ITEM 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(In thousands, except share
and per share data)
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
808,111
|
|
|
$
|
623,855
|
|
Short-term investments
|
122,304
|
|
|
206,779
|
|
Accounts receivable, net
|
237,332
|
|
|
155,901
|
|
Inventories
|
260,661
|
|
|
239,010
|
|
Prepaid income taxes
|
37,912
|
|
|
34,128
|
|
Prepaid expenses and other current assets
|
44,454
|
|
|
41,289
|
|
Total current assets
|
1,510,774
|
|
|
1,300,962
|
|
DEFERRED INCOME TAXES, NET
|
47,843
|
|
|
42,442
|
|
GOODWILL
|
28,728
|
|
|
19,828
|
|
INTANGIBLE ASSETS, NET
|
32,294
|
|
|
28,789
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
389,853
|
|
|
379,375
|
|
OTHER ASSETS
|
21,050
|
|
|
18,603
|
|
TOTAL
|
$
|
2,030,542
|
|
|
$
|
1,789,999
|
|
LIABILITIES AND EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
Current portion of long-term debt
|
$
|
1,188
|
|
|
$
|
3,188
|
|
Accounts payable
|
28,996
|
|
|
28,048
|
|
Accrued expenses and other liabilities
|
116,499
|
|
|
102,485
|
|
Income taxes payable
|
10,102
|
|
|
24,554
|
|
Total current liabilities
|
156,785
|
|
|
158,275
|
|
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES
|
48,025
|
|
|
36,365
|
|
LONG-TERM DEBT, NET OF CURRENT PORTION
|
21,375
|
|
|
37,635
|
|
Total liabilities
|
226,185
|
|
|
232,275
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 12)
|
|
|
|
IPG PHOTONICS CORPORATION EQUITY:
|
|
|
|
Common stock, $0.0001 par value, 175,000,000 shares authorized; 53,793,622 and 53,492,316 shares issued and outstanding, respectively, at June 30, 2017; 53,354,579 and 53,251,805 shares issued and outstanding, respectively, at December 31, 2016
|
5
|
|
|
5
|
|
Treasury stock, at cost (301,306 and 102,774 shares held)
|
(33,058
|
)
|
|
(8,946
|
)
|
Additional paid-in capital
|
681,263
|
|
|
650,974
|
|
Retained earnings
|
1,275,314
|
|
|
1,094,108
|
|
Accumulated other comprehensive loss
|
(119,167
|
)
|
|
(178,583
|
)
|
Total IPG Photonics Corporation equity
|
1,804,357
|
|
|
1,557,558
|
|
NONCONTROLLING INTERESTS
|
—
|
|
|
166
|
|
Total equity
|
1,804,357
|
|
|
1,557,724
|
|
TOTAL
|
$
|
2,030,542
|
|
|
$
|
1,789,999
|
|
See notes to consolidated financial statements.
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
NET SALES
|
$
|
369,373
|
|
|
$
|
252,787
|
|
|
$
|
655,219
|
|
|
$
|
460,035
|
|
COST OF SALES
|
163,077
|
|
|
115,084
|
|
|
291,656
|
|
|
207,921
|
|
GROSS PROFIT
|
206,296
|
|
|
137,703
|
|
|
363,563
|
|
|
252,114
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Sales and marketing
|
12,136
|
|
|
9,689
|
|
|
22,963
|
|
|
17,723
|
|
Research and development
|
25,960
|
|
|
18,412
|
|
|
48,740
|
|
|
35,901
|
|
General and administrative
|
19,875
|
|
|
16,151
|
|
|
37,601
|
|
|
30,052
|
|
Loss (gain) on foreign exchange
|
7,183
|
|
|
(1,556
|
)
|
|
11,636
|
|
|
3,411
|
|
Total operating expenses
|
65,154
|
|
|
42,696
|
|
|
120,940
|
|
|
87,087
|
|
OPERATING INCOME
|
141,142
|
|
|
95,007
|
|
|
242,623
|
|
|
165,027
|
|
OTHER INCOME (EXPENSE), Net:
|
|
|
|
|
|
|
|
Interest income, net
|
468
|
|
|
270
|
|
|
776
|
|
|
462
|
|
Other income (expense), net
|
23
|
|
|
141
|
|
|
(506
|
)
|
|
148
|
|
Total other income (expense)
|
491
|
|
|
411
|
|
|
270
|
|
|
610
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
141,633
|
|
|
95,418
|
|
|
242,893
|
|
|
165,637
|
|
PROVISION FOR INCOME TAXES
|
(37,530
|
)
|
|
(28,387
|
)
|
|
(63,858
|
)
|
|
(49,277
|
)
|
NET INCOME
|
104,103
|
|
|
67,031
|
|
|
179,035
|
|
|
116,360
|
|
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
(13
|
)
|
|
(27
|
)
|
|
(26
|
)
|
|
(25
|
)
|
NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION
|
$
|
104,116
|
|
|
$
|
67,058
|
|
|
$
|
179,061
|
|
|
$
|
116,385
|
|
NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.95
|
|
|
$
|
1.26
|
|
|
$
|
3.35
|
|
|
$
|
2.20
|
|
Diluted
|
$
|
1.91
|
|
|
$
|
1.25
|
|
|
$
|
3.29
|
|
|
$
|
2.17
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
53,380
|
|
|
53,065
|
|
|
53,403
|
|
|
52,981
|
|
Diluted
|
54,471
|
|
|
53,788
|
|
|
54,450
|
|
|
53,705
|
|
See notes to consolidated financial statements.
