covers employees in the United States. Under the plan, a full-time or regular part-time (over 20 hours/week) employee becomes a participant after completing three months of employment. Employees may elect to contribute up to 50 percent of regular gross pay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of the employee contributions and may make a discretionary contribution to the plan. Total employer contributions were approximately $1.6$3.1 million, $1.2$2.7 million and $0.8$1.9 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.   The Company also sponsors a defined contribution retirement plan that covers the employees in the United Kingdom. Total employer contributions were approximately $0.2$0.3 million $0.2 million and $0.1 million forin each of the years ended December 31, 2016, 20152019, 2018 and 2014, respectively.2017.   Note 1213 – Stock-Based Compensation   The Company has two equity incentive plans: the 2000 Stock Option Plan (2000(2000 Plan) and the 2012 Long-Term Incentive Plan (2012(2012 Plan). Upon the adoption of the 2012 Plan on February21,2012, all shares that were reserved but not issued under the 2000 Plan were assumed by the 2012 Plan. No additional sharesawards will be issued under the 2000 Plan. Under the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, performance stock, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee of the board of directors may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant. Restricted stock is valued at fair market value on the date of grant.   67 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements The Company’s Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-monthsix-month offering periods with a single purchase period, and at the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. The Company determines the fair value stock-based compensation related to its ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.   Employees purchased 40,27941,615 and 31,90533,562 shares of common stock under the ESPP at an average exercise price of $48.38$86.70 and $53.64$85.61 during 20162019 and 2015,2018, respectively. As of December 31, 2016, 1,285,3142019, 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 expense for all share-based payment awards made to employees and non-employee directors based on fair value.   Determining the appropriate fair value model and calculating the fair value of stock option grantsgrants requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expected term and stock price volatility and forfeiture rates. Proto Labs, Inc. Notes to Consolidated Financial Statementsvolatility.    The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that the Company’sCompany's stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. Prior to its IPO, the Company estimated the fair value of its common stock using the assistance of an independent third-party valuation specialist using the income and market approach. The Company estimatedestimates the volatility of its stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, the Company is required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vestingaccounts for forfeitures and record stock-based compensation expense for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, stock-based compensation expense could be significantly different from what has been recorded.as they occur. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period.   TheThe following table summarizes stock-based compensation expense for the years ended December 31, 2016, 20152019,2018 and 2014,2017, respectively:               Year Ended December 31,   (in thousands)   2016     2015     2014                             Stock options and other   $ 6,177     $ 5,580     $ 4,386   Employee stock purchase plan     598       502       423   Total stock-based compensation expense   $ 6,775     $ 6,082     $ 4,809                             Cost of revenue   $ 691     $ 513     $ 386   Operating expenses:                         Marketing and sales     977       1,074       927   Research and development     1,396       1,285       1,048   General and administrative     3,711       3,210       2,448   Total stock-based compensation expense   $ 6,775     $ 6,082     $ 4,809   Income tax benefits     (2,042 )     (1,859 )     (1,524 ) Total stock-based compensation expense, net of tax   $ 4,733     $ 4,223     $ 3,285                                 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 Table of Contents   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 December31, 2016, 20152019,2018 and 2014:2017:               Year Ended December 31,       2016     2015     2014                                         Risk-free interest rate     1.53 - 2.68%       1.69 - 1.77%       0.43 - 2.14%   Expected life (years)       6.50         5.50 - 6.50       2.00 - 6.50   Expected volatility     44.38 - 45.93%       46.80 - 47.23%       47.29 - 49.30%   Expected dividend yield       0%           0%           0%     Weighted average grant date fair value       $26.61           $32.42           $32.65                                               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 December31, 2016, 20152019,2018 and 2014:2017:                               Weighted-               Average       Stock Options     Exercise Price                     Options outstanding at January 1, 2014     1,143,250     $ 19.03   Granted     116,050       72.17   Exercised     (253,544 )     13.77   Cancelled     (6,769 )     26.23   Options outstanding at December 31, 2014     998,987       26.49   Granted     110,335       67.36   Exercised     (316,761 )     14.36   Cancelled     (26,519 )     51.72   Options outstanding at December 31, 2015     766,042       36.52   Granted     117,480       57.99   Exercised     (226,164 )     16.65   Cancelled     (87,719 )     61.41   Options outstanding at December 31, 2016     569,639     $ 45.00                     Exercisable at December 31, 2016     320,973     $ 34.65                                 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 generally have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vesting period, which is generally a five-yearfour- 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 December31, 2016, 20152019,2018 and 2014,2017, was $11.1$0.9 million, $18.6$13.0 million and $16.3$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 exercise prices.   