10-Q

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2017

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                      to

Commission File Number: 001-35435

 Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

Minnesota	41-1939628
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5540 Pioneer Creek Drive
Maple Plain, Minnesota	55359
(Address of principal executive offices)	(Zip Code)

(763) 479-3680

(Registrant’s telephone number, including area code)

                   Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☑Yes ☐No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☑Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐    (Do not check if a smaller reporting company)
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,645,826 shares of Common Stock, par value $0.001 per share, were outstanding at October 24, 2017.

Proto Labs, Inc.

TABLE OF CONTENTS

Item	Description	Page
PART I
1.	Financial Statements	1
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
3.	Quantitative and Qualitative Disclosures about Market Risk	22
4.	Controls and Procedures	23
PART II
1.	Legal Proceedings	24
1A.	Risk Factors	24
2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
3.	Defaults Upon Senior Securities	24
4.	Mine Safety Disclosures	24
5.	Other Information	24
6.	Exhibits	25

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2017			2016
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	119,283		$	68,795
Short-term marketable securities		53,201			39,477
Accounts receivable, net of allowance for doubtful accounts of $568 and $442 as of September 30, 2017 and December 31, 2016, respectively		46,276			34,060
Inventory		9,789			9,310
Prepaid expenses and other current assets		6,280			5,697
Income taxes receivable		-			445
Total current assets		234,829			157,784
Property and equipment, net		153,512			139,474
Goodwill		28,916			28,916
Other intangible assets, net		2,261			2,655
Long-term marketable securities		55,351			84,479
Other long-term assets		2,701			933
Total assets	$	477,570		$	414,241
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	13,130		$	11,322
Accrued compensation		11,366			7,670
Accrued liabilities and other		7,463			4,435
Income taxes payable		3,804			-
Total current liabilities		35,763			23,427
Long-term deferred tax liabilities		7,721			7,003
Other long-term liabilities		4,247			3,978
Total liabilities		47,731			34,408
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2017 and December 31, 2016		-			-
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,631,444 and 26,504,868 shares as of September 30, 2017 and December 31, 2016, respectively		27			26
Additional paid-in capital		225,135			213,857
Retained earnings		210,426			176,703
Accumulated other comprehensive loss		(5,749	)		(10,753	)
Total shareholders' equity		429,839			379,833
Total liabilities and shareholders' equity	$	477,570		$	414,241

The accompanying notes are an integral part of these consolidated financial statements.

1

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Statements of Operations:
Revenue	$	88,105	$	78,173	$	250,312	$	225,702
Cost of revenue		38,793		33,448		109,358		99,077
Gross profit		49,312		44,725		140,954		126,625
Operating expenses
Marketing and sales		13,846		11,787		41,463		34,182
Research and development		5,877		5,976		17,784		17,110
General and administrative		10,222		10,020		28,256		28,397
Total operating expenses		29,945		27,783		87,503		79,689
Income from operations		19,367		16,942		53,451		46,936
Other income, net		291		625		1,779		2,342
Income before income taxes		19,658		17,567		55,230		49,278
Provision for income taxes		6,438		5,585		17,724		15,943
Net income	$	13,220	$	11,982	$	37,506	$	33,335
Net income per share:
Basic	$	0.50	$	0.45	$	1.41	$	1.27
Diluted	$	0.49	$	0.45	$	1.40	$	1.26
Shares used to compute net income per share:
Basic		26,617,349		26,416,041		26,600,174		26,334,738
Diluted		26,802,034		26,609,878		26,716,553		26,539,078
Comprehensive Income (net of tax)
Comprehensive income	$	14,875	$	11,828	$	42,510	$	31,781

The accompanying notes are an integral part of these consolidated financial statements.

2

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2017			2016
Operating activities
Net income	$	37,506		$	33,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,539			12,831
Stock-based compensation expense		6,159			5,260
Deferred taxes		715			495
Loss on impairment of assets		-			455
Amortization of held-to-maturity securities		851			881
Other		21			(1,381	)
Changes in operating assets and liabilities:
Accounts receivable		(10,679	)		(1,626	)
Inventories		(188	)		(203	)
Prepaid expenses and other		(1,147	)		(1,107	)
Income taxes		4,158			8,114
Accounts payable		1,387			(2,043	)
Accrued liabilities and other		6,678			3,131
Net cash provided by operating activities		59,000			58,142
Investing activities
Purchases of property and equipment		(24,164	)		(30,981	)
Purchases of marketable securities		(20,037	)		(56,213	)
Proceeds from maturities of marketable securities		34,090			45,907
Purchases of other investments		(514	)		-
Net cash used in investing activities		(10,625	)		(41,287	)
Financing activities
Acquisition-related contingent consideration		-			(400	)
Proceeds from exercises of stock options and other		5,749			4,168
Repurchases of common stock		(4,410	)		-
Net cash provided by financing activities		1,339			3,768
Effect of exchange rate changes on cash and cash equivalents		774			(58	)
Net increase in cash and cash equivalents		50,488			20,565
Cash and cash equivalents, beginning of period		68,795			47,653
Cash and cash equivalents, end of period	$	119,283		$	68,218

The accompanying notes are an integral part of these consolidated financial statements.

3

Note 1 – Basis of Presentation

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Proto Labs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (SEC) on February 22, 2017.

The accompanying Consolidated Balance Sheet as of December 31, 2016 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K filed on February 22, 2017 as referenced above.

Note 2 – Recent Accounting Pronouncements

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 nine months ended September 30, 2017, the amount recorded in the provision for income taxes was $0.1 million and $0.3 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 $2.0 million for the nine months ended September 30, 2016.

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. The Company expects to adopt the new revenue standard using the modified retrospective approach. As of September 30, 2017, the Company has identified revenue streams and has completed its review of individual contracts. Based on this review, the Company expects to recognize revenue over time for the majority of contracts. While the Company is still evaluating the impact of the amended guidance, preliminarily, it does not anticipate a material impact on its financial statements including the potential impact of additional disclosure requirements. The Company expects to quantify and disclose the expected impact, if any, of adopting this amended guidance in its Annual Report on Form 10-K for the year ending December 31, 2017.

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 because the Company owns a majority of its buildings and significant assets it does not expect the impact to be material. 

4

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.

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 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 May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. 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.

Note 3 – Net Income per Common Share

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance Stock Units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

The table below sets forth the computation of basic and diluted net income per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2017		2016		2017		2016
Net income	$	13,220	$	11,982	$	37,506	$	33,335
Basic - weighted-average shares outstanding:		26,617,349		26,416,041		26,600,174		26,334,738
Effect of dilutive securities:
Employee stock options and other		184,685		193,837		116,379		204,340
Diluted - weighted-average shares outstanding:		26,802,034		26,609,878		26,716,553		26,539,078
Net income per share:
Basic	$	0.50	$	0.45	$	1.41	$	1.27
Diluted	$	0.49	$	0.45	$	1.40	$	1.26

Note 4 – Goodwill and Other Intangible Assets

There were no changes in the carrying amount of Goodwill during the three and nine months ended September 30, 2017.

5

Intangible Assets other than Goodwill at September 30, 2017 and December 31, 2016 were as follows:

	September 30, 2017							December 31, 2016							Useful		Weighted Average Useful Life
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)		Remaining (in years)
Intangible Assets with finite lives:
Marketing assets	$	930	$	(318	)	$	612	$	930	$	(248	)	$	682		10.0		6.6
Non-compete agreement		190		(190	)		-		190		(190	)		-		2.0		-
Trade secrets		250		(171	)		79		250		(133	)		117		5.0		1.6
Internally developed software		680		(680	)		-		680		(604	)		76		3.0		-
Customer relationships		2,530		(960	)		1,570		2,530		(750	)		1,780		9.0		5.6
Total intangible assets	$	4,580	$	(2,319	)	$	2,261	$	4,580	$	(1,925	)	$	2,655

Amortization expense for intangible assets was $0.1 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:

(in thousands)	Estimated Amortization Expense
Remaining 2017	$	106
2018		424
2019		391
2020		374
2021		374
Thereafter		592
Total estimated amortization expense	$	2,261

Note 5 – Fair Value Measurements

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs.

6

The following table summarizes financial assets as of September 30, 2017 and December 31, 2016 measured at fair value on a recurring basis:

	September 30, 2017						December 31, 2016
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	26,187	$	-	$	-	$	11,771	$	-	$	-
Total	$	26,187	$	-	$	-	$	11,771	$	-	$	-

Note 6 – Marketable Securities

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of September 30, 2017 and December 31, 2016 is as follows:

	September 30, 2017
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	35,388	$	23	$	(43	)	$	35,368
Corporate debt securities		29,841		3		(68	)		29,776
U.S. government agency securities		37,866		-		(125	)		37,741
Certificates of deposit/time deposits		5,456		1		(25	)		5,432
Total marketable securities	$	108,552	$	27	$	(261	)	$	108,318

	December 31, 2016
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	46,578	$	1	$	(187	)	$	46,392
Corporate debt securities		38,490		2		(147	)		38,345
U.S. government agency securities		31,706		1		(141	)		31,566
Certificates of deposit/time deposits		7,182		12		(22	)		7,172
Total marketable securities	$	123,956	$	16	$	(497	)	$	123,475

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. In reaching this conclusion, the Company considered the credit quality of the issuers of the debt securities as well as the Company’s intent to hold the investments to maturity and recover the full principal.

Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.

The September 30, 2017 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. 

7

	September 30,
(in thousands)	2017
Due in one year or less	$	53,201
Due after one year through five years		55,351
Total marketable securities	$	108,552

Note 7 – Inventory

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

The Company’s inventory consisted of the following as of the dates indicated:

	September 30,			December 31,
(in thousands)	2017			2016
Raw materials	$	8,653		$	8,057
Work in process		1,531			1,531
Total inventory		10,184			9,588
Allowance for obsolescence		(395	)		(278	)
Inventory, net of allowance	$	9,789		$	9,310

Note 8 – Stock-Based Compensation

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

Employee Stock Purchase Plan

The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period.

Stock-Based Compensation Expense

Stock-based compensation expense was $2.2 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively, and $6.2 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.

8

Stock Options

The following table summarizes stock option activity during the nine months ended September 30, 2017:

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2016		569,639		$	45.00
Granted		43,095			58.35
Exercised		(136,483	)		34.82
Forfeited		(16,943	)		58.17
Options outstanding at September 30, 2017		459,308		$	48.79
Exercisable at September 30, 2017		270,705		$	40.54

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a five-year period beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.

The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2017 was $27.57.

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017		2016
Risk-free interest rate		2.24%		1.53	-	1.68%
Expected life (years)		6.50			6.50
Expected volatility		44.68%		44.38	-	45.93%
Expected dividend yield		0%			0%

As of September 30, 2017, there was $4.3 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a five-year period, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date. 

9

The following table summarizes restricted stock activity during the nine months ended September 30, 2017:

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2016		215,105		$	62.78
Granted		197,649			61.60
Restrictions lapsed		(55,205	)		63.62
Forfeited		(13,074	)		63.51
Restricted stock at September 30, 2017		344,475		$	61.94

As of September 30, 2017, there was $18.7 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 3.8 years. 

Performance Stock

Performance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. As of September 30, 2017, the Company is accruing stock-based compensation expense for the PSUs at 100 percent.

The following table summarizes performance stock activity during the nine months ended September 30, 2017:

			Weighted-
			Average
			Grant Date
	Performance		Fair Value
	Stock		Per Share
Performance stock at December 31, 2016		-	$	-
Granted		25,707		58.35
Restrictions lapsed		-		-
Forfeited		-		-
Performance stock at September 30, 2017		25,707	$	58.35

Employee Stock Purchase Plan

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017				2016
Risk-free interest rate		0.59%	-	0.97%		0.39	-	0.56%
Expected life (months)			6.00				6.00
Expected volatility		34.51%	-	39.51%		29.41	-	49.13%
Expected dividend yield			0%				0%

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Note 9 – Accumulated Other Comprehensive Loss

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive loss balances during the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
Foreign currency translation adjustments
Balance at beginning of period	$	(7,404	)	$	(6,612	)	$	(10,753	)	$	(5,212	)
Other comprehensive income (loss) before reclassifications		1,655			(154	)		5,004			(1,554	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		1,655			(154	)		5,004			(1,554	)
Balance at end of period	$	(5,749	)	$	(6,766	)	$	(5,749	)	$	(6,766	)

Note 10 – Income Taxes

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended September 30, 2017 and 2016, the Company recorded an income tax provision of $6.4 million and $5.6 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded an income tax provision of $17.7 million and $15.9 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended September 30, 2017 was 32.8 percent compared to 31.8 percent in the same period of the prior year. The effective income tax rate for the nine months ended September 30, 2017 was 32.1 percent compared to 32.4 percent in the same period of the prior year.

The effective income tax rate for the three and nine months ended September 30, 2017 differs from the U.S. federal statutory rate of 35.0 percent due primarily to the mix of income earned in domestic and foreign tax jurisdictions and deductions for which the Company qualifies.

The Company had reserves against unrecognized tax benefits totaling $4.0 million and $3.8 million at September 30, 2017 and December 31, 2016, respectively, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

Note 11 – Segment Reporting

The Company’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does not allocate directly to its operating segments.

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments.

Revenue and income from operations by reportable segment for the three and nine months ended September 30, 2017 and 2016 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Revenue:
United States	$	67,490	$	59,574	$	191,019	$	169,364
Europe		18,094		15,610		51,224		48,518
Japan		2,521		2,989		8,069		7,820
Total revenue	$	88,105	$	78,173	$	250,312	$	225,702

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	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Income from Operations:
United States	$	26,903		$	23,910		$	76,973		$	67,542
Europe		3,251			3,554			9,626			9,369
Corporate Unallocated and Japan		(10,787	)		(10,522	)		(33,148	)		(29,975	)
Total income from operations	$	19,367		$	16,942		$	53,451		$	46,936

Total long-lived assets at September 30, 2017 and December 31, 2016 were as follows:

	September 30,		December 31,
(in thousands)	2017		2016
Total long-lived assets:
United States	$	113,784	$	108,650
Europe		32,115		23,199
Japan		7,613		7,625
Total assets	$	153,512	$	139,474

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016.

Forward-Looking Statements

Statements contained in this report regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K as filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Overview

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

Our primary manufacturing product lines currently include Injection Molding, CNC Machining and 3D Printing. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these manufacturing processes, extend the variety of materials we are able to support and 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.

Injection Molding

Our Injection Molding product line uses our proprietary 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic or liquid silicone injection molds, which are then used to produce custom injection-molded parts utilizing commercially available equipment. Our Injection Molding product line is used for prototype, on-demand and short-run production. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need low-volume production often come back to Proto Labs’ Injection Molding product line for additional quantities typically ranging up to 10,000 parts or more. They do so to support pilot production for product testing or while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product will only be released in a limited quantity, because demand for their product is unpredictable, or because they need end-of-life production support. These additional part orders typically occur on approximately half of the molds that we make, usually accounting for approximately half of our total Injection Molding revenue.

CNC Machining

Our CNC Machining product line uses our proprietary 3D CAD-to-CNC machining technology on commercially available CNC machines to cut plastic or metal blocks or bars into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 200 parts.

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  3D Printing

Our 3D Printing product line includes stereolithography (SL), selective laser sintering (SLS), direct metal laser sintering (DMLS), Multi Jet Fusion (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. 3D Printing is well suited to produce small quantities, typically in the range of one to 50 parts.

Key Financial Measures and Trends

Revenue

The Company’s operations are conducted in three geographic operating segments in the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers and engineers are located. Revenue within our United States and Europe markets is derived from our Injection Molding, CNC Machining and 3D Printing product lines. Revenue within our Japan market is derived from our Injection Molding and CNC Machining product lines. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by:

● increasing marketing and selling activities;

● offering additional product lines such as 3D Printing through our acquisition of FineLine Prototyping, Inc. in April 2014 and expanded through our acquisition of certain assets of Alphaform AG (Alphaform) in October 2015;

● improving the usability of our product lines such as our web-centric applications;

● expanding the breadth and scope of our products, for example, by adding more sizes and materials to our offerings such as liquid silicone rubber (LSR) in Injection Molding and lathe-turned parts in CNC Machining;

● expanding the breadth of manufacturing capabilities, for example, by adding rapid overmolding and insert molding technology to our Injection Molding product line as well as PolyJet and Multi Jet Fusion technology to our 3D printing product line; and

● adding a suite of capabilities designed to address the on-demand needs of the low-volume, high-mix product segment.

During the three months ended September 30, 2017, we served 16,909 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. During the nine months ended September 30, 2017, we served 31,307 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.0% over the same period in 2016. 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, employee compensation, benefits, stock-based compensation, equipment depreciation, 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.

We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between sales by product line, the mix between domestic and foreign revenue sources, and foreign currency 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 and 3D-printed 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.

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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.

Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation, depreciation on equipment and other related overhead. We expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings.

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

Other Income, 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. We expect income taxes to increase as our taxable income increases and we expect our effective tax rate to remain relatively constant.

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.