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Net income
|
$
|
104,103
|
|
|
$
|
67,031
|
|
|
$
|
179,035
|
|
|
$
|
116,360
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
Translation adjustments
|
32,522
|
|
|
(3,615
|
)
|
|
59,221
|
|
|
24,880
|
|
Unrealized (loss) gain on derivatives
|
(30
|
)
|
|
151
|
|
|
(46
|
)
|
|
151
|
|
Loss on available-for-sale investments, net of tax reclassified to net income
|
—
|
|
|
—
|
|
|
298
|
|
|
—
|
|
Total other comprehensive loss
|
32,492
|
|
|
(3,464
|
)
|
|
59,473
|
|
|
25,031
|
|
Comprehensive income
|
136,595
|
|
|
63,567
|
|
|
238,508
|
|
|
141,391
|
|
Comprehensive loss attributable to noncontrolling interest
|
(37
|
)
|
|
(19
|
)
|
|
(26
|
)
|
|
(13
|
)
|
Comprehensive income attributable to IPG Photonics Corporation
|
$
|
136,632
|
|
|
$
|
63,586
|
|
|
$
|
238,534
|
|
|
$
|
141,404
|
|
See notes to consolidated financial statements.
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(In thousands)
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net income
|
$
|
179,035
|
|
|
$
|
116,360
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
29,714
|
|
|
23,653
|
|
Deferred income taxes
|
4,533
|
|
|
(9,268
|
)
|
Stock-based compensation
|
11,059
|
|
|
10,436
|
|
Unrealized (gains) losses on foreign currency transactions
|
5,538
|
|
|
2,240
|
|
Other
|
688
|
|
|
294
|
|
Provisions for inventory, warranty & bad debt
|
22,754
|
|
|
20,459
|
|
Changes in assets and liabilities that (used) provided cash:
|
|
|
|
Accounts receivable
|
(73,634
|
)
|
|
2,885
|
|
Inventories
|
(25,820
|
)
|
|
(34,668
|
)
|
Prepaid expenses and other current assets
|
(2,768
|
)
|
|
(652
|
)
|
Accounts payable
|
1,914
|
|
|
(8,441
|
)
|
Accrued expenses and other liabilities
|
2,102
|
|
|
(4,341
|
)
|
Income and other taxes payable
|
(22,013
|
)
|
|
(10,653
|
)
|
Net cash provided by operating activities
|
133,102
|
|
|
108,304
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases of and deposits on property, plant and equipment
|
(43,632
|
)
|
|
(70,863
|
)
|
Proceeds from sales of property, plant and equipment
|
15,284
|
|
|
184
|
|
Purchases of short-term investments
|
(71,244
|
)
|
|
(62,211
|
)
|
Proceeds from short-term investments
|
156,171
|
|
|
41,720
|
|
Acquisition of businesses, net of cash acquired
|
(11,307
|
)
|
|
(46,527
|
)
|
Other
|
(568
|
)
|
|
72
|
|
Net cash provided by (used in) investing activities
|
44,704
|
|
|
(137,625
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from line-of-credit facilities
|
6,761
|
|
|
4,002
|
|
Payments on line-of-credit facilities
|
(6,761
|
)
|
|
(4,002
|
)
|
Purchase of noncontrolling interests
|
(197
|
)
|
|
(950
|
)
|
Proceeds on long-term borrowings
|
—
|
|
|
23,750
|
|
Principal payments on long-term borrowings
|
(18,260
|
)
|
|
(1,000
|
)
|
Proceeds from issuance of common stock under employee stock option and purchase plans less payments for taxes related to net share settlement of equity awards
|
17,152
|
|
|
8,579
|
|
Purchase of treasury stock, at cost
|
(24,112
|
)
|
|
—
|
|
Net cash (used in) provided by financing activities
|
(25,417
|
)
|
|
30,379
|
|
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
31,867
|
|
|
3,696
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
184,256
|
|
|
4,754
|
|
CASH AND CASH EQUIVALENTS — Beginning of period
|
623,855
|
|
|
582,532
|
|
