# Proto Labs Inc: Form 10-K for the period ended Dec 31, 2017 - Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669) - Form: 10-K - Filed: 2018-02-23 - Accepted by EDGAR: Feb 23, 2018, 15:37 ET - Period: 2017-12-31 - Accession: 0001437749-18-003222 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1443669/000143774918003222/prlb20171231_10k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000143774918003222/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2017-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Cost of revenue | 12 months, 2017-01-01 to 2017-12-31 | $150.6m | us-gaap:CostOfRevenue | | Gross profit | 12 months, 2017-01-01 to 2017-12-31 | $193.8m | us-gaap:GrossProfit | | Research and development | 12 months, 2017-01-01 to 2017-12-31 | $23.6m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 12 months, 2017-01-01 to 2017-12-31 | $72.2m | us-gaap:OperatingIncomeLoss | | Income tax | 12 months, 2017-01-01 to 2017-12-31 | $22.7m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2017-01-01 to 2017-12-31 | $51.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2017-01-01 to 2017-12-31 | $1.93 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2017-01-01 to 2017-12-31 | $1.94 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2017-01-01 to 2017-12-31 | 26,845,071 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2017-01-01 to 2017-12-31 | $81.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2017-01-01 to 2017-12-31 | $32.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 12 months, 2017-01-01 to 2017-12-31 | $4.4m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2017-12-31 | $36.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2017-12-31 | $165.0m | us-gaap:AssetsCurrent | | Total assets | at 2017-12-31 | $518.7m | us-gaap:Assets | | Current liabilities | at 2017-12-31 | $43.8m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2017-12-31 | $57.5m | us-gaap:Liabilities | | Short-term borrowings | at 2017-12-31 | $5.0m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2017-12-31 | $461.2m | us-gaap:StockholdersEquity | ## Business As filed, 35,713 characters. ### Overview Proto Labs, Inc. was incorporated in Minnesota in 1999. The terms “Proto Labs,” the “Company,” “we,” “us,” and “our” as used herein refer to the business and operations of Proto Labs, Inc. and its subsidiaries. We are the world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts. Our mission is to help companies accelerate product development, reduce risk, and optimize supply chains by providing quality prototyping and on-demand manufacturing services at unprecedented speeds. Our automated quoting and manufacturing systems allow us to produce commercial-grade plastic, metal, and liquid silicone rubber parts within days. We manufacture prototype and low volume production parts for companies worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. Our customers conduct nearly all of their business with us over the Internet. We target our products to the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets. We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where these product developers and engineers are located. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many customers and is the primary reason we have become a leading supplier of custom parts. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our customers typically order short run custom parts for a variety of reasons, including: - they need a prototype to confirm the form, fit and function of one or more components of a product under development; - they need an initial supply of parts to support pilot production for testing of a product; - they need an initial supply of parts to support production while their high-volume production mold is being prepared; - they need to meet their customers' variable demand for custom parts in a competitive timeframe; - their product will only be released in a limited quantity; or - they need to support end-of-life production in a cost-effective manner. In each of these instances, we believe our solution provides product developers, engineers, and supply chains with an exceptional combination of speed, quality, competitive pricing, ease of use and reliability that they typically cannot find among conventional custom parts manufacturers. Our technology enables us to ship parts as soon as the same day after receipt of a customer’s design submission. Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of size and geometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers. We have experienced significant growth since our inception in 1999. We have grown our total revenue from $163.1 million in 2013 to $344.5 million in 2017. We have grown our income from operations from $51.3 million in 2013 to $72.2 million in 2017. Our increases in revenue and income from operations can be attributed to expanding our customer base, broadening our parts envelope, and launching new manufacturing technologies. We were founded in 1999 with plastic injection molding, and have expanded our product lines over the years by the introduction of: - CNC machining in 2007; - liquid silicon rubber (LSR) and lathe manufacturing processes that expanded the breadth and scope of our injection molding and CNC machining product lines in 2014; - 3D printing, including stereolithography (SL), selective laser sintering (SLS), and direct metal laser sintering (DMLS), through our acquisition of FineLine Prototyping, Inc. (FineLine) in 2014 and expanded through our acquisition of certain assets of Alphaform AG (Alphaform) in 2015; - rapid overmolding technology in 2016 and insert molding technology in 2017, both of which expanded the breadth of our manufacturing capabilities in our Injection Molding product line; - PolyJet and Multi Jet Fusion (MJF) in 2017, which expanded the processes with which we produce 3D printed parts; - injection molding commercial offerings tailored to on-demand manufacturing customers in 2017; - sheet metal fabrication capability through our acquisition of RAPID Manufacturing Group, LLC (RAPID) in 2017; and - expanded CNC machining capabilities for larger and more complex parts through our acquisition of RAPID in 2017. ### Industry Overview ### Our Industry We serve product developers and engineers worldwide who bring new ideas to market in the form of products containing one or more custom parts. Many of these product developers and engineers use 3D CAD software to create digital models representing their custom part designs that are then used to create physical parts for concept modeling, prototyping, functional testing, market evaluation or production. Custom prototype parts play a critical role in the product development process, as they provide product developers and engineers with the ability to test and confirm their intended performance requirements and explore design alternatives. Early in the product development process, 3D printing processes such as SL and PolyJet can be used to quickly produce an approximate physical representation of a part, but these representations may not meet product developers’ and engineers’ requirements for material properties. As an alternative, injection molding, CNC machining, sheet metal, and 3D printing processes such as SLS, DMLS, and MJF can be used to produce low volumes of high-quality custom parts in either metal or plastic. For follow-on functional testing, market evaluation and production runs, parts are typically manufactured using injection molding, CNC machining and sheet metal fabrication. ### Our Solution We have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required in quoting, production engineering and manufacturing of custom parts. We believe our interactive web-based interface and highly automated processes address the desires of many product developers and engineers for a fast, efficient and cost-effective means to obtain custom parts, and are the primary reasons we have become a leading supplier of custom parts. Key elements of our solution include: #### Sophisticated Technology that Reduces Turnaround Time Our digital model is centered on our web-based interface and proprietary software, which automate many of the manual and time-consuming processes typically required to obtain custom parts from conventional suppliers. Our platform automates many aspects of the entire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation, mold or part manufacture and digital inspection. To utilize our platform, a prospective customer uploads a 3D CAD file of their required part through our website. Often within minutes of design submission, our software analyzes the design, assesses the manufacturability of the design and our ability to make the part, and returns a firm price quotation with any recommendations for design modifications. Many of our customers find this analysis particularly helpful, as it diagnoses and prevents potential problems prior to manufacturing. We can also provide a flow analysis to identify design flaws that limit the ability to manufacture a quality part. Our quoting system is highly interactive, enabling our prospective customers to change the material, finish, quantity or shipping schedule of orders, and to instantly receive an updated quotation. Once an order is received, our software automates much of the manual engineering and skilled labor that is normally required to manufacture parts. As a result, in many cases we are able to quote orders in minutes and ship parts as soon as the same day ordered. #### Scale to Process Large Numbers of Unique Part Designs Our proprietary, highly scalable quoting technology addresses the manual processes conventionally involved in submitting a design, analyzing its manufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3D CAD part design submissions and provide feedback to our prospective product developer and engineer customers. In 2017 alone, we generated quotations for over 800,000 design submissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large numbers of unique designs and, combined with our manufacturing processes, efficiently and effectively manufacture high volumes of parts to meet the needs of product developers and engineers. #### Enhanced Customer Experience Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysis then quickly analyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides suggested design modifications to enhance manufacturability, which is presented to the product developer or engineer in an interactive quotation containing a color-coded 3D representation of the part. This allows product developers and engineers to quickly determine the manufacturability of their parts, understand the cost and when they can be shipped. Our interactive quotations provide instant visibility into the impact of changing an order’s various parameters such as material, finish, quantity or shipping schedule. As a result, we provide product developers and engineers with an easy-to-use and consistent means to obtain custom parts. #### Attractive Custom Pricing Based on internal market research, we believe we generally have competitive pricing on custom orders. We believe this, combined with speed, is a direct result of our technology and the efficiency of our operations, both of which were designed specifically for lower volume runs of custom parts production. By limiting these costs, we can typically offer attractive pricing not normally possible in the low volume, high mix custom parts market, and as a result, we can typically offer product developers and engineers competitive prices on custom manufactured parts. ### Our Product Lines Our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines offer many product developers and engineers the ability to quickly and efficiently outsource their quick-turn custom parts manufacturing. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the historical revenue generated by each of Injection Molding, CNC Machining, 3D Printing and Sheet Metal. ### Injection Molding Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-run production often come back to Proto Labs’ Injection Molding product line for additional quantities. They do so to support pilot production for product testing, while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-demand manufacturing injection molding service. This service utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs, typically in annual volumes of less than 10,000 parts. ### CNC Machining Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 200 parts. ### 3D Printing Our 3D Printing product line includes SL, SLS, DMLS, MJF and PolyJet processes, which offers customers a wide-variety of high-quality, precision rapid prototyping and low volume production. These processes create parts with a high level of accuracy, detail, strength and durability. Industrial 3D Printing is best suited for functional prototypes, complex designs and end-use applications. 3D Printing is well suited to produce small quantities, typically in the range of one to 50 parts. ### Sheet Metal Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, providing customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the product developer or engineer to fabricate quick turn prototype sheet metal or short run production parts. The Sheet Metal product line is well suited to produce quantities in the range of one to 500 parts. ### Our Process The process for Injection Molding begins when the product developer or engineer uploads one or more 3D CAD models representing the desired part geometry through our website. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and support the creation of an interactive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer or engineer, who can access the quotation, change a variety of order parameters and instantly see the effect on price before finalizing the order. Our proprietary software supports the creation of the mold design and the tool paths required to manufacture the mold components, which are then routed to our CNC machining centers for execution. Once the mold is assembled, it is placed in one of our injection molding presses to create the required parts. Parts are shipped in as little as one business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions. Our other services have similar processes, but differ mainly due to the nature of the manufacturing processes on which each service is based. ### Our Growth Strategy The principal elements of our growth strategy are to: ### Expand the Customer Base We plan to expand our customer base to serve more product developers and engineers within the companies that have already used our product lines. Individual product developers and engineers typically make or influence the choice of vendor when sourcing custom parts. We believe a significant opportunity exists for us to leverage highly satisfied product developers and engineers to encourage others within the same organization to utilize our product lines. We have historically gained a significant number of new customers through word-of-mouth referrals from other product developers and engineers, and combine these referrals with the efforts of our marketing and sales force to identify and market our product lines to the colleagues of our existing customers. We also plan to use our marketing and sales capabilities to continue to pursue product developers and engineers within companies who have not yet used our products. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies on which to focus our marketing and sales efforts. We believe there may be opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the United States, Europe and Japan, where we believe a substantial portion of the world’s product developers and engineers are located. We entered the European market in 2005 and launched operations in Japan in 2009. For 2017, revenue earned in these markets represents approximately 24% of our total revenue. While we currently do not have specific plans to expand into any particular geographic markets, we believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions and we will continue to evaluate such opportunities if and when they arise. We plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our technology in order to further increase automation and meet the evolving needs of product developers and engineers worldwide. We believe product developers and engineers have come to expect advanced web-based tools and a fully integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers and engineers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive quotations quickly and efficiently. ### Launch New Manufacturing Technology We seek to identify additional manufacturing processes to which we can apply our digital technology and expertise to meet a greater range of product developers’ and engineers’ needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunity to cross-sell our existing product lines to our existing customer base. We regularly evaluate new manufacturing processes to offer product developers and engineers and introduce such new processes when we are confident that a sufficient market demand exists and that we can offer the same advantages our customers have come to expect from us. See Item 6. “Selected Financial Data” for disclosure of our historical research and development expenses. We were founded with Injection Molding which represents 56.4% of our total revenue for the year ended December 31, 2017. Examples of new manufacturing services we have added include CNC Machining, 3D Printing and Sheet Metal. Our CNC Machining product line was first introduced in the United States in 2007, expanded to Japan in 2009 and Europe in 2012, and further expanded in the United States through our acquisition of RAPID in November 2017. CNC Machining represents 30.1% of our total revenue for the year ended December 31, 2017. 3D printing technologies were introduced through our acquisition of FineLine in April 2014. We further expanded our 3D printing capabilities in October 2015 through our acquisition of Alphaform. Our 3D product line represents 12.6% of our total revenue for the year ended December 31, 2017. Our Sheet Metal product line was introduced through our acquisition of RAPID in November 2017 and represents $1.8 million of total revenue for the year ended December 31, 2017. We continue to expand our core product lines through product launches including liquid silicone rubber injection molding, lathe-turned parts, rapid overmolding, insert molding, PolyJet and MJF. We introduced liquid silicone rubber injection molding during 2014 and in 2015, we introduced lathe-turned products. In 2016, we expanded the breadth of our manufacturing capabilities by adding rapid overmolding technology. In 2017, we added insert molding to our Injection Molding product line and PolyJet and MJF to our 3D Printing product line. In addition, we launched on-demand manufacturing to address the needs of the low-volume, high-mix product segment. We also opened our first metrology lab in 2017 for enhanced inspection reporting on end-use production parts, including First Article Inspection Reports and digital inspection reports. ### Broaden the Parts Envelope We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a portion of our research and development efforts to expand the range of parts that we can produce. Since we first introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can support. In 2017, we launched two new 3D Printing processes, which strengthened our capability to manufacture complex part geometries quickly and accurately. Through our acquisition of RAPID in November 2017, we added quick-turn and e-commerce-enabled Sheet Metal services to our portfolio and expanded our CNC Machining capabilities to support larger and more complex projects. As we continue to expand the range of our existing process capabilities, we believe we will meet the needs of a broader set of product developers and engineers and consequently convert a higher number of quotation requests into orders. ### Marketing Our global marketing effort generates prospects for our sales teams and seeks to strengthen our reputation as an industry leader in digital manufacturing services for custom prototyping and low-volume manufacturing. Since we are an agile, technology-based company, much of our marketing activities occur online. We use marketing automation software to enhance the productivity of our marketing and sales teams and continuously track the results of every campaign to ensure our return on investment. We maintain top-of-mind brand awareness with product developers and engineers through regular publication of technical information including design guidelines and helpful tips, engineering white papers, educational webinars, quick videos, and a quarterly journal focused on important industry topics. We also provide complimentary physical design aids to designers and engineers — as well as teachers and students — that highlight technical aspects of injection molding to help create efficient, well-designed parts. We believe these educational materials are key aspects of our lead generation efforts. Marketing represents the face of Proto Labs, so it is our goal to actively and intelligently engage designers and engineers across multiple mediums — whether print, online, social media or in person. By doing this, we gain new customers, drive sales and build brand equity. ### Sales and Customer Service We maintain an internal sales team trained in the basics of part design and the capabilities of our manufacturing product lines, as well as the key advantages of our processes over alternate methods of custom parts manufacturing. We organize our sales team into complementary roles: business development, account management and strategic account management, with the former focused on selling to new customer companies and the latter two focused on expanding sales within existing customer companies. We believe our sales staff is adept at researching customer companies and networking to find additional product developers and engineers who may have a need for our products. We also have a team of customer service engineers who can support highly technical engineering discussions with product developers and engineers as required during the sales process. Our revenue is generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2017. ### Competition The market for custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. Our potential competitors include: - *Captive in-house product manufacturing.* Many larger companies undertaking product development have established additive rapid prototyping (3D printing), CNC machining or injection molding capabilities internally to support prototyping or manufacturing requirements of their product developers and engineers. - *Other custom parts manufacturers.* There are thousands of alternative manufacturing machine shops, injection molding suppliers, 3D printing service bureaus and vendors worldwide. The size and scale of these businesses range from very small specialty shops to large, high-volume production manufacturers. We believe that the key competitive factors in our industry include: - Quality: dimensional accuracy, surface finish, material properties, color and cleanliness; - Speed: turnaround time for quotations and parts; - Reliability: greater than 97% on-time delivery; - Service: overall customer experience, from web interface to post-sales support; - Capability: range of part sizes and dimensional complexities supported, variety of manufacturing processes offered, materials supported and post-processing provided; - Scale: ability to support thousands of part designs in parallel; - Capacity: ability to manage peaks in demand with very short lead times and no minimum order quantities; and - Price: mold and part pricing. We believe that our digital end-to-end manufacturing capability positions us favorably and has enabled us to become a leader in our markets. We also believe that substantially all of our current direct competitors are relatively small in terms of size of operations, revenue, number of customers and volume of parts sold, and generally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and more established companies with developed technological capabilities, may begin to focus on low volume, high mix custom parts manufacturing. These companies could more directly compete with us, along with our existing competitors, and could also launch new products and product lines that we do not offer that may quickly gain market acceptance. Any of the foregoing could adversely affect our ability to attract customers. ### Intellectual Property We regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other intellectual property as valuable to our business and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, vendors and others to protect our proprietary rights. We register our patents, trademarks and service marks in the United States and other jurisdictions as we deem appropriate. As of December 31, 2017, we owned and had applications pending for patents relating to various aspects of our quoting and manufacturing processes as follows: | Jurisdiction | Issued Patents | Applications Pending | | --- | ---: | ---: | | United States | 17 | 6 | | United Kingdom | 2 | 0 | | Germany | 0 | 2 | Our patents have expiration dates ranging from 2022 to 2032. We also owned approximately 17 registered and 6 pending United States trademarks or service marks as of December 31, 2017, with corresponding registered protection in Europe and Japan for the most important of these marks such as PROTO LABS, PROTOMOLD, FIRSTCUT, PROTOQUOTE, FIRSTQUOTE, PROTOFLOW and FINELINE, corresponding approved protection in Canada for PROTO LABS, FIRSTCUT and FINELINE, and corresponding registered protection in Australia, Canada and Mexico for PROTOMOLD. There can be no assurance that the steps we take to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate such rights. We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in the ordinary course of our business. In particular, we may face claims from third parties that we have infringed their patents, trademarks or other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results. ### Employees As of December 31, 2017 we had 2,266 full-time employees. We also regularly use independent contractors and other temporary employees across the organization to augment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. ### Information About Segment and Geographic Revenue Information about segment and geographic revenue is set forth in Note 17 – Segment Reporting of the Notes to our consolidated financial statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K. ### Available Information Our principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359 and our telephone number is (763) 479-3680. Our website address is www.protolabs.com. Information on our website does not constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC. We provide free access to various reports that we file with or furnish to the SEC through our website as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports. Our SEC reports can be accessed through the investor relations section of our website. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s website is www.sec.gov. ### Executive Officers of the Registrant Set forth below are the names of our current executive officers, their ages, titles, the year first appointed as an executive officer, and employment for the past five years: | | | | | --- | ---: | --- | | Victoria M. Holt | 60 | President, Chief Executive Officer and Director | | Robert Bodor | 45 | Vice President/General Manager – Americas | | John A. Way | 45 | Chief Financial Officer and Executive Vice President of Development | | Arthur R. Baker III | 50 | Chief Technology Officer | | David M. Fein | 49 | Chief Revenue Officer | | Bjoern Klaas | 48 | Vice President/General Manager and Managing Director – Europe, Middle East and Africa | Executive officers of the Company are elected at the discretion of the board of directors with no fixed terms. There are no family relationships between or among any of the executive officers or directors of the Company. ***Victoria M. Holt***. Ms. Holt has been our President and Chief Executive Officer since February 2014. Prior to joining Proto Labs, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in March 2013. Ms. Holt also is a member of the Board of Directors of Waste Management, Inc. ***Robert Bodor***. Dr. Bodor has served as our Vice President/General Manager - Americas since January 2015. From July 2013 to January 2015, Dr. Bodor served as our Chief Technology Officer. From December 2012 to June 2013, Dr. Bodor served as our Director of Business Development. Prior to joining Proto Labs, from January 2011 to December 2012, Dr. Bodor held several roles at Honeywell, most recently leading SaaS business offerings for Honeywell’s Life Safety Division. ***John A. Way***. Mr. Way has served as our Chief Financial Officer and Executive Vice President of Development since December 2014. From October 2013 to September 2014, Mr. Way served as Chief Financial Officer of Univita Health Inc., a privately held home healthcare service provider. From September 2012 to July 2013, Mr. Way served as Chief Financial Officer of Virtual Radiologic, a global telemedicine company. From October 2002 to November 2012, Mr. Way worked in senior financial positions at several divisions within UnitedHealth Group, including Chief Financial Officer of Optum Collaborative Care, SecureHorizons and OptumHealth. ***Arthur R. Baker III***. Dr. Baker has been our Chief Technology Officer since May 2016. Prior to joining Proto Labs, Dr. Baker served as Chief Technology Officer of PaR Systems, a robotics and specialty machine tool builder. From 2005 to 2014, Dr. Baker held multiple positions at MTS Systems, including General Manager of the Test Division, Chief Technology Officer, and Vice President of Engineering and Operations. MTS Systems was a leader in mechanical testing and simulation systems for automotive, aerospace, medical, civil-seismic and general research. ***David M. Fein***. Mr. Fein has been our Chief Revenue Officer since December 2016. Prior to joining Proto Labs, Mr. Fein spent 16 years at PMC-Sierra, Inc., a semiconductor and software solutions provider for big data storage, optical transport networks and wireless infrastructure markets. Most recently, Mr. Fein served as Executive Vice President, Worldwide Sales from December 2014 until PMC-Sierra, Inc. was acquired by Microsemi Corporation in January 2016. From November 2008 to November 2014, Mr. Fein served as Vice President, Sales for the Americas at PMC-Sierra. ***Bjoern Klaas***. Mr. Klaas has led our company’s business in Europe, Middle East and Africa as the Vice President and Managing Director since December 2017. Prior to joining Proto Labs, Mr. Klaas held key positions with global polymer supplier PolyOne from 2012 to 2017, most recently as its Vice President and General Manager for its ColorMatrix Group headquartered in the United States. From 2008 to 2012, Mr. Klaas worked at Colorant-Chromatics, a global leader for high temperature polymer formulations, as the General Manager for the global business. ## Risk factors As filed, 63,009 characters. The following are the significant factors that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the value of an investment in our common stock. ### Risks Relating to Our Business ***We face significant competition and expect to face increasing competition in many aspects of our business, which could cause our operating results to suffer.*** The market for custom parts manufacturing is fragmented and highly competitive. We compete for customers with a wide variety of custom parts manufacturers and methods. Some of our current and potential competitors include captive in-house product lines, other custom parts manufacturers and alternative manufacturing vendors such as those utilizing 3D printing processes including stereolithography (SL), selective laser sintering (SLS), direct metal laser sintering (DMLS), PolyJet and Multi Jet Fusion (MJF). Moreover, some of our existing and potential competitors are researching, designing, developing and marketing other types of products and product lines. We also expect that future competition may arise from the development of allied or related techniques for custom parts manufacturing that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products and from improvements to existing technologies. Furthermore, our competitors may attempt to adopt and improve upon key aspects of our business model, such as development of technology that automates much of the manual labor conventionally required to quote and manufacture custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or building scalable operating models specifically designed for efficient custom production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that could more effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminate such relationships and establish alliances and relationships with our competitors, our business could be harmed. Existing and potential competitors may have substantially greater financial, technical, marketing and sales, manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enable them to compete effectively against us. Though we plan to continue to expend resources to develop new technologies, processes and product lines, we cannot assure you that we will be able to maintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developing new products is finding product lines for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any new product lines with potential economies of scale similar to our existing product lines. If we do not keep pace with technological change and introduce new technologies, processes and product lines, the demand for our products and product lines may decline and our operating results may suffer. ***Our success depends on our ability to deliver products and product lines that meet the needs of product developers and engineers and to effectively respond to changes in our industry.*** We derive almost all of our revenue from the manufacture and sale to product developers and engineers of quick-turn low volumes of custom parts for prototyping, support of internal manufacturing and limited quantity product release. Our business has been, and, we believe, will continue to be, affected by changes in product developer and engineering requirements and preferences, rapid technological change, new product and product line introductions and the emergence of new standards and practices, any of which could render our technology, products and product lines less attractive, uneconomical or obsolete. To the extent that our customers’ need for quick-turn parts decreases significantly for any reason, it would likely have a material adverse effect on our business and operating results and harm our competitive position. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remain competitive, we must continually expend resources to enhance and improve our technology, product offerings and product lines. In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to further develop our technology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within the research and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture. We believe successful execution of this part of our business plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able to do so in a timely fashion, or at all. Broadening the range of parts we offer is of particular importance since limitations in manufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted to executing on this aspect of our business plan will improve our business and operating results or result in increased demand for our products and product lines. Failures in this area could adversely impact our operating results and harm our reputation and brand. Even if we are successful in executing in these areas, our industry is subject to rapid and significant technological change, and our competitors may develop new technologies, processes and product lines that are superior to ours. Our research and development costs were approximately $23.6 million, $22.4 million and $18.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, and there is no guarantee that these costs will enable us to maintain or grow our revenue profitability. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for additional discussion related to research and development costs. Any failure to properly meet the needs of product developers and engineers or respond to changes in our industry on a cost-effective and timely basis, or at all, would likely have a material adverse effect on our business and operating results and harm our competitive position. ***Our failure to meet our product developers’ and engineers’ expectations regarding quick turnaround time would adversely affect our business and results of operations.*** We believe many product developers and engineers are facing increased pressure from global competitors to be first to market with their finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no guarantees we will be able to meet product developers’ and engineers’ increasing expectations regarding quick turnaround time, especially as we increase the scope of our operations. If we fail to meet our customers’ expectations regarding turnaround time in any given period, our business and results of operations will likely suffer. ***Our failure to meet our product developers’ and engineers’ price expectations would adversely affect our business and results of operations.*** Demand for our product lines is sensitive to price. We believe our competitive pricing has been an important factor in our results to date. Therefore, changes in our pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our production and personnel costs and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectations in any given period, demand for our products and product lines could be negatively impacted and our business and results of operations could suffer. ***Our failure to meet our product developers’ and engineers’ quality specifications would adversely affect our business and results of operations.*** We believe many product developers and engineers have a need for specific quality of quick-turn, on-demand custom parts. We believe our ability to create parts with the specifications of the product developers and engineers is an important factor in our results to date. If we fail to meet our customers’ specifications in any given period, demand for our products and product lines could be negatively impacted and our business and results of operations could suffer. ***The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt our ability to retain and expand our customer base as well as further penetrate existing customers.*** Since our products and product lines are sold primarily through our websites, the success of our business depends upon our ability to attract new and repeat customers to our websites in order to increase business and grow our revenue. Customer awareness and the perceived value of our brand will depend largely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the required timeframes and positive customer experiences, which we may not do successfully. A primary component of our business strategy is the continued promotion and strengthening of our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing efforts directed toward enhancing our brand. We have initiated marketing efforts through social media, but this method of marketing may not be successful and subjects us to a greater risk of inconsistent messaging and bad publicity. We may choose to increase our branding expense materially, but we cannot be sure that this investment will be profitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate revenue. ***Our business depends in part on our ability to process a large volume of new part designs from a diverse group of product developers and engineers and successfully identify significant opportunities for our business based on those submissions.*** We believe the volume of new part designs we process and the size and diversity of our customer base give us valuable insight into the needs of our prospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new part designs we process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product developers and engineers could be negatively impacted. In addition, even if we do continue to process a large number of new part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized to help us identify significant business opportunities or better understand the needs of product developers and engineers. ***The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain additional personnel in the future, could harm our business and negatively affect our ability to successfully grow our business.*** We are highly dependent upon the continued service and performance of the key members of our management team and other personnel. The loss of any of these individuals, each of whom is “at will” and may terminate his or her employment relationship with us at any time, could disrupt our operations and significantly delay or prevent the achievement of our business objectives. We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel. A possible shortage of qualified individuals in the regions where we operate might require us to pay increased compensation to attract and retain key employees, thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many of whom have substantially greater financial and other resources and name recognition than us. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability to achieve our business objectives. ***If we fail to grow our business as anticipated, our net sales, gross margin and operating margin will be adversely affected.*** We are attempting to grow our business substantially. To this end, we have made and expect to continue to make significant investments in our business, including investments in our infrastructure, technology, and marketing and sales efforts. These investments include dedicated facilities expansion and increased staffing, both domestic and international. If our business does not generate the level of revenue required to support our investment, our net sales and profitability will be adversely affected. ***If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be damaged, and our business and results of operations may be harmed.*** Over the past several years, we have experienced rapid growth. For example, we have grown from 749 full-time employees as of January 1, 2014 to 2,266 full-time employees as of December 31, 2017. We have expanded internationally, including establishing manufacturing operations in Europe in 2005 and Japan in 2009. In 2014, we expanded our product lines with 3D Printing through our acquisition of FineLine. In 2015, we expanded our manufacturing operations and our 3D Printing product lines in Europe through our acquisition of Alphaform. In 2017, we expanded our product lines to include Sheet Metal through our acquisition of RAPID. We expect this growth to continue and the number of countries and facilities from which we operate to increase in the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among other things, the following: - enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures, in particular as we continue to operate as a global organization; - effectively scale our operations, including accurately predicting the need for floor space, equipment, and additional staffing; - successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees; and - expand our international resources. These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. Furthermore, our growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on our operational, financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation and brand, including impairing our ability to perform to our customers’ expectations. ***We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.