	Three Months Ended September 30,								Change						Nine Months Ended September 30,								Change
(dollars in thousands)	2017				2016				$			%			2017				2016				$			%
Revenue	$	88,105	100.0	%	$	78,173	100.0	%	$	9,932			12.7		$	250,312	100.0	%	$	225,702	100.0	%	$	24,610			10.9
Cost of revenue		38,793	44.0			33,448	42.8			5,345			16.0			109,358	43.7			99,077	43.9			10,281			10.4
Gross profit		49,312	56.0			44,725	57.2			4,587			10.3			140,954	56.3			126,625	56.1			14,329			11.3
Operating expenses:
Marketing and sales		13,846	15.7			11,787	15.1			2,059			17.5			41,463	16.6			34,182	15.1			7,281			21.3
Research and development		5,877	6.7			5,976	7.6			(99	)		(1.7	)		17,784	7.1			17,110	7.6			674			3.9
General and administrative		10,222	11.6			10,020	12.8			202			2.0			28,256	11.3			28,397	12.6			(141	)		(0.5	)
Total operating expenses		29,945	34.0			27,783	35.5			2,162			7.8			87,503	35.0			79,689	35.3			7,814			9.8
Income from operations		19,367	22.0			16,942	21.7			2,425			14.3			53,451	21.3			46,936	20.8			6,515			13.9
Other income (expense), net		291	0.3			625	0.8			(334	)		(53.4	)		1,779	0.7			2,342	1.0			(563	)		(24.0	)
Income before income taxes		19,658	22.3			17,567	22.5			2,091			11.9			55,230	22.0			49,278	21.8			5,952			12.1
Provision for income taxes		6,438	7.3			5,585	7.2			853			15.3			17,724	7.1			15,943	7.0			1,781			11.2
Net income	$	13,220	15.0	%	$	11,982	15.3	%	$	1,238			10.3	%	$	37,506	14.9	%	$	33,335	14.8	%	$	4,171			12.5	%

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Stock-based compensation expense included in the statements of operations data above for the three and nine months ended September 30, 2017 and 2016 was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2017		2016		2017		2016
Stock options and restricted stock	$	2,063	$	1,553	$	5,706	$	4,820
Employee stock purchase plan		138		166		453		440
Total stock-based compensation expense	$	2,201	$	1,719	$	6,159	$	5,260
Cost of revenue	$	263	$	205	$	698	$	489
Operating expenses:
Marketing and sales		417		250		1,024		741
Research and development		295		309		796		1,084
General and administrative		1,226		955		3,641		2,946
Total stock-based compensation expense	$	2,201	$	1,719	$	6,159	$	5,260

 Comparison of Three Months Ended September 30, 2017 and 2016

Revenue

Revenue by reportable segment and the related changes for the three months ended September 30, 2017 and 2016 was as follows:

	Three Months Ended September 30,
	2017					2016					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$			%
Revenue
United States	$	67,490		76.6	%	$	59,574		76.2	%	$	7,916			13.3	%
Europe		18,094		20.5			15,610		23.0			2,484			15.9
Japan		2,521		2.9			2,989		3.2			(468	)		(15.7	)
Total revenue	$	88,105		100.0	%	$	78,173		100.0	%	$	9,932			12.7	%

Our revenue increased $9.9 million, or 12.7%, for the three months ended September 30, 2017 compared to the same period in 2016. By reportable segment, revenue in the United States increased $7.9 million, or 13.3%, revenue in Europe increased $2.5 million, or 15.9%, and revenue in Japan decreased $0.5 million, or 15.7%, in each case for the three months ended September 30, 2017 compared to the same period in 2016.

Our revenue growth during the three months ended September 30, 2017 was the result of an increase in the volume of the product developers and engineers we served through our web-based customer interface. During the three months ended September 30, 2017, we served 16,909 unique product developers and engineers through our web-based customer interface, an increase of 18.5% over the same period in 2016. The information does not include certain 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface.

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. International revenue was positively impacted by $0.4 million during the three months ended September 30, 2017 when compared to the same period in 2016 as a result of foreign currency movements, primarily the strengthening of the Euro relative to the British Pound.

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Revenue by product line and the related changes for the three months ended September 30, 2017 and 2016 was as follows:

	Three Months Ended September 30,
	2017					2016					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$		%
Revenue
Injection Molding	$	49,480		56.2	%	$	46,445		59.4	%	$	3,035		6.5	%
CNC Machining		27,166		30.8			21,781		27.9			5,385		24.7
3D Printing		11,102		12.6			9,850		12.6			1,252		12.7
Other Revenue		357		0.4			97		0.1			260		268.0
Total revenue	$	88,105		100.0	%	$	78,173		100.0	%	$	9,932		12.7	%

By product line, our revenue growth was driven by a 6.5% increase in Injection Molding revenue, a 24.7% increase in CNC Machining revenue and a 12.7% increase in 3D Printing revenue, as well as a $0.3 million increase in Other Revenue in each case for the three months ended September 30, 2017 compared to the same period in 2016.

 Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $5.3 million, or 16.0%, for the three months ended September 30, 2017 compared to the same period in 2016, which was faster than the rate of revenue increase of 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. The increase in cost of revenue resulted from the growth of the business and was due to raw material and production cost increases of $1.9 million, an increase in direct labor headcount resulting in personnel and related cost increases of $3.1 million and equipment and facility-related cost increases of $0.3 million to support increased sales volumes.

Gross Profit and Gross Margin. Gross profit increased from $44.7 million, or 57.2% of revenue, in the three months ended September 30, 2016 to $49.3 million, or 56.0% of revenue, in the three months ended September 30, 2017. Gross profit increased primarily due to increases in revenue. Gross margin decreased due to the timing and mix of revenue, which impacted the increase in cost of revenue discussed above.

Operating Expenses, Other Income, net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expenses increased $2.1 million, or 17.5%, during the three months ended September 30, 2017 compared to the same period in 2016 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.0 million as well as marketing program cost increases of $0.1 million.

Research and Development. Our research and development expenses decreased $0.1 million, or 1.7%, during the three months ended September 30, 2017 compared to the same period in 2016 due to general operating cost decreases of $0.1 million.

General and Administrative. Our general and administrative expenses increased $0.2 million, or 2.0%, during the three months ended September 30, 2017 compared to the same period in 2016 due to an increase in headcount resulting in personnel and related costs increase of $0.6 million and stock based compensation cost increases of $0.3 million, which were partially offset by decreases in administrative costs of $0.4 million and professional services cost decreases of $0.3 million. The decrease in administrative costs was due to expenses recorded in 2016 related to our decisions to vacate existing facilities and move to new facilities in the U.S. and Japan.

Other Income, net. We recognized other income, net of $0.3 million for the three months ended September 30, 2017, a decrease of $0.3 million compared to other income, net of $0.6 million for the three months ended September 30, 2016. Other income, net decreased primarily due to a decrease of $0.4 million in foreign currency gains, which were partially offset by an increase of $0.1 million in interest income on investments.

Provision for Income Taxes. Our effective tax rate of 32.8% for the three months ended September 30, 2017 increased 1.0% compared to 31.8% for the same period in 2016. The increase in the effective tax rate is primarily due to changes in taxable income in our geographic regions in the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016. Our income tax provision increased by $0.8 million to $6.4 million for the three months ended September 30, 2017 compared to our income tax provision of $5.6 million for the three months ended September 30, 2016.

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Comparison of Nine Months Ended September 30, 2017 and 2016

Revenue

Revenue by reportable segment and the related changes for the nine months ended September 30, 2017 and 2016 was as follows:

	Nine Months Ended September 30,
	2017					2016					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$		%
Revenue
United States	$	191,019		76.3	%	$	169,364		75.0	%	$	21,655		12.8	%
Europe		51,224		20.5			48,518		21.5			2,706		5.6
Japan		8,069		3.2			7,820		3.5			249		3.2
Total revenue	$	250,312		100.0	%	$	225,702		100.0	%	$	24,610		10.9	%

Our revenue increased $24.6 million, or 10.9%, for the nine months ended September 30, 2017 compared to the same period in 2016. By reportable segment, revenue in the United States increased $21.7 million, or 12.8%, revenue in Europe increased $2.7 million, or 5.6%, and revenue in Japan increased $0.2 million, or 3.2%, in each case for the nine months ended September 30, 2017 compared to the same period in 2016.

Our revenue growth during the nine months ended September 30, 2017 was the result of an increase in the volume of the product developers and engineers we served through our web-based customer interface. During the nine months ended September 30, 2017, we served 31,307 unique product developers and engineers through our web-based customer interface, an increase of 18.0% over the same period in 2016. The information does not include certain 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface.

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. International revenue was negatively impacted by $1.4 million during the nine months ended September 30, 2017 when compared to the same period in 2016 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 the nine months ended September 30, 2017 and 2016 was as follows:

	Nine Months Ended September 30,
	2017					2016					Change
(dollars in thousands)	$		% of Total Revenue			$		% of Total Revenue			$			%
Revenue
Injection Molding	$	144,187		57.6	%	$	134,376		59.5	%	$	9,811			7.3	%
CNC Machining		73,318		29.3			60,510		26.8			12,808			21.2
3D Printing		32,061		12.8			28,059		12.4			4,002			14.3
Other Revenue		746		0.3			2,757		1.3			(2,011	)		(72.9	)
Total revenue	$	250,312		100.0	%	$	225,702		100.0	%	$	24,610			10.9	%

By product line, our revenue growth was driven by a 7.3% increase in Injection Molding revenue, which includes headwind from our decision to discontinue MIM and Thixo manufacturing processes during the second quarter of 2016, a 21.2% increase in CNC Machining revenue and a 14.3% increase in 3D Printing revenue, as well as a $2.0 million decrease in Other Revenue driven by our decision in 2016 to exit our non-core resin resale business in Europe, in each case for the nine months ended September 30, 2017 compared to the same period in 2016.

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 Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $10.3 million, or 10.4%, for the nine months ended September 30, 2017 compared to the same period in 2016, which was slower than the rate of revenue increase of 10.9% for the nine months ended September 30, 2017 compared to the same period in 2016 reflecting the realization of productivity improvements. The net increase in cost of revenue resulted from the growth of the business and was due to raw material and production cost increases of $2.8 million, an increase in direct labor headcount resulting in personnel and related cost increases of $6.8 million and equipment and facility-related cost increases of $0.7 million to support increased sales volumes.