CASH AND CASH EQUIVALENTS — End of period
|
$
|
808,111
|
|
|
$
|
587,286
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
Cash paid for interest
|
$
|
975
|
|
|
$
|
349
|
|
Cash paid for income taxes
|
$
|
80,956
|
|
|
$
|
66,478
|
|
Non-cash transactions:
|
|
|
|
Demonstration units transferred from inventory to other assets
|
$
|
1,845
|
|
|
$
|
1,746
|
|
Inventory transferred to machinery and equipment
|
$
|
1,531
|
|
|
$
|
1,129
|
|
(Reductions) additions to property, plant and equipment included in accounts payable
|
$
|
(1,892
|
)
|
|
$
|
806
|
|
See notes to consolidated financial statements.
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(In thousands, except share and per share data)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
COMMON STOCK
|
|
|
|
|
|
|
|
Balance, beginning of year
|
53,251,805
|
|
|
$
|
5
|
|
|
52,883,902
|
|
|
$
|
5
|
|
Exercise of stock options
|
419,161
|
|
|
—
|
|
|
244,895
|
|
|
—
|
|
Common stock issued under employee stock purchase plan
|
19,882
|
|
|
—
|
|
|
19,015
|
|
|
—
|
|
Purchased common stock
|
(198,532
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, end of period
|
53,492,316
|
|
|
5
|
|
|
53,147,812
|
|
|
5
|
|
TREASURY STOCK
|
|
|
|
|
|
|
|
Balance, beginning of year
|
(102,774
|
)
|
|
(8,946
|
)
|
|
—
|
|
|
—
|
|
Purchased treasury stock
|
(198,532
|
)
|
|
(24,112
|
)
|
|
—
|
|
|
—
|
|
Balance, end of period
|
(301,306
|
)
|
|
(33,058
|
)
|
|
—
|
|
|
—
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
650,974
|
|
|
|
|
607,649
|
|
Stock-based compensation
|
|
|
11,059
|
|
|
|
|
10,436
|
|
Proceeds from issuance of common stock under employee stock option plan less payments for taxes related to net share settlement of equity awards
|
|
|
15,483
|
|
|
|
|
10,316
|
|
Proceeds from issuance of common stock issued under employee stock purchase plan
|
|
|
1,669
|
|
|
|
|
1,293
|
|
Effect of adopted accounting standards
|
|
|
2,078
|
|
|
|
|
—
|
|
Balance, end of period
|
|
|
681,263
|
|
|
|
|
629,694
|
|
RETAINED EARNINGS
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,094,108
|
|
|
|
|
833,356
|
|
Net income attributable to IPG Photonics Corporation
|
|
|
179,061
|
|
|
|
|
116,385
|
|
Effect of adopted accounting standards
|
|
|
2,145
|
|
|
|
|
—
|
|
Balance, end of period
|
|
|
1,275,314
|
|
|
|
|
949,741
|
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(178,583
|
)
|
|
|
|
(181,482
|
)
|
Translation adjustments
|
|
|
59,164
|
|
|
|
|
24,880
|
|
Change in unrealized (loss) gain on derivatives, net of tax
|
|
|
(46
|
)
|
|
|
|
151
|
|
Unrealized loss on available-for-sale investments, net of tax
|
|
|
(240
|
)
|
|
|
|
—
|
|
Realized loss on available-for-sale investments, net of tax, reclassified to net income
|
|
|
538
|
|
|
|
|
—
|
|
Balance, end of period
|
|
|
(119,167
|
)
|
|
|
|
(156,451
|
)
|
TOTAL IPG PHOTONICS CORPORATION EQUITY
|
|
|
$
|
1,804,357
|
|
|
|
|
$
|
1,422,989
|
|
NONCONTROLLING INTERESTS ("NCI")
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
166
|
|
|
|
|
1,137
|
|
Purchase of NCI
|
|
|
(197
|
)
|
|
|
|
(950
|
)
|
Net loss attributable to NCI
|
|
|
(26
|
)
|
|
|
|
(25
|
)
|
Other comprehensive income attributable to NCI
|
|
|
57
|
|
|
|
|
12
|
|
Balance, end of period
|
|
|
—
|
|
|
|
|
174
|
|
TOTAL EQUITY
|
|
|
$
|
1,804,357
|
|
|
|
|
$
|
1,423,163
|
|
See notes to consolidated financial statements.