For options outstanding at December 31, 2016, 2019, the weighted-average remaining contractual term was 6.05.5 years and the aggregate intrinsic value was $7.4$8.6 million. For options exercisable at December 31, 2016, 2019, the weighted-average remaining contractual term was 4.63.6 years and the aggregate intrinsic value was $6.8$6.5 million. Refer to the table below for additional information.   69 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements   The following table summarizes information about stock options outstanding at December31, 2016:2019:                                 Options Outstanding, Vested and Expected to Vest     Options Exercisable   Range of Exercise Prices     Number Outstanding     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price ($)     Number Exercisable     Weighted Average Exercise Price ($)                                                   $3.67 to $7.85       29,491       1.72     $ 4.98       29,491     $ 4.98     $7.86         74,100       3.87       7.86       74,100       7.86   $7.87 to $31.43       102,188       5.09       27.62       80,409       26.82   $31.44 to $47.15       56,428       6.08       44.05       24,936       41.95   $47.16 to $66.87       176,743       6.85       57.89       68,116       58.47   $66.88 to $78.59       130,689       7.62       71.64       43,921       73.01                                                       Options Outstanding, Vested and Expected to Vest     Options Exercisable   Range of Exercise Prices   Number Outstanding     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price ($)     Number Exercisable     Weighted Average Exercise Price ($)                                       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, 2016,2019, there was $5.3$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 3.02.6 years. The total fair value of options vested was $3.6$1.5 million, $2.8$1.5 million and $3.2$2.8 million for the years ended December 31, 2016, 20152019,2018 and 2014,2017, 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 the vesting period, which is generally a five-yearfour- 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, 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, 20162019, 2018 and 2015:2017:                               Weighted-               Average               Grant Date       Restricted     Fair Value       Stock Awards     Per Share                     Restricted stock at January 1, 2014     -     $ -   Granted     77,647       69.18   Restrictions lapsed     (798 )     62.68   Forfeited     (275 )     62.68   Restricted stock at December 31, 2014     76,574       69.27   Granted     68,580       68.89   Restrictions lapsed     (16,863 )     69.25   Forfeited     (3,898 )     72.14   Restricted stock at December 31, 2015     124,393       68.97   Granted     161,555       59.37   Restrictions lapsed     (41,415 )     67.78   Forfeited     (29,428 )     63.23   Restricted stock at December 31, 2016     215,105     $ 62.78                                   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   70 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements As of December 31, 2016, 2019, there was $11.0$21.1 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 3.72.6 years.   Performance Stock   Proto Labs, Inc.Performance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. Notes The following table summarizes performance stock activity for the years ended December 31, 2019, 2018 and 2017:             Weighted-               Average               Grant Date       Performance     Fair Value       Stock Awards     Per Share                     Performance stock at January 1, 2017     -     $ -   Granted     25,707       58.35   Restrictions lapsed     -       -   Forfeited     -       -   Performance stock at December 31, 2017     25,707       58.35   Granted     20,006       105.75   Restrictions lapsed     -       -   Performance change     6,427       58.35   Forfeited     -       -   Performance stock at December 31, 2018     52,140       76.54   Granted     21,434       104.99   Restrictions lapsed     -       -   Performance change     (61,816 )     88.06   Forfeited     (2,375 )     105.37   Performance stock at December 31, 2019     9,383     $ 58.35   As of December 31, 2019, there was $0.1 million of unrecognized compensation expense related to Consolidated Financial Statementsnon-vested performance stock, which is expected to be recognized over a weighted-average period of 0.1 years. The decrease in unrecognized stock-based compensation 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 end of future performance periods.   