Gross Profit and Gross Margin. Gross profit increased from $126.6 million, or 56.1% of revenues, in the nine months ended September 30, 2016 to $141.0 million, or 56.3% of revenue, in the nine months ended September 30, 2017. Gross profit increased primarily due to increases in revenue and realization of manufacturing productivity improvements, partially offset by the volume- and mix-related increase in cost of revenue as discussed above.

Operating Expenses, Other Income, net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expenses increased $7.3 million, or 21.3%, during the nine months ended September 30, 2017 compared to the same period in 2016 due primarily to an increase in headcount resulting in personnel and related cost increases of $7.1 million as well as marketing program cost increases of $0.2 million.

Research and Development. Our research and development expenses increased $0.7 million, or 3.9%, during the nine months ended September 30, 2017 compared to the same period in 2016 due to an increase in headcount resulting in personnel and related cost increases of $0.6 million and operating cost increases of $0.2 million, which were partially offset by a decrease in professional services cost of $0.1 million.

General and Administrative. Our general and administrative expenses decreased $0.1 million, or 0.5%, during the nine months ended September 30, 2017 compared to the same period in 2016 due to decreases in administrative costs of $1.7 million and professional services costs of $0.4 million, which were partially offset by an increase in headcount resulting in personnel and related cost increases of $1.3 million and stock based compensation cost increases of $0.7 million. The decrease in administrative costs was due to expenses recorded in 2016 related to our decisions to exit MIM and Thixo manufacturing processes and vacate existing facilities and move to new facilities in the U.S. and Japan.

Other Income, net. We recognized other income, net of $1.8 million for the nine months ended September 30, 2017, a decrease of $0.5 million when compared to other income, net of $2.3 million for the nine months ended September 30, 2016. Other income, net decreased primarily due to a $1.3 million decrease in foreign currency gains, which was partially offset by a $0.4 million favorable legal settlement and a $0.4 million increase in interest income on investments.

Provision for Income Taxes. Our effective tax rate of 32.1% for the nine months ended September 30, 2017 decreased 0.3% compared to 32.4% for the same period in 2016. The decrease in the effective tax rate is primarily due to changes in taxable income in our geographic regions in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Our income tax provision increased by $1.8 million to $17.7 million for the nine months ended September 30, 2017 compared to our income tax provision of $15.9 million for the nine months ended September 30, 2016.

Liquidity and Capital Resources

Cash Flows

The following table summarizes our cash flows during the nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
(dollars in thousands)	2017			2016
Net cash provided by operating activities	$	59,000		$	58,142
Net cash used in investing activities		(10,625	)		(41,287	)
Net cash provided by financing activities		1,339			3,768
Effect of exchange rates on cash and cash equivalents		774			(58	)
Net increase in cash and cash equivalents	$	50,488		$	20,565

19

Sources of Liquidity

Historically, we have primarily financed our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $119.3 million as of September 30, 2017, an increase of $50.5 million from December 31, 2016. The increase in our cash was primarily due to cash generated through operations and proceeds from maturities of marketable securities, which were partially offset by repurchases of common stock and investing activity.

Cash Flows from Operating Activities

Cash flows from operating activities were $59.0 million during the nine months ended September 30, 2017 and primarily consisted of net income of $37.5 million, adjusted for certain non-cash items, including depreciation and amortization of $13.5 million, stock-based compensation expense of $6.2 million, deferred taxes of $0.7 million and amortization of held-to-maturity securities of $0.9 million. Cash flows from operating activities increased $0.9 million during the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to increases in net income of $4.2 million, depreciation and amortization of $0.7 million driven by an increase in capital investments, an increase in stock-based compensation expense of $0.9 million, an increase in deferred taxes of $0.2 million and an increase in other adjustments of $1.3 million primarily due to changes in foreign currency. These increases were partially offset by a decrease in loss on impairment of assets of $0.4 million and a decrease in changes in operating assets and liabilities of $6.0 million driven by general growth of the business and timing of cash receipts and payments.

Cash flows from operating activities of $58.1 million during the nine months ended September 30, 2016 and primarily consisted of net income of $33.3 million, adjusted for certain non-cash items, including depreciation and amortization of $12.8 million, stock-based compensation expense of $5.3 million, deferred taxes of $0.5 million, loss on impairment of assets of $0.5 million and amortization of held-to-maturity securities of $0.9 million, which were partially offset by other adjustments of $1.3 million.

Cash Flows from Investing Activities

Cash used in investing activities was $10.6 million during the nine months ended September 30, 2017, consisting of $24.2 million for the purchases of property and equipment, $20.0 million for the purchases of marketable securities and $0.5 million for the purchases of other investments, which were partially offset by $34.1 million in proceeds from maturities of marketable securities.

Cash used in investing activities was $41.3 million during the nine months ended September 30, 2016, consisting of $31.0 million for the purchases of property and equipment and $56.2 million for the purchases of marketable securities, which were partially offset by $45.9 million in proceeds from maturities of marketable securities.

Cash Flows from Financing Activities

Cash provided by financing activities was $1.3 million during the nine months ended September 30, 2017, consisting of proceeds from exercises of stock options of $5.7 million, which were partially offset by repurchases of common stock of $4.4 million.

Cash provided by financing activities was $3.7 million during the nine months ended September 30, 2016, consisting of proceeds from exercises of stock options of $4.1 million, which were partially offset by $0.4 million for acquisition-related contingent consideration payments.

20

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

We have adopted various accounting policies to prepare the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. There were no material changes in our significant accounting policies during the nine months ended September 30, 2017.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.

21

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 Pounds, Euros and Japanese Yen.

Our operating results and cash flows are adversely impacted when the United States Dollar appreciates relative to foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign currency exchange rates.

We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be assessed by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency losses of $0.1 million in the three months ended September 30, 2017 and foreign currency gains of $0.3 million in the nine months ended September 30, 2017, respectively. We recognized foreign currency gains of $0.4 million and $1.6 million in the three and nine months ended September 30, 2016, respectively.

22

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures are effective and provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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.

23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors we previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 9, 2017, we announced that our board of directors had authorized the repurchase of shares of our common stock from time to time on the open market or in privately negotiated purchases, at an aggregate purchase price of up to $50 million. The timing and amount of any share repurchases will be determined by our management based on market conditions and other factors. The term of the program runs through December 31, 2021.

During the three months ended September 30, 2017, we did not repurchase shares of our common stock.

Item 3. Defaults Upon Senior Securities

No matters to disclose.

Item 4. Mine Safety Disclosures

No matters to disclose.

Item 5. Other Information

No matters to disclose.

24

Item 6. Exhibits

The following documents are filed as part of this report:

Exhibit Number	Description of Exhibit
3.1(1)	Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.
3.2(2)	Second Amended and Restated By-Laws of Proto Labs, Inc., as amended through November 8, 2016
3.3(3)	Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012, and incorporated by reference herein.
(2)	Previously filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-35435), filed with the Commission on November 8, 2016, and incorporated by reference herein.
(3)	Previously filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-35435), filed with the Commission on May 21, 2015, and incorporated by reference herein.

25

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Proto Labs, Inc.
Date: October 31, 2017	/s/ Victoria M. Holt
	Victoria M. Holt
	President and Chief Executive Officer (Principal Executive Officer)

Date: October 31, 2017	/s/ John A. Way
	John A. Way
	Chief Financial Officer (Principal Financial Officer)

26

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Victoria M. Holt, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Proto Labs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2017	By:	/s/ Victoria M. Holt
		Victoria M. Holt
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

 Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, John A. Way, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Proto Labs, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2017	By:	/s/ John A. Way
		John A. Way
		Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Victoria M. Holt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Proto Labs, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Proto Labs, Inc.

Date: October 31, 2017

By:	/s/ Victoria M. Holt
Name:	Victoria M. Holt
Title:	President and Chief Executive Officer

I, John A. Way, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Proto Labs, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Proto Labs, Inc.