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared by IPG Photonics Corporation, or "IPG", "its" or the "Company". Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated financial statements include the Company's accounts and those of its subsidiaries. All intercompany balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
.
In the opinion of the Company's management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The results reported in these consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.
The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Pronouncement
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805)" ("ASU 2017-01"). ASU 2017-01 revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for public companies for annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. Early application generally is allowed for transactions that have not been reported in financial statements which have been issued or made available for issuance. The Company has elected to early adopt this standard, and it did not have a material effect on its consolidated financial statements upon adoption.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 amends ASC Topic 718 to better define what constitutes a modification of a share-based payment award by defining criteria that must be met for changes to a share-based payment award to not qualify as a modification. Changes to a share-based payment award must be accounted for as a modification under ASC Topic 718 unless all the newly defined criteria are met. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 was issued in conjunction with ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), to clarify guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new guidance clarifies what constitutes an "in substance nonfinancial asset" and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments should be applied at the same time as those in ASU 2014-09 with interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350)" ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. ASU 2017-04 is effective for public companies for annual reporting periods beginning after December 15, 2020, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date and require a disclosure as to the nature of and reason for the change in accounting principle upon transition. Early adoption is allowed for
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
all entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets other than Inventory" ("ASU 2016-16"). ASU 2016-16 eliminates the current exception that prohibits the recognition of current and deferred income tax consequences for intra-entity asset transfers (other than inventory) until the asset has been sold to an outside party. The amendments will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. Deferred tax assets should be assessed to determine if realizable. Disclosures will be required for the (i) reason for and notice of change, (ii) effect of change on income from continuing operations and (iii) cumulative effect of change on retained earnings. Public entities will apply these changes in annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. Early adoption is permitted. The Company is continuing to evaluate the standard but does not expect that it will have a material effect on its consolidated financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than twelve months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The Company is continuing to evaluate the standard but does not expect that it will have a material effect on its consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have but does not expect it to have a material effect on its consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date," which defers the effective date of ASU 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. In May 2016, the FASB also issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," to provide additional clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered "completed" for purposes of applying the transition guidance. The Company has completed an initial assessment of the new guidance and is in the process of completing documentation of this assessment. The Company does not expect the standard will have a material impact on the amount and timing of revenue recognized in the Company's consolidated financial statements. The Company has elected to use the modified retrospective application approach for transition to the new standard.
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
3. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Components and raw materials
|
$
|
116,399
|
|
|
$
|
93,284
|
|
Work-in-process
|
26,755
|
|
|
44,723
|
|
Finished components and devices
|
117,507
|
|
|
101,003
|
|
Total
|
$
|
260,661
|
|
|
$
|
239,010
|
|
The Company recorded inventory provisions totaling
$5,435
and
$5,772
for the
three months ended June 30, 2017
and
2016
, respectively, and
$9,406
and
$9,725
for the
six months ended June 30, 2017
and
2016
, respectively. These provisions relate to the recoverability of the value of inventories due to technological changes and excess quantities. These provisions are reported as a reduction to components and raw materials and finished components and devices.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Accrued compensation
|
$
|
43,352
|
|
|
$
|
43,761
|
|
Customer deposits and deferred revenue
|
44,705
|
|
|
34,571
|
|
Current portion of accrued warranty
|
18,411
|
|
|
15,711
|
|
Other
|
10,031
|
|
|
8,442
|
|
Total
|
$
|
116,499
|
|
|
$
|
102,485
|
|
5. FINANCING ARRANGEMENTS
The Company's borrowings under existing financing arrangements consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Term debt:
|
|
|
|
Long-term notes
|
$
|
22,563
|
|
|
$
|
40,823
|
|
Less: current portion
|
(1,188
|
)
|
|
(3,188
|
)
|
Total long-term debt
|
$
|
21,375
|
|
|
$
|
37,635
|
|
At
June 30, 2017
, the amount due on the Company's unsecured long-term note was
$22,563
of which
$1,188
is the current portion. The interest on this unsecured note is variable at
1.20%
above the LIBOR rate and is fixed using an interest rate swap at
2.85%
per annum. The unsecured note matures in May 2023, at which time the outstanding debt balance will be
$15,438
. The long-term note secured by the Company's corporate aircraft was repaid in the second quarter of 2017 when the Company sold the aircraft.