Employee Stock Purchase Plan   The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended December 31,2019,2018 and 2017:     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%   71 Table of Contents Note 14 – Leases The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2016, 2015 and 2014:             Year ended December 31,       2016     2015     2014                                         Risk-free interest rate     0.56 - 0.59%       0.08 - 0.39%       0.01 - 0.11%   Expected life (months)       6.00           6.00           6.00     Expected volatility     39.51 - 49.13%       29.41 - 37.64%       37.64 - 39.80%   Expected dividend yield       0%           0%           0%                                           Note 13 – Commitments2019. Significant changes to the Company’s accounting policies as a result of adopting ASC 842 are discussed below.   The Company accounts for leases property from third parties.in accordance with ASC 842. The Company adopted the standard as of January 1, 2019, using the alternative transition method provided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date (the "effective date method"). Under the effective date method, comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments to reflect the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. The Company did not elect the hindsight practical 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 a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 did not have a material impact on the Company's consolidated statements of comprehensive income, shareholders' equity or cash flows as of the adoption date. The Company has operating leases two of its U.S.for office space, manufacturing facilities and certain company vehicles and equipment. The leases have remaining lease terms of 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 expire in July 2017 and May 2018.may be deemed to include options to extend or terminate the lease when it 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 or terminate leases. The Company also leases office space in France, Germany and Italy with terms expiring at various times from 2017 to 2023. The Company leases an office and manufacturing space in Japan, and the initial term expires in April 2023. The Company also leases office and manufacturing space for former Alphaform in Germany and Finland with terms expiring at various times from 2017 to 2022.currently has 0 finance leases.   Future minimum commitments under non-cancelableThe Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets, current operating lease liabilities and long-term operating lease liabilities in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at December 31, 2016,commencement date. The majority of the Company’s leases do not provide an implicit rate of return, therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease agreements that contain non-lease components, with the exception of certain real estate leases, are accounted for as follows:a single lease component.               Operating Leases   (in thousands)         Years Ending December 31,   2017   $ 3,531   2018     2,945   2019     1,960   2020     1,644   2021     1,623   After 2021     2,148   Total future minimum lease payments   $ 13,851             Supplemental balance sheet information related to leases was as follows: (in thousands)   December 31, 2019   Operating lease assets   $ 11,425             Current operating lease liabilities   $ 3,340   Long-term operating lease liabilities     8,565   Total operating lease liabilities   $ 11,905     RentalLease expense was approximately $3.6 million, $1.4 million and $1.0 millionis recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred. The components of lease expense for the years ended periods reported were as follows:     Three Months Ended     Twelve Months Ended   (in thousands)   December 31, 2019     December 31, 2019   Operating lease cost   $ 976     $ 3,960   Variable lease cost     228       1,039   Total lease cost   $ 1,204     $ 4,999   72 Table of Contents Maturities of operating lease liabilities as of December 31, 2016, 20152019 (in accordance with ASC 842) were as follows: (in thousands)   Operating Leases   Year Ending December 31,         2020   $ 4,034   2021     2,835   2022     2,634   2023     1,064   2024     498   After 2024     1,613   Total future minimum lease payments     12,678   Less interest     (773 ) Present value of lease liabilities   $ 11,905   As of December 31, 2019, we have 0 operating leases that have not yet commenced. Weighted average remaining lease term and 2014, respectively.discount rate was as follows:  December 31, 2019 Weighted Average Remaining Lease Term (Years) 4.8 Weighted Average Discount Rate 2.6% 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 liabilities     1,921     73 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements Note 1415 – Accumulated Other Comprehensive Loss   Other comprehensive loss is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive loss balances for the years ending December 31, 2016, 20152019, 2018 and 2014,2017, respectively:               Year Ended December 31,   (in thousands)   2016     2015     2014                             Foreign currency translation adjustments                         Balance at beginning of period   $ (5,212 )   $ (2,929 )   $ (1,091 ) Other comprehensive loss before reclassifications     (5,541 )     (2,283 )     (1,838 ) Amounts reclassified from accumulated other comprehensive income (loss)     -       -       -   Net current-period other comprehensive loss     (5,541 )     (2,283 )     (1,838 ) Balance at end of period   $ (10,753 )   $ (5,212 )   $ (2,929 )                               