Date: October 31, 2017

By:	/s/ John A. Way
Name:	John A. Way
Title:	Chief Financial Officer

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Oct. 24, 2017
Document Information [Line Items]
Entity Registrant Name	Proto Labs Inc
Entity Central Index Key	0001443669
Trading Symbol	prlb
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	Yes
Entity Common Stock, Shares Outstanding (in shares)		26,645,826
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets
Cash and cash equivalents	$ 119,283	$ 68,795
Short-term marketable securities	53,201	39,477
Accounts receivable, net of allowance for doubtful accounts of $568 and $442 as of September 30, 2017 and December 31, 2016, respectively	46,276	34,060
Inventory	9,789	9,310
Prepaid expenses and other current assets	6,280	5,697
Income taxes receivable		445
Total current assets	234,829	157,784
Property and equipment, net	153,512	139,474
Goodwill	28,916	28,916
Other intangible assets, net	2,261	2,655
Long-term marketable securities	55,351	84,479
Other long-term assets	2,701	933
Total assets	477,570	414,241
Liabilities and shareholders' equity
Accounts payable	13,130	11,322
Accrued compensation	11,366	7,670
Accrued liabilities and other	7,463	4,435
Income taxes payable	3,804
Total current liabilities	35,763	23,427
Long-term deferred tax liabilities	7,721	7,003
Other long-term liabilities	4,247	3,978
Total liabilities	47,731	34,408
Shareholders' equity
Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2017 and December 31, 2016
Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 26,631,444 and 26,504,868 shares as of September 30, 2017 and December 31, 2016, respectively	27	26
Additional paid-in capital	225,135	213,857
Retained earnings	210,426	176,703
Accumulated other comprehensive loss	(5,749)	(10,753)
Total shareholders' equity	429,839	379,833
Total liabilities and shareholders' equity	$ 477,570	$ 414,241

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Allowance for doubtful accounts	$ 568	$ 442
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	150,000,000	150,000,000
Common stock, shares issued (in shares)	26,631,444	26,504,868
Common stock, shares outstanding (in shares)	26,631,444	26,504,868

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Statements of Operations:
Revenues	$ 88,105	$ 78,173	$ 250,312	$ 225,702
Cost of revenue	38,793	33,448	109,358	99,077
Gross profit	49,312	44,725	140,954	126,625
Operating expenses
Marketing and sales	13,846	11,787	41,463	34,182
Research and development	5,877	5,976	17,784	17,110
General and administrative	10,222	10,020	28,256	28,397
Total operating expenses	29,945	27,783	87,503	79,689
Income from operations	19,367	16,942	53,451	46,936
Other income, net	291	625	1,779	2,342
Income before income taxes	19,658	17,567	55,230	49,278
Provision for income taxes	6,438	5,585	17,724	15,943
Net income	$ 13,220	$ 11,982	$ 37,506	$ 33,335
Net income per share:
Basic (in dollars per share)	$ 0.50	$ 0.45	$ 1.41	$ 1.27
Diluted (in dollars per share)	$ 0.49	$ 0.45	$ 1.40	$ 1.26
Shares used to compute net income per share:
Basic - weighted-average shares outstanding: (in shares)	26,617,349	26,416,041	26,600,174	26,334,738
Diluted (in shares)	26,802,034	26,609,878	26,716,553	26,539,078
Comprehensive Income (net of tax)
Comprehensive income	$ 14,875	$ 11,828	$ 42,510	$ 31,781

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Operating activities
Net income	$ 37,506	$ 33,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,539	12,831
Share-based Compensation	6,159	5,260
Deferred taxes	715	495
Loss on impairment of assets		455
Amortization of held-to-maturity securities	851	881
Other	21	(1,381)
Changes in operating assets and liabilities:
Accounts receivable	(10,679)	(1,626)
Inventories	(188)	(203)
Prepaid expenses and other	(1,147)	(1,107)
Income taxes	4,158	8,114
Accounts payable	1,387	(2,043)
Accrued liabilities and other	6,678	3,131
Net cash provided by operating activities	59,000	58,142
Investing activities
Purchases of property and equipment	(24,164)	(30,981)
Purchases of marketable securities	(20,037)	(56,213)
Proceeds from maturities of marketable securities	34,090	45,907
Purchases of other investments	(514)
Net cash used in investing activities	(10,625)	(41,287)
Financing activities
Acquisition-related contingent consideration		(400)
Proceeds from exercises of stock options and other	5,749	4,168
Repurchases of common stock	(4,410)
Net cash provided by financing activities	1,339	3,768
Effect of exchange rate changes on cash and cash equivalents	774	(58)
Net increase in cash and cash equivalents	50,488	20,565
Cash and cash equivalents, beginning of period	68,795	47,653
Cash and cash equivalents, end of period	$ 119,283	$ 68,218

XML

Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note

1

– Basis of Presentation

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Proto Labs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form

10

-Q and Article

 

10

of Regulation S-

X.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are

not

necessarily indicative of results that

may

be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company

’s Annual Report on Form

10

-K for the year ended

December 

31,

2016

as filed with the Securities and Exchange Commission (SEC) on

February 

22,

2017.

The accompanying Consolidated Balance Sheet as of

December

 

31,

2016

was derived from the audited Consolidated Financial Statements but does

not

include all disclosures required by U.S. GAAP for a full set of financial statements. This Form

10

-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form

10

-K filed on

February 

22,

2017

as referenced above.

XML

Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

Note

2

– Recent Accounting Pronouncements

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

nine

months ended

September 30, 2017,

the amount recorded in the provision for income taxes was

$0.1

million and

$0.3

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

$2.0

million for the

nine

months ended

September 30, 2016.

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. The Company expects to adopt the new revenue standard using the modified re

trospective approach. As of

September 30, 2017,

the Company has identified revenue streams and has completed its review of individual contracts. Based on this review, the Company expects to recognize revenue over time for the majority of contracts. While the Company is still evaluating the impact of the amended guidance, preliminarily, it does

not

anticipate a material impact on its financial statements including the potential impact of additional disclosure requirements. The Company expects to quantify and disclose the expected impact, if any, of adopting this amended guidance in its Annual Report on Form

10

-K for the year ending

December 31, 2017.

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 because the Company owns a majority of its buildings and significant assets it does

not

expect the impact to be material. 

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.

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 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

May 2017,

the FASB issued ASU

2017

-

09,

Compensation – Stock Compensation

, which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. 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.

XML

Note 3 - Net Income Per Common Share

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

Note

3

– Net Income per Common Share

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance Stock Units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

The table below sets forth the computation of basic and diluted net income per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2017		2016		2017		2016
Net income	$	13,220	$	11,982	$	37,506	$	33,335
Basic - weighted-average shares outstanding:		26,617,349		26,416,041		26,600,174		26,334,738
Effect of dilutive securities:
Employee stock options and other		184,685		193,837		116,379		204,340
Diluted - weighted-average shares outstanding:		26,802,034		26,609,878		26,716,553		26,539,078
Net income per share:
Basic	$	0.50	$	0.45	$	1.41	$	1.27
Diluted	$	0.49	$	0.45	$	1.40	$	1.26

XML

Note 4 - Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

Note

4

– Goodwill and Other Intangible Assets

There were

no

changes in the carrying amount of G

oodwill during the

three

and

nine

months ended

September 30, 2017.

Intangible As

sets other than Goodwill at

September 30, 2017

and

December 31, 2016

were as follows:

	September 30, 2017							December 31, 2016							Useful		Weighted Average Useful Life
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)		Remaining (in years)
Intangible Assets with finite lives:
Marketing assets	$	930	$	(318	)	$	612	$	930	$	(248	)	$	682		10.0		6.6
Non-compete agreement		190		(190	)		-		190		(190	)		-		2.0		-
Trade secrets		250		(171	)		79		250		(133	)		117		5.0		1.6
Internally developed software		680		(680	)		-		680		(604	)		76		3.0		-
Customer relationships		2,530		(960	)		1,570		2,530		(750	)		1,780		9.0		5.6
Total intangible assets	$	4,580	$	(2,319	)	$	2,261	$	4,580	$	(1,925	)	$	2,655

Amortization expense for intangible assets was $

0.1

million and

$0.2

million for the

three

months ended

September 30, 2017

and

2016,

respectively, and

$0.4

million and

$0.5

million for the

nine

months ended

September 30, 2017

and

2016,

respectively.

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:

(in thousands)	Estimated Amortization Expense
Remaining 2017	$	106
2018		424
2019		391
2020		374
2021		374
Thereafter		592
Total estimated amortization expense	$	2,261

XML

Note 5 - Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note

5

– Fair Value Measurements

ASC

820,

Fair Value Measuremen

t (ASC

820

), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC

820

also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring fair value. There are

three

levels of inputs that

may

be used to measure fair value:

Level

1

—Quoted prices in active markets for identical assets or liabilities.

Level

2

—Observable inputs other than Level

1

prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are

not

active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level

3

—Unobservable inputs that are supported by little or

no

market activity and that are significant to the fair value of the assets or liabilities.

The Company

’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level

1

inputs.

The following table summ

arizes financial assets as of

September 30, 2017

and

December 31, 2016

measured at fair value on a recurring basis:

	September 30, 2017						December 31, 2016
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	26,187	$	-	$	-	$	11,771	$	-	$	-
Total	$	26,187	$	-	$	-	$	11,771	$	-	$	-

XML

Note 6 - Marketable Securities

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Investment [Text Block]

Note

6

– Marketable Securities

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company

’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of

September 30, 2017

and

December 31, 2016

is as follows:

	September 30, 2017
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	35,388	$	23	$	(43	)	$	35,368
Corporate debt securities		29,841		3		(68	)		29,776
U.S. government agency securities		37,866		-		(125	)		37,741
Certificates of deposit/time deposits		5,456		1		(25	)		5,432
Total marketable securities	$	108,552	$	27	$	(261	)	$	108,318

	December 31, 2016
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	46,578	$	1	$	(187	)	$	46,392
Corporate debt securities		38,490		2		(147	)		38,345
U.S. government agency securities		31,706		1		(141	)		31,566
Certificates of deposit/time deposits		7,182		12		(22	)		7,172
Total marketable securities	$	123,956	$	16	$	(497	)	$	123,475

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level

1

). Fair values for the U.S. municipal securities, U.S. government agency securities and certificates of deposit are primarily determined using dealer quotes or quoted market prices for similar securities (Level

2

).