The Company also maintains U.S. and Euro lines-of-credit which are available to certain foreign subsidiaries and allow for borrowings in the local currencies of those subsidiaries. At
June 30, 2017
and
December 31, 2016
, there were
no
amounts drawn on the U.S. line-of-credit, and there were
$109
and
$2,828
, respectively, of guarantees issued against the facility which reduces the amount of the facility available to draw. At
June 30, 2017
and
December 31, 2016
, there were
no
amounts drawn on the Euro lines-of-credit, and there were
$11,112
and
$8,221
, respectively, of guarantees issued against those facilities which reduces the amount available to draw providing for total unused credit lines and overdraft facilities of
$75,332
at
June 30, 2017
.
Subsequent to June 30, 2017, the Company entered into a new Euro credit facility, which replaced an expiring credit facility and increased the available line-of-credit to Euro
50,000
from Euro
30,000
and closed on the purchase of a corporate aircraft for
$28,000
that replaced the previous aircraft sold during the second quarter of 2017. The Company financed the entire purchase with proceeds from borrowing on a new long-term note that is secured by the aircraft with a fixed interest rate of
2.75%
that matures in July 2022, at which time the outstanding debt balance will be
$15,375
.
6. NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE
The following table sets forth the computation of diluted net income attributable to IPG Photonics Corporation per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributable to IPG Photonics Corporation
|
$
|
104,116
|
|
|
$
|
67,058
|
|
|
$
|
179,061
|
|
|
$
|
116,385
|
|
Weighted average shares
|
53,380
|
|
|
53,065
|
|
|
53,403
|
|
|
52,981
|
|
Dilutive effect of common stock equivalents
|
1,091
|
|
|
723
|
|
|
1,047
|
|
|
724
|
|
Diluted weighted average common shares
|
54,471
|
|
|
53,788
|
|
|
54,450
|
|
|
53,705
|
|
Basic net income attributable to IPG Photonics Corporation per share
|
$
|
1.95
|
|
|
$
|
1.26
|
|
|
$
|
3.35
|
|
|
$
|
2.20
|
|
Diluted net income attributable to IPG Photonics Corporation per share
|
$
|
1.91
|
|
|
$
|
1.25
|
|
|
$
|
3.29
|
|
|
$
|
2.17
|
|
For the
three months ended June 30, 2017
and
2016
, respectively, the computation of diluted weighted average common shares excludes of
45,900
and
59,000
common stock equivalents which include
6,400
and
11,000
restricted stock units ("RSUs") and
200
and
0
performance stock units ("PSUs"), respectively. For the
six months ended June 30, 2017
and
2016
, it excludes
95,400
and
95,100
common stock equivalents which include
23,200
and
31,300
RSUs and
8,100
and
6,400
PSUs, respectively, because the effect of including them would be anti-dilutive.
Under ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), excess tax benefits and deficiencies as a result of stock option exercises and release of RSUs upon vesting are to be recognized as discrete items within income tax expense or benefit in the consolidated statements of comprehensive income in the reporting period in which they occur. The Company recognized excess tax benefits from stock award exercises and restricted stock unit vesting as a discrete tax benefit, which reduced the provision for income taxes for the
three months ended June 30, 2017
by
$3,394
and for the
six months ended June 30, 2017
by
$7,524
. The adoption of ASU 2016-09 also increased the calculation of fully diluted shares outstanding for the
three months ended June 30, 2017
, by
238,917
shares and for
six months ended June 30, 2017
, by
210,776
shares.