Year Ended December 31,   (in thousands)   2019     2018     2017                             Foreign currency translation adjustments                         Balance at beginning of period   $ (8,492 )   $ (5,234 )   $ (10,753 ) Other comprehensive (loss) income before reclassifications     1,474       (3,258 )     5,519   Amounts reclassified from accumulated other comprehensive income (loss)     -       -       -   Net current-period other comprehensive (loss) income     1,474       (3,258 )     5,519   Balance at end of period   $ (7,018 )   $ (8,492 )   $ (5,234 )   Note 1516– Income Taxes   The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the years ended December 31, 2016, 20152019,2018 and 2014,2017, the Company recorded an income tax provision of $21.5$17.5 million, $21.3$15.1 million and $18.9$22.7 million, respectively. The effective income tax rate for the years ended December 31,2019,2018 and 2017 was 21.6 percent, 16.4 percent and 30.4 percent, respectively. 74 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements The effective tax rate increased by 5.2% for the year ended December 31, 2016, 20152019 when compared to 2018 primarily due to a decrease in tax benefits from the vesting of restricted stock and 2014exercise 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 33.4 percent, 31.5 percentenacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and 31.2 percent, respectively.creates new taxes on certain foreign sourced earnings. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.    The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income before income taxes are as follows:               Year Ended December 31,   (in thousands)   2016     2015     2014                             Domestic   $ 59,232     $ 59,421     $ 51,052   Foreign     4,989       8,440       9,479   Total   $ 64,221     $ 67,861     $ 60,531                                 Year Ended December 31,   (in thousands)   2019     2018     2017                             Domestic   $ 74,841     $ 81,893     $ 69,929   Foreign     6,352       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)   2016     2015     2014                             Current:                         Federal   $ 15,119     $ 15,845     $ 17,413   State     1,091       1,074       1,185   Foreign     2,439       1,591       2,149   Deferred                         Federal     2,758       2,798       (1,821 ) State     75       (38 )     (17 ) Foreign     (1,960 )     294       130   Valuation Allowance     1,992       (217 )     (143 ) Total   $ 21,514     $ 21,347     $ 18,896                                 Year Ended December 31,   (in thousands)   2019     2018     2017                             Current:                         Federal   $ 6,991     $ (782 )   $ 17,808   State     2,882       2,078       1,367   Foreign     1,544       1,810       2,215   Deferred                         Federal     5,121       11,325       865   State     269       538       193   Foreign     (809 )     (430 )     (1,918 ) Valuation Allowance     1,540       528       2,127   Total   $ 17,538     $ 15,067     $ 22,657     75 Table of Contents   Proto Labs, Inc. Notes to Consolidated Financial Statements A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:               Year Ended December 31,       2016     2015     2014                             Federal tax statutory rate     35.0 %     35.0 %     35.0 % State tax (net of federal benefit)     0.6       0.5       0.5   Qualified subsidiary election     (0.8 )     0.6       0.2   Valuation allowance against deferred tax assets     3.1       (0.3 )     (0.2 ) Research and development credit     (2.2 )     (2.9 )     (0.8 ) Foreign rate differential     (2.8 )     (1.8 )     (2.1 ) Tax reserves     1.4       1.5       0.4   Domestic manufacturing deduction     (1.8 )     (1.4 )     (2.1 ) Miscellaneous     0.9       0.3       0.3   Total     33.4 %     31.5 %     31.2 %                               Year Ended December 31,       2019     2018     2017                             Federal tax statutory rate     21.0 %     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 assets     1.4       0.7       2.9   Research and development credit     (2.8 )     (2.5 )     (2.2 ) Foreign rate differential     (0.3 )     (0.1 )     (1.9 ) Tax reserves     1.1       (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 ) Total     21.6 %     16.4 %     30.4 %   Significant components of deferred tax assets and liabilities are as follows:               December 31,   (in thousands)   2016     2015                     Deferred tax assets:                 Accrued expenses   $ 857     $ 628   Warrants and stock options     3,226       2,828   Intangibles     612       499   Inventories     169       177   Other assets     983       856   Net operating loss     4,333       2,409   Less valuation allowance     (4,559 )     (2,625 ) Total deferred tax assets     5,621       4,772   Deferred tax liabilities:                 Depreciation     (10,860 )     (7,945 ) Goodwill     (1,764 )     (1,067 ) Total deferred tax liabilities     (12,624 )     (9,012 ) Net deferred tax liability   $ (7,003 )   $ (4,240 )                       December 31,   (in thousands)   2019     2018                     Deferred tax assets:                 Accrued expenses   $ 1,362     $ 931   Leases     3,337       -   Warrants and stock options     3,325       2,908   Intangible assets     1,171       748   Inventories     169       154   Other assets     1,765       666   Net operating loss     6,513       6,605   Less valuation allowance     (8,248 )     (6,900 ) Total deferred tax assets     9,394       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 December31, 2016.2019. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2016, 2019, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $26.6$9.3 million. Proto Labs, Inc. Notes to Consolidated Financial Statements    As of December 31, 2016, 2019, the Company had estimated net operating loss carry forwards of $13.4$6.5 million for tax purposes. The net operating losses relate to operations in Japan and Germany. Japan losses can be carried forward for ten years but are limitedup to 80 percent of taxable income. Germany net operating losses may be carried forward without any time limitations but are limited to €1 million, plus 50% of taxable income exceeding €1 million.ten years. The remaining Japan net operating losses begin to expire at various dates between 20182020 and 2026. The Company’s Japan operations are taxed both by local authorities and in the U.S. Accordingly, a portion of JapanGermany net operating losses has been recognized as a benefit in the U.S.may be carried forward without any time limitations but are limited to €1 million, plus 60 percent of taxable income exceeding €1 million.   76 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements The Company establishes valuation allowances for deferred tax assets when, after consideration of all positive and negative evidence, it is considered more-likely-than-notmore-likely-than-not that a portion of the deferred tax assets will not be realized. The Company's valuation allowances of $4.6$8.2 million and $2.6$6.9 million at December 31, 2016 2019 and 2015,2018, respectively, reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient positive evidence for recognition. The increase in the valuation allowance is primarily attributable to fluctuations in foreign currency and the net operating losses incurred in Japan and Germany in 2016.2019.   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 no longer subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2012.2016.   The Company has liabilities related to unrecognized tax benefits totaling $3.8$4.6 million and $2.8$4.1 million at December 31, 2016 2019 and 2015,2018, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2016, 20152019, 2018 and 2014.2017.   A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:               December 31,       2016     2015                     Balance at beginning of period   $ 2,769     $ 1,295   Additions for tax positions of current year     1,077       919   Additions for tax positions of prior years     170       555   Decrease related to expiration of statutes of limitations     (220 )     -   Balance at period end   $ 3,796     $ 2,769                         December 31,       2019     2018                     Balance at beginning of period   $ 4,096     $ 4,233   Additions for tax positions of current year     592       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 1617–Litigation   From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to any litigation the outcome of which, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business.   Note 1718–Segment Reporting   The Company’sCompany’s reportable segments are based on the internal reporting used by the Company’s CEO, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. Beginning in the fourth quarter of 2016, the Company revised itsThe Company’s reportable segments to beare based upon geographic region, consisting of the United States and Europe. Prior to this change, the CODM managed based on consolidated operating information. Prior period segment reporting disclosures have been restated to present such information on a comparable basis. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that are global in nature and that the Company does not allocate directly to its operating segments. Proto Labs, Inc. Notes to Consolidated Financial Statements    Revenue in the United States is derived from Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Revenue in Europe is derived from Injection Molding, CNC Machining, and 3D Printing product lines. Revenue in Japan is derived from Injection Molding and CNC Machining product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined and lathe-turned customer parts. 3D Printing revenue consists of sales of 3D-printed3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal parts.   77 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements The accounting policies of the reportable segments are the same as those described in the Note 2 – Summary of Significant Accounting Policies note.Policies. Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. Beginning in 2019, the Company's CODM made a decision to view certain research and development costs by geographic region. As a result, costs previously included in the Corporate Unallocated and Japan category have been included in the respective geographic regions. All periods presented have been restated to reflect this change.   