The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. In reaching this conclusion, the Company considered the credit quality of the issuers of the debt securities as well as the Company

’s intent to hold the investments to maturity and recover the full principal.

Classification of marketable securities as current or non-current is based upon the security

’s maturity date as of the date of these financial statements.

Th

e

September 30, 2017

balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities

may

differ from contractual maturities because the issuers of the securities

may

have the right to prepay obligations without prepayment penalties. 

	September 30,
(in thousands)	2017
Due in one year or less	$	53,201
Due after one year through five years		55,351
Total marketable securities	$	108,552

XML

Note 7 - Inventory

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

Note

7

– Inventory

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates

first

-in,

first

-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

The Company

’s inventory consisted of the following as of the dates indicated:

	September 30,			December 31,
(in thousands)	2017			2016
Raw materials	$	8,653		$	8,057
Work in process		1,531			1,531
Total inventory		10,184			9,588
Allowance for obsolescence		(395	)		(278	)
Inventory, net of allowance	$	9,789		$	9,310

XML

Note 8 - Stock-based Compensation

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note

8

– Stock-Based Compensation

Under the Company

’s

2012

Long-Term Incentive Plan, as amended (the

2012

Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the

2012

Plan have a maximum term of

ten

years from the date of grant. The compensation committee

may

provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the

2012

Plan generally

may

not

be less than the fair market value of a share of our common stock on the date of the grant.

Employee Stock Purchase Plan

The Company

’s

2012

Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to

15

percent of their eligible compensation, subject to plan limitations. The ESPP provides for

six

-month offering periods with a single purchase period ending

May 

15

and

November 

15,

respectively. At the end of each offering period, employees are able to purchase shares at

85

percent of the lower of the fair market value of the Company’s common stock on the

first

trading day of the offering period or on the last trading day of the offering period.

Stock-Based Compensation Expense

Stock-bas

ed compensation expense was

$2.2

million and

$1.7

million for the

three

months ended

September 30, 2017

and

2016,

respectively, and

$6.2

million and

$5.3

million for the

nine

months ended

September 30, 2017

and

2016,

respectively.

Stock Options

The following table summarizes st

ock option activity during the

nine

months ended

September 30, 2017:

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2016		569,639		$	45.00
Granted		43,095			58.35
Exercised		(136,483	)		34.82
Forfeited		(16,943	)		58.17
Options outstanding at September 30, 2017		459,308		$	48.79
Exercisable at September 30, 2017		270,705		$	40.54

The outstanding options generally have a term of

ten

years. For employees, options granted become exercisable ratably over the vesting period, which is generally a

five

-year period beginning on the

first

anniversary of the grant date, subject to the employee

’s continuing service to the Company. For directors, options generally become exercisable in full on the

first

anniversary of the grant date.

The weighted-average grant date fair value of options

that were granted during the

nine

months ended

September 30, 2017

was

$27.57.

The following table provides the assumptions used in the Black-Scholes pricing model val

uation of options during the

nine

months ended

September 30, 2017

and

2016:

	Nine Months Ended September 30,
	2017		2016
Risk-free interest rate		2.24%		1.53	-	1.68%
Expected life (years)		6.50			6.50
Expected volatility		44.68%		44.38	-	45.93%
Expected dividend yield		0%			0%

As of

September 30, 2017,

there was

$4.3

million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of

2.8

years.

Restricted Stock

Restricted stock awards

 are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a

five

-year period, beginning on the

first

anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, restrictions generally lapse in full on the

first

anniversary of the grant date. 

The following table summarizes restri

cted stock activity during the

nine

months ended

September 30, 2017:

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2016		215,105		$	62.78
Granted		197,649			61.60
Restrictions lapsed		(55,205	)		63.62
Forfeited		(13,074	)		63.51
Restricted stock at September 30, 2017		344,475		$	61.94

As of

September

30,

2017,

there was

$18.7

million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of

3.8

years. 

Performance Stock

Performance Stock Units (

PSUs) are expressed in terms of a target number of PSUs, with anywhere between

0

percent and

150

percent of that target number capable of being earned and vesting at the end of a

three

-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. As of

September 30, 2017,

the Company is accruing stock-based compensation expense for the PSUs at

100

percent.

The following table summarizes performan

ce stock activity during the

nine

months ended

September 30, 2017:

			Weighted-
			Average
			Grant Date
	Performance		Fair Value
	Stock		Per Share
Performance stock at December 31, 2016		-	$	-
Granted		25,707		58.35
Restrictions lapsed		-		-
Forfeited		-		-
Performance stock at September 30, 2017		25,707	$	58.35

Employee Stock Purchase Plan

The following table presents the assumptions used to estimate the fair

value of the ESPP during the

nine

months ended

September 30, 2017

and

2016:

	Nine Months Ended September 30,
	2017				2016
Risk-free interest rate		0.59%	-	0.97%		0.39	-	0.56%
Expected life (months)			6.00				6.00
Expected volatility		34.51%	-	39.51%		29.41	-	49.13%
Expected dividend yield			0%				0%

XML

Note 9 - Accumulated Other Comprehensive Loss

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Disclosure of Reclassification Amount [Text Block]

Note

9

– Accumulated Other Comprehensive Loss

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive loss b

alances during the

three

and

nine

months ended

September 30, 2017

and

2016:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
Foreign currency translation adjustments
Balance at beginning of period	$	(7,404	)	$	(6,612	)	$	(10,753	)	$	(5,212	)
Other comprehensive income (loss) before reclassifications		1,655			(154	)		5,004			(1,554	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		1,655			(154	)		5,004			(1,554	)
Balance at end of period	$	(5,749	)	$	(6,766	)	$	(5,749	)	$	(6,766	)

XML

Note 10 - Income Taxes

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

10

– Income Taxes

The

Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the

three

months ended

September 30, 2017

and

2016,

the Company recorded an income tax provision of

$6.4

million and

$5.6

million, respectively. For the

nine

months ended

September 30, 2017

and

2016,

the Company recorded an income tax provision of

$17.7

million and

$15.9

million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the

three

months ended

September 30, 2017

was

32.8

percent compared to

31.8

percent in the same period of the prior year. The effective income tax rate for the

nine

months ended

September 30, 2017

was

32.1

percent compared to

32.4

percent in the same period of the prior year.

The effective income ta

x

rate for the

three

and

nine

months ended

September 30, 2017

differs from the U.S. federal statutory rate of

35.0

percent due primarily to the mix of income earned in domestic and foreign tax jurisdictions and deductions for which the Company qualifies.

The Company had reserves against unrecog

nized tax benefits totaling

$4.0

million and

$3.8

million at

September 30, 2017

and

December 31, 2016,

respectively, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

XML

Note 11 - Segment Reporting

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

Note

11

– Segment Reporting

The Company

’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does

not

allocate directly to its operating segments.

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are

not

allocated to business segments.

Revenue and income from operations by reportable segment

 for the

three

and

nine

months ended

September 30, 2017

and

2016

were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Revenue:
United States	$	67,490	$	59,574	$	191,019	$	169,364
Europe		18,094		15,610		51,224		48,518
Japan		2,521		2,989		8,069		7,820
Total revenue	$	88,105	$	78,173	$	250,312	$	225,702

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Income from Operations:
United States	$	26,903		$	23,910		$	76,973		$	67,542
Europe		3,251			3,554			9,626			9,369
Corporate Unallocated and Japan		(10,787	)		(10,522	)		(33,148	)		(29,975	)
Total income from operations	$	19,367		$	16,942		$	53,451		$	46,936

Total long-lived assets

 at

September 30, 2017

and

December 31, 2016 

were as follows:

	September 30,		December 31,
(in thousands)	2017		2016
Total long-lived assets:
United States	$	113,784	$	108,650
Europe		32,115		23,199
Japan		7,613		7,625
Total assets	$	153,512	$	139,474

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Proto Labs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form

10

-Q and Article

 

10

of Regulation S-

X.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are

not

necessarily indicative of results that

may

be expected for the fiscal year as a whole.

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company

’s Annual Report on Form

10

-K for the year ended

December 

31,

2016

as filed with the Securities and Exchange Commission (SEC) on

February 

22,

2017.

The accompanying Consolidated Balance Sheet as of

December

 

31,

2016

was derived from the audited Consolidated Financial Statements but does

not

include all disclosures required by U.S. GAAP for a full set of financial statements. This Form

10

-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form

10

-K filed on

February 

22,

2017

as referenced above.

New Accounting Pronouncements, Policy [Policy Text Block]

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

nine

months ended

September 30, 2017,

the amount recorded in the provision for income taxes was

$0.1

million and

$0.3

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

$2.0

million for the

nine

months ended

September 30, 2016.

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. The Company expects to adopt the new revenue standard using the modified re

trospective approach. As of

September 30, 2017,

the Company has identified revenue streams and has completed its review of individual contracts. Based on this review, the Company expects to recognize revenue over time for the majority of contracts. While the Company is still evaluating the impact of the amended guidance, preliminarily, it does

not

anticipate a material impact on its financial statements including the potential impact of additional disclosure requirements. The Company expects to quantify and disclose the expected impact, if any, of adopting this amended guidance in its Annual Report on Form

10

-K for the year ending

December 31, 2017.