On July 28, 2016, the Company announced that its Board of Directors authorized a share repurchase program (the “Program”) to mitigate the dilutive impact of shares issued upon exercise or release under the Company's various employee and director equity compensation and employee stock purchase plans. Under the Program, the Company's management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees and directors under its various employee and director equity compensation and employee stock purchase plans from January 1, 2016 through December 31, 2017. The Program limits aggregate share repurchases to no more than
$100,000
over a period ending June 30, 2018.
For the
three months ended June 30, 2017
, the Company repurchased
90,832
shares of its common stock with an average price of
$127.41
per share in the open market. Also, for the
six months ended June 30, 2017
, the Company repurchased
198,532
shares of its common stock with an average price of
$121.45
per share in the open market. The impact on the reduction of weighted average shares for the
three months ended June 30, 2017
was
59,256
shares and for the
six months ended June 30, 2017
was
99,421
shares. As the Program was announced in July 2016, there were
no
repurchases made by the Company for the
three months ended June 30, 2016
or
six months ended June 30, 2016
.
7. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments
–
The Company's primary market exposures are to interest rates and foreign exchange rates. The Company uses certain derivative financial instruments to help manage these exposures. The Company executes these instruments with financial institutions it judges to be credit-worthy. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company has
no
derivatives that are not accounted for as a hedging instrument.
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
Cash flow hedges
–
The Company entered into a cash flow hedge which is an interest rate swap associated with a long-term note issued during the second quarter of 2016 that will terminate with the long-term note in May 2023. The fair value amounts in the consolidated balance sheet related to the interest rate swap were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts
1
|
|
Other Assets
|
|
Other Long-Term Liabilities
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
$
|
22,563
|
|
|
$
|
23,156
|
|
|
$
|
37
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
The derivative gains and losses in the consolidated statements of income related to the Company's interest rate swap contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Effective portion recognized in other comprehensive income, pretax:
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
(13
|
)
|
|
$
|
239
|
|
|
$
|
(40
|
)
|
|
$
|
239
|
|
Effective portion reclassified from other comprehensive income to interest expense, pretax:
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Ineffective portion recognized in income:
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8. FAIR VALUE MEASUREMENTS
The Company's financial instruments consist of cash equivalents, short-term investments, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, contingent purchase consideration and interest rate swaps.
The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The carrying amounts of cash equivalents, short-term investments, accounts receivable, accounts payable and drawings on revolving lines of credit are considered reasonable estimates of their fair market value due to their short maturities. At June 30, 2017, the Company's long-term notes consisted entirely of a variable rate note, accordingly, the book value of the long-term note is considered a reasonable estimate of its fair market value.
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
The following table presents information about the Company's assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
390,764
|
|
|
$
|
390,764
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments
|
122,179
|
|
|
122,179
|
|
|
—
|
|
|
—
|
|
Interest rate swap
|
37
|
|
|
—
|
|
|
37
|
|
|
—
|
|
Auction rate securities
|
1,148
|
|
|
—
|
|
|
—
|
|
|
1,148
|
|
Total assets
|
$
|
514,128
|
|
|
$
|
512,943
|
|
|
$
|
37
|
|
|
$
|
1,148
|
|
Liabilities
|
|
|
|
|
|
|
|
Long-term notes
|
$
|
22,563
|
|
|
$
|
—
|
|
|
$
|
22,563
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
22,563
|
|
|
$
|
—
|
|
|
$
|
22,563
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
179,699
|
|
|
$
|
179,699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments
|
206,616
|
|
|
206,616
|
|
|
—
|
|
|
—
|
|
Interest rate swap
|
77
|
|
|
—
|
|
|
77
|
|
|
—
|
|
Auction rate securities
|
1,144
|
|
|
—
|
|
|
—
|
|
|
1,144
|
|
Total assets
|
$
|
387,536
|
|
|
$
|
386,315
|
|
|
$
|
77
|
|
|
$
|
1,144
|
|
Liabilities
|
|
|
|
|
|
|
|
Long-term notes
|
$
|
41,351
|
|
|
$
|
—
|
|
|
$
|
41,351
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
41,351
|
|
|
$
|
—
|
|
|
$
|
41,351
|
|
|
$
|
—
|
|
Short-term investments consist of liquid investments including U.S. government and government agency notes, corporate notes, commercial paper and certificates of deposit with original maturities of greater than three months but less than one year and are recorded at amortized cost. The fair value of the short-term investments considered available-for-sale as of
December 31, 2016
was
$41,591
. This amount included an unrealized loss of
$432
. There were
no
short-term investments considered available-for-sale as of
June 30, 2017
. The fair value of the short-term investments considered held-to-maturity as of
June 30, 2017
and
December 31, 2016
was
$122,179
and
$165,025
, respectively, which represents an unrealized loss of
$125
and
$163
, respectively, as compared to the book value recorded on the Consolidated Balance Sheets for the same periods.