Revenue and income from operations by reportable segment are as follows:               Year Ended December 31,   (in thousands)   2016     2015     2014   Revenue:                         United States   $ 223,930     $ 208,018     $ 165,117   Europe     63,365       47,433       37,491   Japan     10,760       8,655       6,975   Total revenue   $ 298,055     $ 264,106     $ 209,583                                       Year Ended December 31,     Year Ended December 31,   (in thousands)   2016     2015     2014     2019     2018     2017   Income from Operations:                         Revenue:                   United States   $ 89,308     $ 86,450     $ 74,445     $ 360,205     $ 350,535     $ 263,086   Europe     11,657       13,304       14,734     82,805     80,889     70,154   Corporate Unallocated and Japan     (39,198 )     (32,605 )     (28,651 ) Total income from operations   $ 61,767     $ 67,149     $ 60,528                           Japan     15,718       14,172       11,250   Total revenue   $ 458,728     $ 445,596     $ 344,490           Year Ended December 31,   (in thousands)   2019     2018     2017   Income from Operations:                         United States   $ 108,594     $ 115,710     $ 99,561   Europe     15,077       16,747       12,796   Corporate Unallocated and Japan     (43,815 )     (43,557 )     (40,131 ) Total income from operations   $ 79,856     $ 88,898     $ 72,226   Proto Labs, Inc. Notes to Consolidated Financial Statements   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)   2016     2015     2014   Long-lived assets:                         United States   $ 108,650     $ 98,633     $ 76,923   Europe     23,199       23,636       12,512   Japan     7,625       3,206       2,191   Total long-lived assets   $ 139,474     $ 125,475     $ 91,626                                       Year Ended December 31,     December 31,   December 31,   December 31,   (in thousands)   2016     2015     2014     2019     2018     2017   Expenditures for additions to long-lived assets:                         Long-lived assets:                   United States   $ 21,190     $ 32,560     $ 33,480     $ 210,171     $ 185,979     $ 125,308   Europe     5,954       10,396       9,520     45,019     34,577     33,691   Japan     6,472       1,406       507       8,522       7,445       7,441   Total expenditures for additions to long-lived assets   $ 33,616     $ 44,362     $ 43,507                           Total long-lived assets   $ 263,712     $ 228,001     $ 166,440                  Year Ended December 31,   (in thousands)   2016     2015     2014   Depreciation and Amortization:                         United States   $ 12,533     $ 11,596     $ 9,233   Europe     3,386       2,132       1,530   Japan     1,566       398       375   Total depreciation and amortization   $ 17,485     $ 14,126     $ 11,138                                 Year Ended December 31,   (in thousands)   2019     2018     2017   Expenditures for additions to long-lived assets:                         United States   $ 45,123     $ 78,762     $ 20,370   Europe     14,743       7,576       11,704   Japan     2,364       766       561   Total expenditures for additions to long-lived assets   $ 62,230     $ 87,104     $ 32,635     The Company’s revenue is derived primarily from its Injection Molding, CNC Machining, and 3D Printing product lines. Total revenue by product lines is as follows: 78 Table of Contents Proto Labs, Inc. Notes to Consolidated Financial Statements               Year Ended December 31,   (in thousands)   2016     2015     2014                             Revenue:                         Injection Molding   $ 175,974     $ 163,387     $ 140,282   CNC Machining     81,407       74,368       59,914   3D Printing     37,847       25,132       9,387   Other Product     2,827       1,219       -   Total revenue   $ 298,055     $ 264,106     $ 209,583                                 Year Ended December 31,   (in thousands)   2019     2018     2017   Depreciation and Amortization:                         United States   $ 24,767     $ 21,117     $ 13,267   Europe     4,746       4,679       4,174   Japan     1,351       958       1,033   Total depreciation and amortization   $ 30,864     $ 26,754     $ 18,474       Note 18 19– Subsequent Events   On February 9, 2017, the Company announced that its board of directors had authorized the repurchase of shares of the Company’s common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million.  The timing and amount of any share repurchases will be determined by the Company’s management based on market conditions and other factors.  The term of the program runs through December 31, 2021.None.   79 Table of Contents   Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   Not applicable.   Item 9A. Controls and Procedures   Evaluation of Disclosure Controls and Procedures   Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time framestimeframes specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.   Management’sManagement’s Annual Report on Internal Control Over Financial Reporting   The Company’sCompany’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on the assessment, management concluded that, as of December 31, 2016,2019, the Company’s internal control over financial reporting is effective. The Company’s registered public accounting firm’s attestation report on the Company’s internal control over financial reporting is provided in Part II, Item 8 of this Annual Report on Form 10-K.   Changes in Internal Control over Financial Reporting   There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.    Item 9B. Other Information   None.   80 Table of Contents   PART III   Item 10. Directors, Executive Officers and Corporate Governance   The information required by this item with respect to Item 401 relating to executive officers is contained in Item 1 of this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant” and with respect to other information relating to our directors will be set forth in our 20172020 Proxy Statement under the caption “Proposal 1 — Election of Directors,” which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference.   