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 because the Company owns a majority of its buildings and significant assets it does

not

expect the impact to be material. 

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.

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 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

May 2017,

the FASB issued ASU

2017

-

09,

Compensation – Stock Compensation

, which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. 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.

XML

Note 3 - Net Income Per Common Share (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share and per share amounts)	2017		2016		2017		2016
Net income	$	13,220	$	11,982	$	37,506	$	33,335
Basic - weighted-average shares outstanding:		26,617,349		26,416,041		26,600,174		26,334,738
Effect of dilutive securities:
Employee stock options and other		184,685		193,837		116,379		204,340
Diluted - weighted-average shares outstanding:		26,802,034		26,609,878		26,716,553		26,539,078
Net income per share:
Basic	$	0.50	$	0.45	$	1.41	$	1.27
Diluted	$	0.49	$	0.45	$	1.40	$	1.26

XML

Note 4 - Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	September 30, 2017							December 31, 2016							Useful		Weighted Average Useful Life
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Life (in years)		Remaining (in years)
Intangible Assets with finite lives:
Marketing assets	$	930	$	(318	)	$	612	$	930	$	(248	)	$	682		10.0		6.6
Non-compete agreement		190		(190	)		-		190		(190	)		-		2.0		-
Trade secrets		250		(171	)		79		250		(133	)		117		5.0		1.6
Internally developed software		680		(680	)		-		680		(604	)		76		3.0		-
Customer relationships		2,530		(960	)		1,570		2,530		(750	)		1,780		9.0		5.6
Total intangible assets	$	4,580	$	(2,319	)	$	2,261	$	4,580	$	(1,925	)	$	2,655

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

(in thousands)	Estimated Amortization Expense
Remaining 2017	$	106
2018		424
2019		391
2020		374
2021		374
Thereafter		592
Total estimated amortization expense	$	2,261

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Note 5 - Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

	September 30, 2017						December 31, 2016
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents
Money market mutual fund	$	26,187	$	-	$	-	$	11,771	$	-	$	-
Total	$	26,187	$	-	$	-	$	11,771	$	-	$	-

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Note 6 - Marketable Securities (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Held-to-maturity Securities [Table Text Block]

	September 30, 2017
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	35,388	$	23	$	(43	)	$	35,368
Corporate debt securities		29,841		3		(68	)		29,776
U.S. government agency securities		37,866		-		(125	)		37,741
Certificates of deposit/time deposits		5,456		1		(25	)		5,432
Total marketable securities	$	108,552	$	27	$	(261	)	$	108,318

	December 31, 2016
(in thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. municipal securities	$	46,578	$	1	$	(187	)	$	46,392
Corporate debt securities		38,490		2		(147	)		38,345
U.S. government agency securities		31,706		1		(141	)		31,566
Certificates of deposit/time deposits		7,182		12		(22	)		7,172
Total marketable securities	$	123,956	$	16	$	(497	)	$	123,475

Investments Classified by Contractual Maturity Date [Table Text Block]

	September 30,
(in thousands)	2017
Due in one year or less	$	53,201
Due after one year through five years		55,351
Total marketable securities	$	108,552

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Note 7 - Inventory (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	September 30,			December 31,
(in thousands)	2017			2016
Raw materials	$	8,653		$	8,057
Work in process		1,531			1,531
Total inventory		10,184			9,588
Allowance for obsolescence		(395	)		(278	)
Inventory, net of allowance	$	9,789		$	9,310

XML

Note 8 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Share-based Compensation, Stock Options, Activity [Table Text Block]

				Weighted-
				Average
	Stock Options			Exercise Price
Options outstanding at December 31, 2016		569,639		$	45.00
Granted		43,095			58.35
Exercised		(136,483	)		34.82
Forfeited		(16,943	)		58.17
Options outstanding at September 30, 2017		459,308		$	48.79
Exercisable at September 30, 2017		270,705		$	40.54

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Nine Months Ended September 30,
	2017		2016
Risk-free interest rate		2.24%		1.53	-	1.68%
Expected life (years)		6.50			6.50
Expected volatility		44.68%		44.38	-	45.93%
Expected dividend yield		0%			0%

Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity [Table Text Block]

				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock			Per Share
Restricted stock at December 31, 2016		215,105		$	62.78
Granted		197,649			61.60
Restrictions lapsed		(55,205	)		63.62
Forfeited		(13,074	)		63.51
Restricted stock at September 30, 2017		344,475		$	61.94

Schedule of Nonvested Performance-based Units Activity [Table Text Block]

			Weighted-
			Average
			Grant Date
	Performance		Fair Value
	Stock		Per Share
Performance stock at December 31, 2016		-	$	-
Granted		25,707		58.35
Restrictions lapsed		-		-
Forfeited		-		-
Performance stock at September 30, 2017		25,707	$	58.35

Schedule of Share-based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions [Table Text Block]

	Nine Months Ended September 30,
	2017				2016
Risk-free interest rate		0.59%	-	0.97%		0.39	-	0.56%
Expected life (months)			6.00				6.00
Expected volatility		34.51%	-	39.51%		29.41	-	49.13%
Expected dividend yield			0%				0%

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Note 9 - Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Comprehensive Income (Loss) [Table Text Block]

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
Foreign currency translation adjustments
Balance at beginning of period	$	(7,404	)	$	(6,612	)	$	(10,753	)	$	(5,212	)
Other comprehensive income (loss) before reclassifications		1,655			(154	)		5,004			(1,554	)
Amounts reclassified from accumulated other comprehensive loss		-			-			-			-
Net current-period other comprehensive income (loss)		1,655			(154	)		5,004			(1,554	)
Balance at end of period	$	(5,749	)	$	(6,766	)	$	(5,749	)	$	(6,766	)

XML

Note 11 - Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Revenue:
United States	$	67,490	$	59,574	$	191,019	$	169,364
Europe		18,094		15,610		51,224		48,518
Japan		2,521		2,989		8,069		7,820
Total revenue	$	88,105	$	78,173	$	250,312	$	225,702

Income from Operations by Geographic Area [Table Text Block]

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Income from Operations:
United States	$	26,903		$	23,910		$	76,973		$	67,542
Europe		3,251			3,554			9,626			9,369
Corporate Unallocated and Japan		(10,787	)		(10,522	)		(33,148	)		(29,975	)
Total income from operations	$	19,367		$	16,942		$	53,451		$	46,936

Long-lived Assets by Geographic Areas [Table Text Block]

	September 30,		December 31,
(in thousands)	2017		2016
Total long-lived assets:
United States	$	113,784	$	108,650
Europe		32,115		23,199
Japan		7,613		7,625
Total assets	$	153,512	$	139,474

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Note 2 - Recent Accounting Pronouncements (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Tax Expense (Benefit)	$ 6,438	$ 5,585	$ 17,724	$ 15,943
Accounting Standards Update 2016-09 [Member]
Income Tax Expense (Benefit)	$ (100)		(300)
Reclassification of Cash Flows Related to Excess Tax Benefits from Financing Activities to Operating Activity [Member] | Nine Months Ended September 30, 2016 [Member]
Prior Period Reclassification Adjustment			$ 2,000

XML

Note 3 - Net Income Per Common Share - Computation of Basic and Diluted Net Income Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Net income	$ 13,220	$ 11,982	$ 37,506	$ 33,335
Basic - weighted-average shares outstanding: (in shares)	26,617,349	26,416,041	26,600,174	26,334,738
Employee stock options and other (in shares)	184,685	193,837	116,379	204,340
Diluted - weighted-average shares outstanding: (in shares)	26,802,034	26,609,878	26,716,553	26,539,078
Basic (in dollars per share)	$ 0.50	$ 0.45	$ 1.41	$ 1.27
Diluted (in dollars per share)	$ 0.49	$ 0.45	$ 1.40	$ 1.26

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Note 4 - Goodwill and Other Intangible Assets (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Goodwill, Period Increase (Decrease)	$ 0		$ 0
Amortization of Intangible Assets	$ 100	$ 200	$ 400	$ 500

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Note 4 - Goodwill and Other Intangible Assets - Intangible Assets Other Than Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Intangible Assets with finite lives:
Gross	$ 4,580	$ 4,580
Accumulated amortization	(2,319)	(1,925)
Net	2,261	2,655
Marketing-Related Intangible Assets [Member]
Intangible Assets with finite lives:
Gross	930	930
Accumulated amortization	(318)	(248)
Net	$ 612	682
Useful life (Year)	10 years
Weighted average useful life remaining (Year)	6 years 219 days
Noncompete Agreements [Member]
Intangible Assets with finite lives:
Gross	$ 190	190
Accumulated amortization	(190)	(190)
Net
Useful life (Year)	2 years
Weighted average useful life remaining (Year)
Trade Secrets [Member]
Intangible Assets with finite lives:
Gross	$ 250	250
Accumulated amortization	(171)	(133)
Net	$ 79	117
Useful life (Year)	5 years
Weighted average useful life remaining (Year)	1 year 219 days
Computer Software, Intangible Asset [Member]
Intangible Assets with finite lives:
Gross	$ 680	680
Accumulated amortization	(680)	(604)
Net		76
Useful life (Year)	3 years
Weighted average useful life remaining (Year)
Customer Relationships [Member]
Intangible Assets with finite lives:
Gross	$ 2,530	2,530
Accumulated amortization	(960)	(750)
Net	$ 1,570	$ 1,780
Useful life (Year)	9 years
Weighted average useful life remaining (Year)	5 years 219 days