The fair value of the auction rate securities considered prices observed in inactive secondary markets for the securities held by the Company.
The fair value of accrued contingent purchase consideration incurred was determined using an income approach at the acquisition date and reporting date. That approach is based on significant inputs that are not observable in the market. Key assumptions include assessing the probability of meeting certain milestones required to earn the contingent purchase consideration.
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
The following table presents information about the Company's movement in Level 3 assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Auction Rate Securities
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
1,146
|
|
|
$
|
1,138
|
|
|
$
|
1,144
|
|
|
$
|
1,136
|
|
Change in fair value and accretion
|
2
|
|
|
2
|
|
|
4
|
|
|
4
|
|
Balance, end of period
|
$
|
1,148
|
|
|
$
|
1,140
|
|
|
$
|
1,148
|
|
|
$
|
1,140
|
|
Contingent Purchase Consideration
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Period transactions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in fair value and currency fluctuations
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Balance, end of period
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
9. GOODWILL AND INTANGIBLES
The following table sets forth the changes in the carrying amount of goodwill for the
six months ended June 30, 2017
:
|
|
|
|
|
|
Amounts
|
Balance at January 1
|
$
|
19,828
|
|
Total goodwill arising from acquisition
|
8,900
|
|
Balance at June 30
|
$
|
28,728
|
|
Intangible assets, subject to amortization, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Weighted-
Average Lives
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Weighted-
Average Lives
|
|
|
|
|
|
|
|
|
|
Patents
|
$
|
8,114
|
|
$
|
(5,103
|
)
|
$
|
3,011
|
|
7 Years
|
$
|
8,114
|
|
$
|
(4,926
|
)
|
$
|
3,188
|
|
7 Years
|
Customer relationships
|
13,958
|
|
(4,360
|
)
|
9,598
|
|
9 Years
|
12,727
|
|
(3,621
|
)
|
9,106
|
|
9 Years
|
Production know-how
|
6,743
|
|
(4,577
|
)
|
2,166
|
|
8 Years
|
6,618
|
|
(4,093
|
)
|
2,525
|
|
8 Years
|
Technology, trademark and tradename
|
22,623
|
|
(5,104
|
)
|
17,519
|
|
8 Years
|
17,910
|
|
(3,940
|
)
|
13,970
|
|
8 Years
|
|
$
|
51,438
|
|
$
|
(19,144
|
)
|
$
|
32,294
|
|
|
$
|
45,369
|
|
$
|
(16,580
|
)
|
$
|
28,789
|
|
|
During the second quarter of 2017, the Company acquired
100%
of the shares of OptiGrate Corporation ("OptiGrate"). OptiGrate is located in Oviedo, Florida. OptiGrate is a developer and manufacturer of volume Bragg gratings used in the production of lasers and laser diodes. The Company paid
$16,870
to acquire OptiGrate, which represents the fair value on that date. Of the purchase price,
$1,849
was held back in escrow for potential post-closing adjustments related to working capital and indemnities provided by the sellers. As a result of the acquisition, the Company recorded intangible assets of
$1,010
related to customer relationships and
$4,650
of technology, trademark and tradename. Additionally, the Company recorded
$8,900
of goodwill related to expected synergies from having in-house supply of these optical components. The goodwill arising from this acquisition will not be deductible for tax purposes.
The purchase price allocations included in the Company's financial statements are estimates and are not complete. They are preliminary fair value estimates as of
June 30, 2017
and may be subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. Any subsequent adjustments to
these fair value estimates occurring during the measurement period will result in an adjustment to goodwill or income, as applicable.
Subsequent to June 30, 2017, the Company closed the previously announced acquisition of
100%
of the shares of Innovative Laser Technologies, LLC ("ILT") for
$40,181
in cash, subject to working capital adjustments. ILT is a Minneapolis,
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
Minnesota based company which produces high precision laser-based systems for the medical device industry and other end user markets.