The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to the section titled “Corporate Governance — Section 16(a) Beneficial Ownership Reporting Compliance” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. The information required by this item under Items 407 (c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference to the section titled “Corporate Governance” of our 2015 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Ethics and Business Conduct is available on our website at www.protolabs.com under the Investors Relations section. We plan to post to our website at the address described above any future amendments or waivers of our Code of Ethics and Business Conduct.   Item 11. Executive Compensation   Information related to this item is incorporated herein by reference to the sections titled “Compensation Discussion and Analysis,” “Corporate Governance — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   Item 12. Security Ownership of Certain Beneficial Owners and Management   Information related to security ownership required by this item is incorporated herein by reference to the section titled “Security Ownership of Certain Beneficial Owners and Management” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Information related to our equity compensation plans required by this item is incorporated herein by reference to the section titled “Compensation Discussion and Analysis – Information Regarding Equity-Based Compensation Plans” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   Item 13. Certain Relationships and Related Transactions, and Director Independence   Information required by this item is incorporated herein by reference to the sections titled “Corporate“Corporate Governance — Certain Relationships and Related Party Transactions,” and “Corporate Governance — Director Independence” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   Item 14. Principal Accountant Fees and Services   Information required by this item is incorporated herein by reference to the section titled “Fees Paid to Independent Registered Public Accounting Firm” of our 20172020 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   81 Table of Contents   PART IV   Item 15. 15. Exhibits and Financial Statement Schedules   (a) The following documents are filed as part of this report:   1. Consolidated Financial Statements   See Index to Consolidated Financial Statement at Item 8 herein.   2. Financial Statement Schedules   Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statement or notes herein.   3. Exhibits   See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.   82 Table of Contents   SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Proto Labs, Inc. Date: February 22, 2017 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer (Principal Executive Officer) Date: February 22, 2017 /s/ John A. Way John A. Way Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: February 22, 2017 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer and Director (Principal Executive Officer) Date: February 22, 2017 /s/ John A. Way John A Way Chief Financial Officer (Principal Financial and Accounting Officer) Chairman of the Board of Directors: Lawrence J. Lukis* Directors: Archie C. Black* Rainer Gawlick* John B. Goodman* Brian K. Smith* Sven A. Wehrwein* *Victoria M. Holt, by signing her name hereto, does hereby sign this document on behalf of each of the above named officers and directors of the registrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto. Date: February 22, 2017 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer (Principal Executive Officer) EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1(29) Membership Interest Purchase Agreement, dated November 16, 2017, by and among Proto Labs, Inc., Rapid Manufacturing Group, LLC and the members listed therein. (Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.) 3.1(1) Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. 3.2(26)(27) Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015 3.3(2) Second Amended and Restated By-Laws of Proto Labs, Inc.,Inc, as amended through November 8, 20162016. 4.1(3) Second Form of certificate representing common shares of Proto Labs, Inc., as amended through November 8, 2016 4.2(31) Description of Securities of Registrant 10.1(4)# 2012 Long-Term Incentive Plan, as amended as of August 5, 2015 10.2(5)# Form of Incentive Stock Option Agreement under 2012 Long-Term Incentive Plan 10.3(6)# Form of Non-Statutory Stock Option Agreement (Directors) under 2012 Long-Term Incentive Plan 10.4(7)# Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2012 Long-Term Incentive Plan 10.5(8)# Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2012 Long-Term Incentive Plan 10.6(9)# Employee Stock Purchase Plan 10.7(10) Stock Subscription Warrant issued to John B. Tumelty 10.8(11)# 2000 Stock Option Plan, as amended 10.9(12)# Form of Incentive Stock Option Agreement under 2000 Stock Option Plan 10.10(13)# Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan 10.11(14)# Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan 10.12(15)# Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan 10.13(16)# Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan 10.14(17)# Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and Wells Fargo Bank, N.A. 10.15(18)# Credit Agreement, dated November 27, 2017, by and among Proto Labs and Wells Fargo Bank, National Association 10.16(19)# Form of U.S. Severance Agreement 10.1610.17(19)(20)# Form of UK Severance Agreement 10.1710.18(20)(21)# Amended and