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Note 4 - Goodwill and Other Intangible Assets - Estimated Aggregated Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Remaining 2017	$ 106
2018	424
2019	391
2020	374
2021	374
Thereafter	592
Total estimated amortization expense	$ 2,261	$ 2,655

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Note 5 - Fair Value Measurements - Fair Value of Financial Assets Measured on a Recurring Basis (Details) - Fair Value, Measurements, Recurring [Member] - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Inputs, Level 1 [Member]
Cash and cash equivalents:
Money market mutual fund	$ 26,187	$ 11,771
Total	26,187	11,771
Fair Value, Inputs, Level 2 [Member]
Cash and cash equivalents:
Money market mutual fund
Total
Fair Value, Inputs, Level 3 [Member]
Cash and cash equivalents:
Money market mutual fund
Total

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Note 6 - Marketable Securities - Short-term and Long-term Marketable Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Amortized Cost	$ 108,552	$ 123,956
Unrealized Gains	27	16
Unrealized Losses	(261)	(497)
Fair Value	108,318	123,475
Bank Time Deposits [Member]
Amortized Cost	5,456	7,182
Unrealized Gains	1	12
Unrealized Losses	(25)	(22)
Fair Value	5,432	7,172
US States and Political Subdivisions Debt Securities [Member]
Amortized Cost	35,388	46,578
Unrealized Gains	23	1
Unrealized Losses	(43)	(187)
Fair Value	35,368	46,392
Corporate Debt Securities [Member]
Amortized Cost	29,841	38,490
Unrealized Gains	3	2
Unrealized Losses	(68)	(147)
Fair Value	29,776	38,345
US Government Agencies Debt Securities [Member]
Amortized Cost	37,866	31,706
Unrealized Gains		1
Unrealized Losses	(125)	(141)
Fair Value	$ 37,741	$ 31,566

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Note 6 - Marketable Securities - Balance of Held-to-maturity Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Due in one year or less	$ 53,201
Due after one year through five years	55,351
Total marketable securities	$ 108,552	$ 123,956

XML

Note 7 - Inventory - Inventory (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Raw materials	$ 8,653	$ 8,057
Work in process	1,531	1,531
Total inventory	10,184	9,588
Allowance for obsolescence	(395)	(278)
Inventory, net of allowance	$ 9,789	$ 9,310

XML

Note 8 - Stock-based Compensation (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
Share-based Compensation Arrangement by Share-based Payment Award, Discount from Market Price, Offering Date			15.00%
Share-based Compensation Arrangement by Share-based Payment Award, Award Requisite Service Period			180 days
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent			85.00%
Share-based Compensation	$ 2,200	$ 1,700	$ 6,159	$ 5,260
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			5 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 27.57
Percentage of Accruing Stock-based Compensation Expense for PSUs	100.00%		100.00%
Employee Stock Option [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 4,300		$ 4,300
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			2 years 292 days
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			5 years
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 18,700		$ 18,700
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			3 years 292 days
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years
Percentage of Target Number Capable of Being Earned and Vesting, Lower Limit	0.00%		0.00%
Percentage of Target Number Capable of Being Earned and Vesting, Upper Limit	150.00%		150.00%

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Note 8 - Stock-based Compensation - Stock Option Activity (Details)	9 Months Ended
	Sep. 30, 2017 $ / shares shares
Options outstanding (in shares) | shares	569,639
Options outstanding, weighted- average exercise price (in dollars per share) | $ / shares	$ 45
Granted (in shares) | shares	43,095
Granted, weighted- average exercise price (in dollars per share) | $ / shares	$ 58.35
Exercised (in shares) | shares	(136,483)
Exercised, weighted- average exercise price (in dollars per share) | $ / shares	$ 34.82
Forfeited (in shares) | shares	(16,943)
Forfeited, weighted- average exercise price (in dollars per share) | $ / shares	$ 58.17
Options outstanding (in shares) | shares	459,308
Options outstanding, weighted- average exercise price (in dollars per share) | $ / shares	$ 48.79
Options exercisable (in shares) | shares	270,705
Options exercisable, weighted- average exercise price (in dollars per share) | $ / shares	$ 40.54

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Note 8 - Stock-based Compensation - Assumptions Used in the Black-scholes Option Pricing Model (Details) - Employee Stock Option [Member]	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Risk-free interest rate	2.24%
Risk-free interest rate, minimum		1.53%
Risk-free interest rate, maximum		1.68%
Expected life (Year)	6 years 182 days	6 years 182 days
Expected volatility	44.68%
Expected volatility, minimum		44.38%
Expected volatility, maximum		45.93%
Expected dividend yield	0.00%	0.00%

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Note 8 - Stock-based Compensation - Non-vested Restricted Stock Options (Details) - Restricted Stock [Member]	9 Months Ended
	Sep. 30, 2017 $ / shares shares
Restricted stock (in shares) | shares	215,105
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 62.78
Granted (in shares) | shares	197,649
Granted, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 61.60
Restrictions lapsed (in shares) | shares	(55,205)
Restrictions lapsed, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 63.62
Forfeited (in shares) | shares	(13,074)
Forfeited, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 63.51
Restricted stock (in shares) | shares	344,475
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 61.94

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Note 8 - Stock-based Compensation - Performance Stock (Details) - Performance Shares [Member]	9 Months Ended
	Sep. 30, 2017 $ / shares shares
Restricted stock (in shares) | shares
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares
Granted (in shares) | shares	25,707
Granted, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 58.35
Restrictions lapsed (in shares) | shares
Restrictions lapsed, weighted-average grant date fair value (in dollars per share) | $ / shares
Forfeited (in shares) | shares
Forfeited, weighted-average grant date fair value (in dollars per share) | $ / shares
Restricted stock (in shares) | shares	25,707
Restricted stock, weighted-average grant date fair value (in dollars per share) | $ / shares	$ 58.35

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Note 8 - Stock-based Compensation - Assumptions Used to Estimate the Fair Value of the ESPP (Details) - ESPP [Member]	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Risk-free interest rate, minimum	0.59%	0.39%
Risk-free interest rate, maximum	0.97%	0.56%
Expected life (Year)	180 days	180 days
Expected volatility, minimum	34.51%	29.41%
Expected volatility, maximum	39.51%	49.13%
Expected dividend yield	0.00%	0.00%

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Note 9 - Accumulated Other Comprehensive Loss - Other Comprehensive Loss (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Balance beginning of period			$ 379,833
Balance at end of period	$ 429,839		429,839
Accumulated Foreign Currency Adjustment Attributable to Parent [Member]
Balance beginning of period	(7,404)	$ (6,612)	(10,753)	$ (5,212)
Other comprehensive income (loss) before reclassifications	1,655	(154)	5,004	(1,554)
Amounts reclassified from accumulated other comprehensive loss	0	0	0	0
Net current-period other comprehensive income (loss)	1,655	(154)	5,004	(1,554)
Balance at end of period	$ (5,749)	$ (6,766)	$ (5,749)	$ (6,766)

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Note 10 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Income Tax Expense (Benefit)	$ 6,438	$ 5,585	$ 17,724	$ 15,943
Effective Income Tax Rate Reconciliation, Percent	32.80%	31.80%	32.10%	32.40%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	35.00%		35.00%
Unrecognized Tax Benefits	$ 4,000		$ 4,000		$ 3,800

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Note 11 - Segment Reporting - Revenue to External Customers and Long-lived Assets by Geography (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenues	$ 88,105	$ 78,173	$ 250,312	$ 225,702
Operating Segments [Member] | United States Segment [Member]
Revenues	67,490	59,574	191,019	169,364
Operating Segments [Member] | Europe Segment [Member]
Revenues	18,094	15,610	51,224	48,518
Operating Segments [Member] | Japan Segment [Member]
Revenues	$ 2,521	$ 2,989	$ 8,069	$ 7,820

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Note 11 - Segment Reporting - Income From Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income from operations	$ 19,367	$ 16,942	$ 53,451	$ 46,936
Operating Segments [Member] | United States Segment [Member]
Income from operations	26,903	23,910	76,973	67,542
Operating Segments [Member] | Europe Segment [Member]
Income from operations	3,251	3,554	9,626	9,369
Corporate and Reconciling Items [Member] | Corporate Unallocated and Japan Segment[Member]
Income from operations	$ (10,787)	$ (10,522)	$ (33,148)	$ (29,975)

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Note 11 - Segment Reporting - Long-lived Assets by Geographic Region (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Property and equipment, net	$ 153,512	$ 139,474
Operating Segments [Member] | United States Segment [Member]
Property and equipment, net	113,784	108,650
Operating Segments [Member] | Europe Segment [Member]
Property and equipment, net	32,115	23,199
Operating Segments [Member] | Japan Segment [Member]
Property and equipment, net	$ 7,613	$ 7,625