*** A key element to our continued growth is the ability to quickly and efficiently quote an increasing number of product developer and engineer submissions across geographic regions and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improve their performance, especially during periods of heavy usage and as our solutions become more complex and our user traffic increases across geographic regions. Similarly, our manufacturing automation technology may not enable us to process the large numbers of unique designs and efficiently manufacture the related parts in a timely fashion to meet the needs of product developers and engineers as our business continues to grow. Any failure in our ability to timely and effectively scale and adapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers and attract new customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations. ***Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.*** Although our revenue has grown over the past five years from $163.1 million for the year ended December 31, 2013 to $344.5 million for the year ended December 31, 2017, we may not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, a number of which are out of our control, including among others, our ability to: - retain and further penetrate existing customer companies, as well as attract new customer companies; - consistently execute on custom part orders in a manner that satisfies product developers’ and engineers’ needs and provides them with a superior experience; - develop new technologies or manufacturing processes and broaden the range of parts we offer; - successfully execute on our international strategy and expand into new geographic markets; - capitalize on product developer and engineer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours per day, 7 days per week; - increase the strength and awareness of our brand across geographic regions; - respond to changes in product developer and engineer needs, technology and our industry; and - react to challenges from existing and new competitors. We cannot assure you that we will be successful in addressing the factors above and continuing to grow our business and revenue. ***Our operating results and financial condition may fluctuate on a quarterly and annual basis.*** Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to continue to vary due to a number of factors, some of which are outside of our control. In addition, our actual or projected operating results may fail to match our past performance. These events could in turn cause the market price of our common stock to fluctuate. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Our operating results and financial condition may fluctuate due to a number of factors, including those listed below and those identified throughout this “Risk Factors” section: - the development of new competitive systems or processes by others; - the entry of new competitors into our market, whether by established companies or by new companies; - changes in the size and complexity of our organization, including our international operations; - levels of sales of our products and product lines to new and existing customers; - the geographic distribution of our sales; - changes in product developer and engineer preferences or needs; - changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generally increase and may fluctuate in the future; - delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto; - our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth; - limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue; - changes in our pricing policies or those of our competitors, including our responses to price competition; - changes in the amount we spend in our marketing and other efforts; - unexpected increases in expenses as compared to our related accounting accruals or operating plan; - the volatile global economy; - general economic and industry conditions that affect customer demand and product development trends; - interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations; - changes in accounting rules and tax and other laws; and - plant shutdowns due to a health pandemic or weather conditions. Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely on quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance. ***Interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations could damage our reputation and brand and substantially harm our business and results of operations.*** The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technology systems, manufacturing processes and other operations are critical to our reputation and brand, and to our ability to effectively service product developers and engineers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costs seeking to remedy the problem and otherwise substantially harm our business and results of operations. A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults, challenges associated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce-related issues, capacity constraints due to an unusually large number of product developers and engineers accessing our websites or ordering parts at the same time, and other similar events. These risks are augmented by the fact that our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to these product developers and engineers. We are dependent upon our facilities through which we satisfy all of our production demands and in which we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fully redundant systems in multiple locations. However, we have back-up computing systems for each of our United States, European and Japanese operations. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extent outside of our control. Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our product lines as a result of system failures. ***We depend on the continued growth of product developers’ and engineers’ e-commerce expectations when working with their custom parts manufacturers and their migration from 2D to 3D CAD software.*** The business of selling custom parts over the Internet via an interactive web-based and automated user interface and quoting system is not widespread in our industry. Moreover, many product developers and engineers still utilize 2D CAD software. Concerns about privacy and technological and other problems may discourage some product developers and engineers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers and engineers in industries not well suited to utilize our product lines, such as architecture. In order to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If product developers and engineers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers and engineers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely impacted. ***We store confidential customer information in our systems that, if breached or otherwise subjected to unauthorized access, may harm our reputation or brand or expose us to liability.*** Our system stores, processes and transmits our customers’ confidential information, including the intellectual property in their part designs and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure such confidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed the internal and external risks posed to the security of our company’s systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brand and could cause the loss of customers. ***Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.*** The prospects for economic growth in the United States and other countries remain uncertain and could worsen. Economic concerns and other issues such as reduced access to capital for businesses may cause product developers and engineers to further delay or reduce the product development projects that our business supports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, product developers and engineers and other related risks to our business. ***Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.*** On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The outcome of the Brexit vote triggered short-term financial volatility, including a decline in the value of the British Pound in comparison to both the United States dollar and the Euro. The impact of the Brexit referendum and the ongoing uncertainty associated with the outcome thereof may result in various long-term financial consequences for businesses operating in the UK, the EU and beyond. As a result of the referendum, the British government is negotiating the terms of the UK’s relationship with the EU going forward, including the terms of trade between the UK and the EU. Although the specific terms and the timeframe of the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations. ### We operate a global business that exposes us to additional risks. We have established our operations in the United States, Europe and Japan and are seeking to further expand our international operations. As of December 31, 2017, we had sold products into approximately 60 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our international revenue accounted for approximately 24%, 25% and 27% of our total revenue in the years ended December 31, 2017, 2016 and 2015, respectively. The future growth and profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the United States and may again in the future: - difficulties in staffing and managing foreign operations, particularly in new geographic locations; - challenges in providing solutions across a significant distance, in different languages and among different cultures; - rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, and other similar outbreaks or events; - fluctuations in foreign currency exchange rates; - differences in product developer and engineer preferences and means of procuring parts; - compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad, including those associated with export controls, tariffs and embargoes, other trade restrictions and antitrust and data privacy concerns; - different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain areas; - differing levels of use of the Internet or 3D CAD software; - seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe and holiday season; - higher costs of doing business internationally; - interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad; - protectionist laws and business practices that favor local producers and service providers; - taxation; - energy costs; - restrictions imposed by local labor practices and laws on our business and operations; - workforce uncertainty in countries where labor unrest is more common than in the United States; - transportation delays; and - increased payment risk and higher levels of payment fraud. Our business depends on product developers’ and engineers’ demand for our product lines, the general economic health of current and prospective customers, and companies’ desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce demand for our product lines, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected. ***If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.*** We manufacture all of our products in 12 manufacturing facilities, located in Maple Plain, Minnesota; Rosemount, Minnesota; Plymouth, Minnesota; Cary, North Carolina; Nashua, New Hampshire (3 facilities); Telford, United Kingdom; Feldkirchen, Germany; Eschenlohe, Germany; Rusko, Finland and Zama, Kanagawa, Japan. These facilities and the manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, hurricanes, tsunamis and nuclear disasters. In the event any of our facilities are affected by a disaster, we may: - be unable to meet the shipping deadlines of our customers; - experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide marketing and sales support and customer service, and otherwise operate our business, any of which could negatively impact our business; - be forced to rely on third-party manufacturers; - need to expend significant capital and other resources to address any damage caused by the disaster; and - lose customers and be unable to regain those customers. Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. ***If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.*** We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing operation and future growth of our business from just a few third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and materials for our products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on terms acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or increases in pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited source supplier could adversely affect our relationship with our customers and our results of operations and financial condition. ***We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.*** Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer product lines similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or gross margin, which would adversely affect our net income. ### We may be subject to infringement claims. We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patents in the fields of injection molding, CNC machining, 3D printing, sheet metal or part production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted. ***Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.*** Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws, treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property. ***We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business and reputation and brand.*** The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors that are not discovered until after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error. We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future. The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers. ***Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.*** We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and product lines. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations. ***Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.*** We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic and abroad. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules, including those set forth in the Tax Cuts and Jobs Act enacted in 2017, and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities. In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position. ***We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.*** We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed. ***Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating results and financial condition.*** Our business and our customer base have been built primarily through organic growth. However, from time to time, we may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or product line capabilities. For example, in April 2014, we acquired FineLine to enable us to offer our customers 3D printing manufacturing processes; in October 2015, we acquired Alphaform to enable us to expand our 3D printing capabilities in Europe, and in November 2017, we acquired RAPID to enable us to offer our customers Sheet Metal processes. We cannot forecast the number, timing or size of any future acquisitions or other similar strategic transactions, or the effect that any such transactions might have on our operating or financial results. We have limited experience engaging in these types of transactions. Such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including: - an acquired company, asset or technology not furthering our business strategy as anticipated; - difficulties entering and competing in new product or geographic markets and increased competition, including price competition; - integration challenges; - challenges in working with strategic partners and resolving any related disagreements or disputes; - high valuation for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition; - significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses, assets or technologies; - acquisition of a significant amount of goodwill, which could result in future impairment charges that would reduce our earnings; and - requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensation and other items, as well as other charges or expenses. Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended resources on them, as well as divert our management’s attention. Any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or stakeholders. In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs. ***We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business is dependent in part on the availability of such licenses on commercially reasonable terms.*** We currently, and will continue to, license certain technologies from third parties. While these licenses are not material to our financial results, their function in our business is integral to our operations. We cannot be certain that these third-party content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party licenses may expose us to increased risk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer. ***Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.*** Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed. ***If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we manufacture, our business, financial condition or operating results could be harmed.*** As a manufacturer of CNC-machined and injection-molded custom parts, we are required to meet certain regulatory standards, including International Organization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in Minnesota. In North Carolina, we are required to meet ISO 9001:2008 standards for our plastics manufacturing and AS9100 standards for our metals manufacturing. In New Hampshire, we are required to meet ISO 9001:2015 for our CNC-machined and sheet metal fabrication, as well as AS9100C standards. We are also able to meet regulatory standards ISO 9001:2008 at our manufacturing facilities in Feldkirchen, Germany, Eschenlohe, Germany and Rusko, Finland. We also meet regulatory standard ISO 13485 at our manufacturing facility in Eschenlohe, Germany. We are also able to meet regulatory standards ISO 9001 and ISO 14001 in Japan. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert management’s attention. ### We are subject to payment-related risks. We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. ### Risks Relating to Ownership of Our Common Stock ### Our stock price has been and may continue to be volatile. In the year ended December 31, 2017, our common stock traded as high as $109.10 and as low as $48.00. The market for our common stock may become less active, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to fluctuate include: - fluctuations in our financial condition and operating results; - our ability to retain and attract customers and increase net sales; - pricing pressures due to competition or otherwise and changes in gross margins; - changes in general economic and market conditions, economic uncertainty and changes in product development activity levels; - announcements by us or our competitors of technological innovations or new product or product lines offerings or significant acquisitions; - timing, effectiveness, and costs of expansion and upgrades of our offerings, systems and infrastructure; - changes in key personnel; - success in entry into new markets and expansion efforts; - the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission and announcements relating to litigation; - the projections we may provide to the public, any changes in these projections or our failure to meet these projections; - the issuance of new or updated research or reports by any securities or industry analysts who follow our common stock, changes in analysts’ financial estimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock; - changes in the market valuations of similar companies; - significant lawsuits, including patent or shareholder litigation; - changes in laws or regulations applicable to us; - changes in accounting principles; - the sustainability of an active trading market for our common stock; - future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders; - share price and volume fluctuations attributable to inconsistent trading levels of our shares; and - other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events. In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business. ***If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.*** The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline. ***Our failure to maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 of the Sarbanes-Oxley Act or prevent or detect misstatements in our financial statements in the future could harm our business and cause a decrease in our stock price.*** Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we are required to perform annual system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we are not able to comply with the requirements of Section 404 in the future, or if we fail to prevent or detect misstatements in the financial statements we include in our reports filed with the SEC, our business could be harmed and the market price of our common stock could decline. ***Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for us that you might consider favorable.*** Our Third Amended and Restated Articles of Incorporation, as amended, and Amended and Restated By-Laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions: - permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our board may designate, including the right to approve an acquisition or other change in our control; - provide that the authorized number of directors may be changed by resolution of the board of directors; - provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; - provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a shareholder’s notice; and - do not provide for cumulative voting rights. We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of the corporation’s voting shares within four years following the date the person became an interested shareholder, unless the business combination is approved by a committee composed solely of one or more disinterested members of the corporation’s board of directors before the date the person became an interested shareholder. These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate actions you desire. ### We do not expect to pay any cash dividends for the foreseeable future. We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such cash dividends for the foreseeable future. We anticipate that we will retain all of our future earnings for use in the business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. ## Properties As filed, 2,145 characters. We believe that our facilities are well maintained and of sufficient capacity to support our current operations. We have facilities in the following regions: ### United States Our corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of office space. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We own a facility in Rosemount, Minnesota that encompasses approximately 130,000 square feet of manufacturing and office space. We also own a facility in Plymouth, Minnesota that encompasses approximately 170,000 square feet of manufacturing and office space. We own a facility in Cary, North Carolina that encompasses approximately 77,000 square feet of manufacturing and office space. In November 2017, we purchased RAPID and assumed the leases of three facilities in Nashua, New Hampshire. The three facilities we lease total approximately 146,000 square feet of manufacturing and office space. The leases expire at various times from 2018 to 2022. ### Europe Our European operations are headquartered in Telford, United Kingdom in a facility we own encompassing approximately 126,000 square feet of office and manufacturing space. We also lease office space in the United Kingdom; Mosbach, Germany; Le Bourget du Lac, France; and Novara, Italy, for sales, customer service and technical support staff. The leases expire at various times from 2018 to 2023. In October 2015, we purchased Alphaform, headquartered in Feldkirchen (Munich), Germany. As a result of the acquisition, we lease manufacturing and office facilities encompassing approximately 60,000 square feet in Feldkirchen, Germany, approximately 22,000 square feet in Eschenlohe, Germany and approximately 24,000 square feet in Rusko, Finland. The leases expire at various times from 2018 to 2019. ### 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. ## Legal proceedings As filed, 483 characters. 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. ## Management's discussion and analysis As filed, 63,676 characters. *The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.* ### Overview We are an e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded, CNC-machined, 3D-printed and sheet metal-fabricated custom parts for prototyping and short-run production. We provide custom parts to product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our product lines to the millions of product developers and engineers who use 3D CAD software to design products across a diverse range of end markets. Our primary manufacturing product lines currently include Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We have experienced significant growth since our inception. Since we first introduced our Injection Molding product line in 1999, we have steadily expanded the size and geometric complexity of the injection-molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our CNC Machining product line in 2007, we have expanded the range of part sizes, design geometries and materials we can support. In 2014, we acquired FineLine Prototyping, Inc. (FineLine) to expand the number of process types we offer to include stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS). In 2017, we acquired RAPID to expand the number of process types we offer to include sheet metal fabrication and expand our CNC machining capability. We also continually seek to enhance other aspects of our technology and manufacturing processes, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly to enhance our technology and manufacturing processes and expand the range of our existing capabilities with the aim of meeting the needs of a broader set of customers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 89%, 86% and 88% of our revenue in 2017, 2016 and 2015, respectively, derived from existing customers. We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers and engineers are located. We entered the European market in 2005, launched operations in Japan in late 2009 and further expanded into Europe through our acquisition of Alphaform in 2015 and the United States through our acquisition of RAPID in November 2017. As of December 31, 2017, we had sold products into approximately 60 countries. Our revenue outside of the United States accounted for approximately 24%, 25% and 27% of our consolidated revenue in the years ended December 31, 2017, 2016 and 2015, respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers and engineers in select new geographic regions. We have grown our total revenue from $163.1 million in 2013 to $344.5 million in 2017. During this period, our operating expenses increased from $50.4 million in 2013 to $121.6 million in 2017. We have grown our income from operations from $51.3 million in 2013 to $72.2 million in 2017. Our recent growth in revenue and income from operations has been accompanied by increased cost of revenues and operating expenses. We expect to increase investment in our operations to support anticipated future growth as discussed more fully below. In addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target product developer and engineer customers have increasing e-commerce expectations, are facing increased pressure to accelerate the time to market for their products and continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom parts, starting with our elegant web interface through which a product developer or engineer submits a 3D CAD part design. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer and engineer orders for custom parts in low volumes, including, among others, changes in product developer and engineer preferences or needs, developments in our industry and among our competitors, and factors impacting new product development volume such as economic conditions. For a more complete discussion of the risks facing our business, see Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. ### Key Financial Measures and Trends ### Revenue Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our revenue is generated from a diverse customer base, with no single customer company representing more than 2% of our total revenue in 2017. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including: - the introduction of our 3D Printing product line through our acquisition of FineLine in 2014; - expanding internationally through our acquisition of Alphaform in October 2015; - the introduction of our Sheet Metal product line through our acquisition of RAPID in 2017; - continuously improving the usability of our product lines such as our web-centric applications; and - expanding the breadth and scope of our products by adding more sizes and materials to our offerings. During 2017, we served 37,267 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.5% over the same period in 2016. The information does not include 3D Printing, Injection Molding and Sheet Metal customers, principally related to our recent acquisitions, who do not utilize our web-based interface. During 2016, we served 31,457 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 15.5% over the same period in 2015. The information does not include 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface. During 2015, we served 27,235 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 26.0% over the same period in 2014. The information does not include 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface. ### Cost of Revenue, Gross Profit and Gross Margin Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilities costs and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue. Our business model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the expectations for quick delivery of our products to our customers. Therefore, during each of 2017, 2016 and 2015 we made significant investments in additional factory space, equipment, and infrastructure in the United States. We also made significant investments in infrastructure in Europe in 2017 and significant investments in additional factory space in Japan in 2016. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that these additional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins to remain relatively consistent over time. We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our mix of revenue by product line, pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates. ### Operating Expenses Operating expenses consist of marketing and sales, research and development and general and administrative expenses. Personnel-related costs are the most significant component in each of these categories. Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn, on-demand injection-molded, CNC-machined, CNC-turned, 3D-printed and sheet metal custom parts for prototyping and low-volume production. In order to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses. *Marketing and sales.* Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as electronic, print and pay-per-click advertising, trade shows and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base and grow revenue. *Research and development.* Research and development expense consists primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, software developed for internal use, maintenance of internally developed software, quality assurance and testing. All of our internal research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings and supporting business systems. *General and administrative.* General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization. ### Other Income, Net Other income, net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. ### Provision for Income Taxes Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. As a result, many provisions will affect our tax rate in future years. Some provisions, such as the reduction to the U.S. corporate tax rate from 35% to 21%, beginning in 2018, will likely reduce our effective tax rate in future years. Other provisions taken in isolation, such as the elimination of the Domestic Production Activities Deduction, will likely result in an increase to our tax rate. Overall, we anticipate our effective tax rate will be lower in 2018 and beyond than in recent periods based on the current tax laws. ### Results of Operations The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods. *(dollars in thousands)* | | Year Ended December 31, 2017 | | 2016 | | Change $% | | Year Ended December 31, 2016 | | 2015 | | Change $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Revenue | $344,490 | 100.0% | $298,055 | 100.0% | $46,435 | 15.6% | $298,055 | 100.0% | $264,106 | 100.0% | $33,949 | 12.9% | | Cost of revenue | 150,648 | 43.7 | 131,118 | 44.0 | 19,530 | 14.9 | 131,118 | 44.0 | 109,703 | 41.5 | 21,415 | 19.5 | | Gross profit | 193,842 | 56.3 | 166,937 | 56.0 | 26,905 | 16.1 | 166,937 | 56.0 | 154,403 | 58.5 | 12,534 | 8.1 | | Operating expenses: | | | | | | | | | | | | | | Marketing and sales | 56,856 | 16.5 | 46,131 | 15.5 | 10,725 | 23.2 | 46,131 | 15.5 | 39,188 | 14.8 | 6,943 | 17.7 | | Research and development | 23,560 | 6.8 | 22,388 | 7.5 | 1,172 | 5.2 | 22,388 | 7.5 | 18,350 | 6.9 | 4,038 | 22.0 | | General and administrative | 41,200 | 12.0 | 36,651 | 12.3 | 4,549 | 12.4 | 36,651 | 12.3 | 29,716 | 11.3 | 6,935 | 23.3 | | Total operating expenses | 121,616 | 35.3 | 105,170 | 35.3 | 16,446 | 15.6 | 105,170 | 35.3 | 87,254 | 33.0 | 17,916 | 20.5 | | Income from operations | 72,226 | 21.0 | 61,767 | 20.7 | 10,459 | 16.9 | 61,767 | 20.7 | 67,149 | 25.5 | (5,382) | (8.0) | | Other income, net | 2,209 | 0.6 | 2,454 | 0.8 | (245) | (10.0) | 2,454 | 0.8 | 712 | 0.2 | 1,742 | \* | | Income before income taxes | 74,435 | 21.6 | 64,221 | 21.5 | 10,214 | 15.9 | 64,221 | 21.5 | 67,861 | 25.7 | (3,640) | (5.4) | | Provision for income taxes | 22,657 | 6.6 | 21,514 | 7.2 | 1,143 | 5.3 | 21,514 | 7.2 | 21,347 | 8.1 | 167 | 0.8 | | Net income | $51,778 | 15.0% | $42,707 | 14.3% | $9,071 | 21.2% | $42,707 | 14.3% | $46,514 | 17.6% | $(3,807) | (8.2)% | \* Percentage change not meaningful Stock-based compensation expense included in the statements of comprehensive income data above is as follows: *(dollars in thousands)* | | Year Ended December 31, 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Stock options and grants | $7,954 | $6,177 | $5,580 | | Employee stock purchase plan | 604 | 598 | 502 | | Total stock-based compensation expense | $8,558 | $6,775 | $6,082 | | Cost of revenue | $970 | $691 | $513 | | Operating expenses: | | | | | Marketing and sales | 1,429 | 977 | 1,074 | | Research and development | 1,091 | 1,396 | 1,285 | | General and administrative | 5,068 | 3,711 | 3,210 | | Total stock-based compensation expense | $8,558 | $6,775 | $6,082 | ### Comparison of Years Ended December 31, 2017 and 2016 #### Revenue Revenue by reportable segment and the related changes for 2017 and 2016 is summarized as follows: *(dollars in thousands)* | Revenue | Year Ended December 31, 2017 $% of Total Revenue | | 2016 $% of Total Revenue | | Change $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | United States | $263,086 | 76.4% | $223,930 | 75.1% | $39,156 | 17.5% | | Europe | 70,154 | 20.4 | 63,365 | 21.3 | 6,789 | 10.7 | | Japan | 11,250 | 3.2 | 10,760 | 3.6 | 490 | 4.6 | | Total revenue | $344,490 | 100.0% | $298,055 | 100.0% | $46,435 | 15.6% | 35 Our revenue increased $46.4 million, or 15.6%, for 2017 compared with 2016. By reportable segment, revenue in the United States increased $39.2 million, or 17.5%, for 2017 compared with 2016. Revenue growth in the United States was partially attributable to the acquisition of RAPID in November 2017, which contributed $3.6 million in revenue. Excluding RAPID, revenue in the United States increased $35.6 million, or 15.9%, for 2017 compared with 2016. Revenue in Europe increased $6.8 million, or 10.7%, for 2017 compared with 2016. Revenue in Japan increased $0.5 million, or 4.6%, for 2017 compared with 2016. Our revenue growth in 2017 was the result of increased volume of the product developers and engineers we served. During 2017, we served 37,267 unique product developers and engineers, an increase of 18.5% over 2016. Average revenue per product developer or engineer remained relatively consistent during 2017 as compared to 2016. Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. The impact on international revenue in 2017 compared to 2016 as a result of foreign currency movements was not material. Revenue by product line and the related changes for 2017 and 2016 is summarized as follows: *(dollars in thousands)* | Revenue | Year Ended December 31, 2017 $% of Total Revenue | | 2016 $% of Total Revenue | | Change $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Injection Molding | $194,432 | 56.4% | $175,974 | 59.0% | $18,458 | 10.5% | | CNC Machining | 103,739 | 30.1 | 81,407 | 27.3 | 22,332 | 27.4 | | 3D Printing | 43,329 | 12.6 | 37,847 | 12.7 | 5,482 | 14.5 | | Sheet Metal | 1,767 | 0.5 | - | - | 1,767 | 100.0 | | Other Product | 1,223 | 0.4 | 2,827 | 1.0 | (1,604) | (56.7) | | Total revenue | $344,490 | 100.0% | $298,055 | 100.0% | $46,435 | 15.6% | By product line, our revenue growth was driven by a 10.5% increase in Injection Molding revenue, a 27.4% increase in CNC Machining revenue and a 14.5% increase in 3D Printing revenue, in each case for 2017 compared with 2016, which was partially offset by a $1.6 million decrease in Other Product revenue. As a result of our acquisition of RAPID in November 2017, we experienced a $1.8 million increase in Sheet Metal revenue, a $1.7 million increase in CNC Machining revenue and a $0.2 million increase in Other Product revenue. #### Cost of Revenue, Gross Profit and Gross Margin *Cost of Revenue.* Cost of revenue increased $19.5 million, or 14.9%, for 2017 compared to 2016, which was slower than the rate of revenue increase of 15.6% for 2017 compared to 2016 reflecting the realization of productivity improvements. The increase in cost of revenue resulted from the growth of the business, including via the RAPID acquisition, and was due to raw material and production cost increases of $5.6 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $12.7 million and equipment and facility-related cost increases of $1.2 million. *Gross Profit and Gross Margin.* Gross profit increased from $166.9 million in 2016 to $193.8 million in 2017 primarily due to an increase in revenue growth. Gross margin increased from 56.0% of revenue in 2016 to 56.3% of revenue in 2017 primarily due to increases in revenue and realization of manufacturing productivity improvements. #### Income from Operations Income from operations increased $10.5 million, or 16.9%, for 2017 compared with 2016. By reportable segment, income from operations for the United States and Europe increased 15.5% and 10.2%, respectively, as a percentage of revenue for 2017 compared with 2016. Income from operations for Corporate Unallocated and Japan decreased 11.6% as a percentage of revenue for 2017 compared with 2016. #### Operating Expenses *Marketing and Sales.* Marketing and sales expense increased $10.7 million, or 23.2%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $10.3 million and marketing program cost increases of $0.4 million. The increase in marketing program costs is the result of our focus on funding those programs that have proven to be the most effective in growing our business. *Research and Development.* Our research and development expense increased $1.2 million, or 5.2%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $0.9 million and other operating cost increases of $0.3 million. *General and Administrative.* Our general and administrative expense increased $4.5 million, or 12.4%, for 2017 compared to 2016 due to an increase in headcount resulting in personnel and related cost increases of $4.0 million, professional service cost increases of $0.4 million primarily related to outside legal and accounting services, and stock-based compensation cost increases of $1.3 million, partially offset by a decrease in facility and administrative costs of $1.2 million resulting from $0.8 million of non-recurring costs related to facility moves and vacating leases in 2016. #### Other Income, Net and Provision for Income Taxes *Other Income, Net.* We recognized other income, net of $2.2 million in 2017, a decrease of $0.3 million compared to other income, net of $2.5 million for 2016. Other income, net decreased primarily due to a decrease of $1.1 million in foreign currency exchange gains, which were partially offset by a $0.4 million favorable legal settlement in the second quarter of 2017 and an increase of $0.5 million in interest income on investments. *Provision for Income Taxes.* Our income tax provision increased by $1.1 million for 2017 compared to 2016. This was the result of a significant increase to taxable income along with a tax provision for the transition tax that was part of the Tax Cuts and Jobs Act. Partially offsetting these tax increases was a tax benefit recorded to reflect the decrease to the valuation of our deferred tax liabilities caused by the U.S. corporate income tax rate reduction. As a result of this decrease to the valuation of deferred tax liability, our effective tax rate decreased to 30.4% in 2017 from 33.4% in 2016. ### Comparison of Years Ended December 31, 2016 and 2015 #### Revenue Revenue by reportable segment and the related changes for 2016 and 2015 is summarized as follows: *(dollars in thousands)* | Revenue | Year Ended December 31, 2016 $% of Total Revenue | | 2015 $% of Total Revenue | | Change $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 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% | Our revenue increased $34.0 million, or 12.9%, for 2016 compared with 2015. By reportable segment, revenue in the United States increased $15.9 million, or 7.6%, for 2016 compared with 2015. Revenue in Europe increased $15.9 million, or 33.6%, for 2016 compared with 2015, partially driven by the acquisition of Alphaform in the fourth quarter of 2015. Revenue in Japan increased $2.1 million, or 24.3%, for 2016 compared with 2015. Our revenue growth in 2016 was the result of increased volume of the product developers and engineers we served. During 2016, we served 31,457 unique product developers and engineers, an increase of 15.5% over 2015. Average revenue per product developer or engineer decreased 6% during 2016 as compared to 2015 due to changes in the mix of products purchased by our customers. Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue decreased by $1.3 million in 2016 compared to 2015 as a result of foreign currency movements, primarily the strengthening of the United States dollar relative to the British pound. Revenue by product line and the related changes for 2016 and 2015 is summarized as follows: *(dollars in thousands)* | Revenue | Year Ended December 31, 2016 $% of Total Revenue | | 2015 $% of Total Revenue | | Change $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 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 growth was driven by a 7.7% increase in Injection Molding revenue, a 9.5% increase in CNC Machining revenue and a 50.6% increase in 3D Printing revenue, in each case for 2016 compared with 2015, as well as a $1.6 million increase in Other Product revenue driven by our acquisition of Alphaform. During the second quarter of 2016, we made the decision to discontinue offering two manufacturing processes within our Injection Molding product line, Metal Injection Molding (MIM) and Magnesium Thixomolding (Thixo). In addition, in the second quarter of 2016, we decided to exit our non-core resin resale business, which was acquired from Alphaform in October 2015. Revenue from resin resale was included in Other Product revenue in 2015 and 2016. MIM, Thixo and resin resale in the aggregate represented approximately 1.6% of revenue during 2016. #### Cost of Revenue, Gross Profit and Gross Margin *Cost of Revenue.* Cost of revenue increased $21.4 million, or 19.5%, for 2016 compared to 2015, which was greater than the rate of revenue increase of 12.9% for 2016 compared to 2015. The increase in cost of revenue resulted from the growth of the business, including via the Alphaform acquisition. Additional increase in the cost of revenue was due to raw material and production cost increases of $5.9 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $10.4 million and equipment and facility-related cost increases of $5.1 million. Equipment and facility-related cost increases included $0.6 million of accelerated depreciation of leasehold assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016. *Gross Profit and Gross Margin.* Gross profit increased from $154.4 million in 2015 to $166.9 million in 2016 primarily due to increasing revenue growth as noted above. Gross margin decreased from 58.5% of revenue in 2015 to 56.0% of revenue in 2016 primarily as a result of our lower margins from the acquired Alphaform business, as well as increases in investments of additional manufacturing capacity, accelerated depreciation of leasehold assets resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016 and the impact of fluctuations in foreign currency exchange rates. #### Income from Operations Income from operations decreased $5.4 million, or 8.0%, for 2016 compared with 2015. By reportable segment, income from operations for the United States and Corporate Unallocated and Japan increased 3.3% and 20.2%, respectively, as a percentage of revenue for 2016 compared with 2015. Income from operations for Europe decreased 12.4% as a percentage of revenue for 2016 compared with 2015. #### Operating Expenses *Marketing and Sales.* Marketing and sales expense increased $6.9 million, or 17.7%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $6.2 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus on funding those programs which have proven to be the most effective in growing our business. *Research and Development.* Our research and development expense increased $4.0 million, or 22.0%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $3.1 million, other operating cost increases of $0.8 million and professional services cost increases of $0.1 million. *General and Administrative.* Our general and administrative expense increased $6.9 million, or 23.3%, for 2016 compared to 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.2 million, facility and administrative cost increases of $3.6 million, professional service cost increases of $0.6 million for outside legal and accounting services and stock-based compensation cost increases of $0.5 million. The increase in administrative costs for 2016 includes accelerated depreciation and facilities-related charges of $0.8 million resulting from our move to new facilities in the U.S. and Japan in the third quarter of 2016. #### Other Income, Net and Provision for Income Taxes *Other Income, Net.* We recognized other income, net of $2.5 million in 2016, an increase of $1.8 million compared to other income, net of $0.7 million for 2015. Other income, net included $1.4 million in foreign currency exchange gains for 2016 compared to $0.5 million in foreign currency exchange losses in 2015. The increase was primarily due to the amount of foreign-currency denominated cash balances abroad and movements in the underlying exchange rates at the end of the period. *Provision for Income Taxes.* Our income tax provision increased $0.2 million for 2016 compared to 2015 resulting in an effective tax rate increase to 33.4% in 2016 from 31.5% in 2015 due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which we qualify in the current year. ### Selected Quarterly Results of Operations Data The following tables set forth selected unaudited quarterly results of operations data for 2017 and 2016. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in conjunction with our selected financial data and consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Operating results for any quarter are not necessarily indicative of results for a full-year period, and the historical results presented below are not necessarily indicative of the results to be expected in any future period. *(in thousands, except share and per share amounts)* *(unaudited)* | | Three Months Ended Dec. 31, 2017 | Sep. 30, 2017 | Jun. 30, 2017 | Mar. 31, 2017 | Dec. 31, 2016 | Sep. 30, 2016 | Jun. 30, 2016 | Mar. 31, 2016 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Revenue | $94,178 | $88,105 | $82,040 | $80,167 | $72,353 | $78,173 | $74,961 | $72,568 | | Cost of revenue | 41,290 | 38,793 | 35,671 | 34,894 | 32,041 | 33,448 | 32,715 | 32,914 | | Gross profit | 52,888 | 49,312 | 46,369 | 45,273 | 40,312 | 44,725 | 42,246 | 39,654 | | Operating expenses: | | | | | | | | | | Marketing and sales | 15,393 | 13,846 | 14,630 | 12,987 | 11,949 | 11,787 | 11,453 | 10,942 | | Research and development | 5,776 | 5,877 | 6,084 | 5,823 | 5,278 | 5,976 | 5,816 | 5,318 | | General and administrative | 12,944 | 10,222 | 9,253 | 8,781 | 8,254 | 10,020 | 10,126 | 8,251 | | Total operating expenses | 34,113 | 29,945 | 29,967 | 27,591 | 25,481 | 27,783 | 27,395 | 24,511 | | Income from operations | 18,775 | 19,367 | 16,402 | 17,682 | 14,831 | 16,942 | 14,851 | 15,143 | | Other income, net | 430 | 291 | 1,173 | 315 | 112 | 625 | 1,092 | 625 | | Income before income taxes | 19,205 | 19,658 | 17,575 | 17,997 | 14,943 | 17,567 | 15,943 | 15,768 | | Provision for income taxes | 4,933 | 6,438 | 5,489 | 5,797 | 5,571 | 5,585 | 5,252 | 5,106 | | Net income | $14,272 | $13,220 | $12,086 | $12,200 | $9,372 | $11,982 | $10,691 | $10,662 | | Net income per share: | | | | | | | | | | Basic | $0.53 | $0.50 | $0.46 | $0.46 | $0.35 | $0.45 | $0.41 | $0.41 | | Diluted | $0.53 | $0.49 | $0.45 | $0.46 | $0.35 | $0.45 | $0.40 | $0.40 | | Shares used to compute net income per share: | | | | | | | | | | Basic | 26,705,909 | 26,617,349 | 26,541,978 | 26,466,731 | 26,457,302 | 26,416,041 | 26,368,001 | 26,222,148 | | Diluted | 27,009,017 | 26,802,034 | 26,649,152 | 26,599,200 | 26,609,929 | 26,609,878 | 26,561,148 | 26,442,357 | ### Liquidity and Capital Resources #### Cash Flows The following table summarizes our cash flows for the years ended December 31, 2017, 2016 and 2015: *(dollars in thousands)* | | Year Ended December 31, 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Net cash provided by operating activities | $81,748 | $77,499 | $64,096 | | Net cash used in investing activities | (123,975) | (60,755) | (63,594) | | Net cash provided by financing activities | 9,192 | 5,315 | 4,699 | | Effect of exchange rates on cash and cash equivalents | 947 | (917) | (877) | | Net increase (decrease) in cash and cash equivalents | $(32,088) | $21,142 | $4,324 | 40 #### Sources of Liquidity We finance our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $36.7 million as of December 31, 2017, a decrease of $32.1 million from December 31, 2016. The decrease in our cash was due primarily to the acquisition of RAPID in November 2017. We had cash and cash equivalents of $68.8 million as of December 31, 2016, an increase of $21.1 million from December 31, 2015. The increase in our cash was due primarily to cash generated through operations and, to a lesser extent, exercises of stock options and purchases through our employee stock purchase plan, which were partially offset by investing activity. We had cash and cash equivalents of $47.7 million as of December 31, 2015, an increase of $4.3 million from December 31, 2014. The increase in our cash was due primarily to cash generated through operations and exercises of stock options, which were partially reduced by investment activity. As of December 31, 2017, the amount of cash and cash equivalents held by foreign subsidiaries was $18.4 million. The Tax Cuts and Jobs Act imposes a transition tax on foreign earnings previously treated as permanently reinvested, resulting in an increase to our U.S. tax liability. However, our intent is to continue to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the next 12 months. #### Cash Flows from Operating Activities Cash flow from operating activities of $81.8 million during 2017 primarily consisted of net income of $51.8 million, adjusted for certain non-cash items, including depreciation and amortization of $18.5 million, stock-based compensation expense of $8.6 million and changes in operating assets and liabilities and other items totaling $2.9 million. The cash flow from operating activities during 2017 compared to 2016 increased $4.2 million due to increases in net income of $9.0 million, increases in stock-based compensation expense of $1.8 million driven by an increased level of equity grants to employees and increases in depreciation and amortization of $1.0 million driven by an increase in capital investments. These increases were partially offset by decreases to deferred taxes of $1.6 million, amortization of held-to-maturity securities of $0.1 million and changes in operating assets and liabilities of $5.9 million. Cash flow from operating activities of $77.5 million during 2016 primarily consisted of net income of $42.7 million, adjusted for certain non-cash items, including depreciation and amortization of $17.5 million, stock-based compensation expense of $6.8 million, deferred taxes of $2.8 million, loss on impairment of assets of $0.5 million and amortization of held-to-maturity securities of $1.2 million. The cash flow from operating activities during 2016 compared to 2015 increased $13.4 million due to changes in operating assets and liabilities of $14.0 million, increases in depreciation and amortization of $3.4 million driven by an increase in capital investments, stock-based compensation expense of $0.7 million driven by an increased level of equity grants to employees, loss on impairment of assets of $0.5 million driven by the decision to exit certain product lines, and a $0.3 million of gain from the Alphaform acquisition in 2015 that did not recur. These increases were partially offset by a decrease in net income of $3.8 million, a decrease in deferred taxes of $0.1 million, a decrease in amortization of held-to-maturity securities of $0.1 million, as well as other adjustments of $1.5 million primarily related to unrealized gains on the translation of foreign currency denominated cash. Cash flow from operating activities of $64.1 million during 2015 primarily consisted of net income of $46.5 million, adjusted for certain non-cash items, including depreciation and amortization of $14.1 million and stock-based compensation expense of $6.1 million. The cash flow from operating activities during 2015 compared to 2014 increased $2.4 million due to increases in net income of $4.9 million, depreciation and amortization of $3.0 million, deferred taxes of $4.7 million and stock-based compensation expense of $1.3 million, which were partially offset by a gain on acquisition of $0.3 million and decreases in amortization of held-to-maturity securities of $0.3 million and changes in operating assets and liabilities of $10.9 million. #### Cash Flows from Investing Activities Cash used in investing activities was $123.9 million for the year ended December 31, 2017, consisting of $110.5 million for the purchase of RAPID, $32.6 million for the purchase of property and equipment primarily to expand our production capacity, $20.0 million for the purchase of marketable securities and $8.8 million for the purchases of other assets and investments, which were partially offset by $48.0 million in proceeds from maturities and call redemption of marketable securities. Cash used in investing activities was $60.8 million for the year ended December 31, 2016, consisting of $33.6 million for the purchase of property and equipment primarily to expand our production capacity, and $89.3 million for the purchase of marketable securities, which were partially offset by $62.1 million in proceeds from maturities and call redemption of marketable securities. Cash used in investing activities was $63.6 million for the year ended December 31, 2015, consisting of $44.4 million for the purchase of property and equipment primarily to expand our production capacity, $5.0 million for the payments on business acquisitions and $66.4 million for the purchase of marketable securities, which were partially offset by $52.2 million in proceeds from maturities and call redemption of marketable securities. #### Cash Flows from Financing Activities Cash provided by financing activities was $9.2 million for the year ended December 31, 2017, consisting of $5.0 million in short-term debt obligations and $8.6 million in proceeds from exercises of stock options, partially offset by $4.4 million for repurchases of common stock. Cash provided by financing activities was $5.3 million for the year ended December 31, 2016, consisting of $5.7 million in proceeds from exercises of stock options, partially offset by $0.4 million for payments of acquisition-related contingent consideration. Cash provided by financing activities was $4.7 million for the year ended December 31, 2015, consisting of $6.3 million in proceeds from exercises of stock options, partially offset by $0.2 million for payments of debt and $1.4 million for payments of acquisition-related contingent consideration. ### Operating and Capital Expenditure Requirements We believe, based on our current operating plan, that our cash balances and cash generated through operations and interest income will be sufficient to meet our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell equity or convertible debt securities or enter into credit facilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional funds through the issuance of convertible debt securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on terms acceptable to us, or at all. Our future capital requirements will depend on many factors, including the following: - the revenue growth in Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines; - costs of operations, including costs relating to expansion and growth; - the emergence of competing or complementary technological developments; - the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in litigation-related activities; and - the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We believe future growth capital expenditures, excluding any expenditures for buildings and maintenance capital we might purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue. ### Contractual Obligations As of December 31, 2017, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future periods were as follows: *(in thousands)* | | Total | Payment Due by Period Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | | Operating leases | $12,965 | $4,322 | $4,534 | $3,923 | $186 | | Total | $12,965 | $4,322 | $4,534 | $3,923 | $186 | The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate to three of our United States manufacturing facilities; our European sales, customer service and technical support offices; three manufacturing and office facilities located in Germany and Finland; and our Japan facility. ### Financing Arrangements The following table summarizes our financing arrangements as of December 31, 2017 and 2016: *(in thousands)* | | December 31, 2017 | 2016 | | --- | ---: | ---: | | Revolving Credit Facility, with interest rates from 2.50% to 2.56%, due at maturity in November 2019 | $5,000 | $- | | Total Financing Obligations | $5,000 | $- | ### Inflation We believe that inflation and changing prices have not had a material effect on our financial condition during the three most recent fiscal years. ### Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. ### Critical Accounting Policies and Use of Estimates The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill, other intangible assets, stock-based compensation, and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. See the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about these critical accounting policies, as well as a description of our other accounting policies. ### Revenue Recognition We recognize revenue in accordance with ASC 605, *Revenue Recognition*, which states that revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured. Revenue is recognized upon transfer of title and risk of loss, which is generally upon the shipment of parts in our Injection Molding, CNC Machining, 3D Printing, Sheet Metal and Other product lines. As of January 1, 2018, the Company has adopted ASC 606, *Revenue from Contracts with Customers,* using the modified retrospective approach. The Company manufactures parts that have no alternative use to the Company (since the parts are custom made to specific customer orders), and the Company believes for certain customers there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the Company will recognize revenue over time. ### Goodwill We recognize goodwill in accordance with ASC 350, *Intangibles—Goodwill and Other*. Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. As of December 31, 2017 no impairment charges for goodwill have been recognized. ### Other Intangible Assets We recognize other intangibles assets in accordance with ASC 350, *Intangibles—Goodwill and Other*. Other intangible assets include internally developed software, customer relationships and other intangible assets acquired from independent parties. Other intangible assets with a definite life are amortized over a period ranging from two to 10 years on a straight line basis. Other intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows generated by the asset. As of December 31, 2017 no impairment charges for intangible assets have been recognized. ### Stock-Based Compensation We determine our stock-based compensation in accordance with ASC 718, *Compensation—Stock Compensation* (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grant date fair value of the award. Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include our expected term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related stock-based compensation expense may be materially impacted. The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base the risk-free interest rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that our stock options are expected to be outstanding. We estimated the volatility of our stock price based on the historic volatility of our common stock. We have never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model. We account for forfeitures as they occur. 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: | Risk-free interest rate | Year Ended December 31, 2017 2.24 - 2.36% | 2016 1.53 - 2.68% | 2015 1.69 - 1.77% | | --- | ---: | ---: | ---: | | Expected life (years) | 6.50 | 6.50 | 5.50 - 6.50 | | Expected volatility | 42.68 - 44.68% | 44.38 - 45.93% | 46.80 - 47.23% | | Expected dividend yield | 0% | 0% | 0% | | Weighted average grant date fair value | $32.26 | $26.61 | $32.42 | Our 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of our common stock during each offering period at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the last trading day of the offering period. We determine the fair value stock-based compensation related to our ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model. The fair value of each offering period was estimated using the Black-Scholes option pricing model with the following assumptions: | Risk-free interest rate | Year ended December 31, 2017 0.97 - 1.48% | 2016 0.56 - 0.59% | 2015 0.08 - 0.39% | | --- | ---: | ---: | ---: | | Expected life (months) | 6.00 | 6.00 | 6.00 | | Expected volatility | 24.49 - 34.51% | 39.51 - 49.13% | 29.41 - 37.64% | | Expected dividend yield | 0.00% | 0% | 0% | There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods, or if we decide to use a different valuation model, such as a lattice model, the stock-based compensation expense that we record in the future under ASC 718 may differ significantly from what we have recorded using the Black-Scholes option pricing model and could materially affect our operating results. We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded stock-based compensation expense relating to stock options, restricted stock awards and our ESPP of $8.6 million, $6.8 million and $6.1 million during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we had $3.8 million of unrecognized stock-based compensation costs related to unvested stock options that are expected to be recognized over a weighted average period of 3.3 years. We issued options to purchase 60,100, 117,480 and 110,335 shares of our common stock in 2017, 2016 and 2015, respectively. In future periods, our stock-based compensation expense is expected to increase due to our existing unrecognized stock-based compensation and the issuance of additional stock-based awards to continue to attract and retain employees and non-employee directors. ### Income Taxes We account for income taxes in accordance with ASC 740, *Income Taxes* (ASC 740). Under this method, we determine tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability. We establish a valuation allowance for any portion of our deferred tax assets that we believe will not be recognized. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Including interest and penalties, we have established a liability for uncertain tax positions of $4.6 million as of December 31, 2017. The effective tax rate decreased by 3.0% for the year ended December 31, 2017 when compared to 2016 primarily due to the impact of tax reform. The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The reduction to the U.S. tax rate resulted in revaluing deferred tax liabilities which provided a tax benefit of $4.2 million. At December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a reasonable estimate on the effects of the transition tax and recognized a provisional amount of $2.4 million which is included as a component of income tax expense from continuing operations. The foreign tax effects of the transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed our calculation of the total post-1986 E&P. Furthermore, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. ### Recently adopted accounting pronouncements During the first quarter of 2017, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-09, *Employee Share-Based Payment Accounting*, which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. As a result of the adoption, the amount in excess tax benefits from stock-based compensation is recorded in our provision for income taxes. For the three and twelve months ended December 31, 2017, the amount recorded in the provision for income taxes was $0.4 million and $0.7 million, respectively. Historically, these amounts were recorded as additional paid-in capital as required by the accounting pronouncements in force during the periods presented. In addition, for each period presented, cash flows related to excess tax benefits are now classified as an operating activity along with other income tax cash flows. Retrospective application of the cash flow presentation requirements resulted in an increase to net cash provided by operations and a decrease to net cash provided by financing activities of $2.5 million and $5.5 million for the twelve months ended December 31, 2016 and 2015, respectively. In January 2017, the FASB issued ASU 2017-01, *Business Combinations,* which is intended to clarify the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company has elected to early adopt this guidance effective October 1, 2017. The impact on its consolidated financial statements is not material. ### Recently issued accounting pronouncements In May 2014, the FASB issued ASU No. 2014-09, *Revenue from Contracts with Customers*. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement using one of two retrospective application methods. On July 9, 2015, the FASB voted to approve a deferral of the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. As of January 1, 2018, the Company has adopted the new revenue standard using the modified retrospective approach. The Company manufactures parts that have no alternative use to the Company (since the parts are custom made to specific customer orders), and the Company believes for certain customers there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the Company will recognize revenue over time. The expected transition adjustment to be recorded is an increase to the Company’s retained earnings balance on January 1, 2018 of $1.5 million. In February 2016, the FASB issued ASU 2016-02, *Leases*, which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its consolidated financial statements, but does not expect the impact to be material because the Company owns a majority of its buildings and significant assets. In August 2016, the FASB issued ASU 2016-15, *Statement of Cash Flows*, which is intended to reduce diversity in how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material. In January 2017, the FASB issued ASU 2017-04, *Intangibles – Goodwill and Other,* which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material. ## Market risk As filed, 2,126 characters. ### Quantitative and Qualitative Disclosure of Market Risks Our exposure to market risk is confined to our cash and cash equivalent balances and investments. The primary goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of debt securities with various maturities ranging from one to three years. Due to the nature of our investment portfolio, we are subject to interest rate risks, which we mitigate by holding our investments to maturity. In future periods, we will continue to evaluate our investment policy in order to continue our overall goals. ### Foreign Currency Risk As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue and incur production costs and operating expenses in British Pound, Euro and Japanese Yen. Our operating results and cash flows are adversely impacted when the United States dollar appreciates relative to other foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign exchange rates. We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be assessed by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency gains of $0.4 million and $1.4 million for the year ended December 31, 2017 and 2016, respectively and foreign currency losses of $0.5 million the year ended December 31, 2015. ## Controls and procedures As filed, 3,262 characters. ### Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the timeframes specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. ### Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in *Internal Control – Integrated Framework* (2013 framework). Based on the assessment, management concluded that, as of December 31, 2017, the Company’s internal control over financial reporting is effective. The Company’s registered public accounting firm’s attestation report on the Company’s internal control over financial reporting is provided in Part II, Item 8 of this Annual Report on Form 10-K. Management has excluded certain elements of RAPID from its assessment of internal control over financial reporting as of December 31, 2017 given that the acquisition of RAPID was not consummated until November 2017. Subsequent to the acquisition, RAPID maintained its revenue, inventory and payroll systems and processing through the year ended December 31, 2017. Those elements of the acquired business’s internal control over financial reporting that were not fully integrated into the Company’s existing internal control over financial reporting during 2017 have been excluded from management’s assessment of the effectiveness of internal control over financial reporting. RAPID is a wholly-owned subsidiary of the Company; its combined total assets and total revenues excluded from our assessment represent approximately 3% and 1%, respectively, of the related consolidated financial statements amounts as of the year ended December 31, 2017. ### Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Filed Feb 23, 2018. Source: SEC EDGAR, the filing index for accession 0001437749-18-003222. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.