Restated Executive Employment Agreement, dated February 6, 2014,August 1, 2019, by and between Proto Labs, Inc. and Victoria M. Holt 10.1810.19(21)(22)# Form of Restricted Stock Agreement under 2012 Long-Term Incentive Plan for the initial grant to Victoria M. Holt 10.1910.20(22)(23)# Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.S. Employees) 10.2010.21(23)(24)# Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (U.K. Employees) 10.2110.22(24)(25)# Form of Restricted Stock Unit Agreement under 2012 Long-Term Incentive Plan (Directors) 10.2210.23(25)(26)# Amended and Restated Severance Agreement, dated December 18, 2014,August 1, 2019, by and between Proto Labs, Inc. and John A. Way 10.23(27)# Form of Severance Agreement with Executive Officers 10.24(28)# Form of Performance Stock Unit Agreement under 2012 Long-Term Incentive Plan 10.25(30)# Form of Deferred Stock Unit Agreement under 2012 Long-Term Incentive Plan 10.26(32)# Transition and Separation Agreement, dated May 8, 2019 by and between Proto Labs, Inc. and David M. Fein 10.27(33)# Form of Executive Severance Agreement 21.1 Subsidiaries of Proto Labs, Inc. 23.1 Consent of Ernst & Young LLP 24.1 Powers of Attorney 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act 32.1* Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act 101.INS** XBRL Instance DocumentDocument- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH** Inline XBRL Taxonomy Extension Schema Document 101.CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)   83 Table of Contents   (1) Incorporated by reference to Exhibit 3.2 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (2) Incorporated by reference to Exhibit 3.1 to the Company’sCompany’s Form 8-K, filed with the Commission on November 8, 2016. (3) Incorporated by reference to Exhibit 4.1 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (4) Incorporated by reference to Exhibit 10.1 to the Company’sCompany’s Form 10-Q, filed with the Commission on November 3, 2015. (5) Incorporated by reference to Exhibit 10.14 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (6) Incorporated by reference to Exhibit 10.15 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (7) Incorporated by reference to Exhibit 10.16 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (8) Incorporated by reference to Exhibit 10.17 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (9) Incorporated by reference to Exhibit 10.18 to the Company’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012. (10) Incorporated by reference to Exhibit 99.7 to the Company’sCompany’s Registration Statement on Form S-8 (File No. 333-179651), filed with the Commission on February 23, 2012. (11) Incorporated by reference to Exhibit 10.7 to the Company’sCompany’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’sCompany’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’sCompany’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’sCompany’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’sCompany’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’sCompany’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’sCompany’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on October 26, 2011. (18) Incorporated by reference to Exhibit 99.110.1 to the Company’sCompany’s Form 8-K, filed with the Commission on MarchDecember 1, 2013.2017. (19) Incorporated by reference to Exhibit 10.299.1 to the Company’sCompany’s Form 10-Q,8-K, filed with the Commission on May 8,March 1, 2013. (20) Incorporated by reference to Exhibit 10.110.2 to the Company’sCompany’s Form 8-K,10-Q, filed with the Commission on February 6, 2014.May 8, 2013. (21) Incorporated by reference to Exhibit 10.210.1 to the Company’sCompany’s Form 8-K, filed with the Commission on February 6, 2014.August 2, 2019. (22) Incorporated by reference to Exhibit 10.110.2 to the Company’sCompany’s Form 8-K, filed with the Commission on February 12,6, 2014. (23) Incorporated by reference to Exhibit 10.210.1 to the Company’sCompany’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. (25) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the Commission on December 19, 2014. (26) Incorporated by reference to Exhibit 3.110.2 to the Company’sCompany’s Form 8-K, filed with the Commission on May 21, 2015.August 2, 2019. (27) Incorporated by reference to Exhibit 3.1 to the Company’sCompany’s Form 8-K, filed with the Commission on April 6,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 February 17, 2017.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 of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. ** Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. 84 Table of Contents SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Proto Labs, Inc. Date: February 26, 2020 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer (Principal Executive Officer) Date: February 26, 2020 /s/ John A. Way John A. Way Chief Financial Officer (Principal Financial and Accounting Officer)     82Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: February 26, 2020 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer and Director (Principal Executive Officer) Date: February 26, 2020 /s/ John A. Way John A Way Chief Financial Officer (Principal Financial and Accounting Officer) Chairman of the Board of Directors: Sven A. Wehrwein* Directors: Archie C. Black* Sujeet Chand* 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 registrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto. Date: February 26, 2020 /s/ Victoria M. Holt Victoria M. Holt President and Chief Executive Officer (Principal Executive Officer) 85