Amortization expense for the
three months ended June 30, 2017
and
2016
was
$1,168
and
$901
, respectively. Amortization expense for the
six months ended June 30, 2017
and
2016
was
$2,233
and
$1,444
, respectively. The estimated future amortization expense for intangibles for the remainder of
2017
and subsequent years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
$2,633
|
|
$5,201
|
|
$4,652
|
|
$4,141
|
|
$4,102
|
|
$11,565
|
|
$32,294
|
10. PRODUCT WARRANTIES
The Company typically provides
one
to
three
-year parts and service warranties on lasers and amplifiers. Most of the Company's sales offices provide support to customers in their respective geographic areas. Warranty reserves have generally been sufficient to cover product warranty repair and replacement costs.
The following table summarizes product warranty accrual activity recorded during the
six months ended June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
33,978
|
|
|
$
|
28,210
|
|
Provision for warranty accrual
|
12,626
|
|
|
10,344
|
|
Warranty claims
|
(7,476
|
)
|
|
(8,040
|
)
|
Foreign currency translation
|
1,687
|
|
|
442
|
|
Balance at June 30
|
$
|
40,815
|
|
|
$
|
30,956
|
|
Accrued warranty reported in the accompanying consolidated financial statements as of
June 30, 2017
and
December 31, 2016
consisted of
$18,411
and
$15,711
in accrued expenses and other liabilities and
$22,404
and
$18,267
in other long-term liabilities, respectively.
11. INCOME TAXES
A reconciliation of the total amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
6,403
|
|
|
$
|
7,579
|
|
Change in prior period positions
|
(2,240
|
)
|
|
—
|
|
Change for tax positions in current period
|
—
|
|
|
—
|
|
Balance at June 30
|
$
|
4,163
|
|
|
$
|
7,579
|
|
Substantially all of the liability for uncertain tax benefits related to various federal, state and foreign income tax matters, would benefit the Company's effective tax rate, if recognized.
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business.
These proceedings may include allegations of infringement of intellectual property, commercial disputes and employment
matters. As of
June 30, 2017
and through the filing date of these Financial Statements, the Company has
no
legal proceedings ongoing that management estimates could have a material effect on the Company's Consolidated Financial Statements.
13. LONG-LIVED ASSETS
Long-lived assets, which consist primarily of property, plant and equipment, are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In cases in which undiscounted expected future cash flows are less than the carrying value, an impairment loss is recorded equal to the amount by which the carrying value exceeds the fair value of assets. In the fourth quarter of 2016, the Company began assessing the possible sale of its corporate aircraft included within Property, Plant and Equipment, net in its Consolidated Balance Sheets. As a result of this assessment and certain market indications of the aircraft's value if sold, the Company prepared an updated
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
impairment analysis of the carrying value of the aircraft as of March 31, 2017. The impairment analysis was probability weighted considering market data available, future cash flows and whether or not the Company would sell the aircraft. Based on that analysis the Company recorded a
$162
impairment charge included in general and administrative expense in its Consolidated Statements of Income for the
six months ended June 30, 2017
. There were
no
impairment losses recorded by the Company for the
six months ended June 30, 2016
. The corporate aircraft was sold during the
three months ended June 30, 2017
.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."
Overview
We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers, diode lasers, laser systems and optical accessories that are used for diverse applications, primarily in materials processing. We sell our products globally to original equipment manufacturers ("OEMs"), system integrators and end users. We market our products internationally primarily through our direct sales force.
We are vertically integrated such that we design and manufacture most of the key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. We also manufacture complementary products used with our lasers including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers. In addition, we offer laser-based systems for certain markets and applications.
Factors and Trends That Affect Our Operations and Financial Results
In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.
Net sales.
We derive net sales primarily from the sale of fiber lasers and amplifiers. We also sell diode lasers, communications systems, laser systems and complementary products. We sell our products through our direct sales organization and our network of distributors and sales representatives, as well as system integrators. We sell our products to OEMs that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. We also sell our products to end users that build their own systems which incorporate our products or use our products as an energy or light source. Our scientists and engineers work closely with OEMs, systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications. Our sales cycle varies substantially, ranging from a period of a few weeks to as long as one year or more, but is typically several months.
Sales of our products generally are recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments.
We develop our products to standard specifications and use a common set of components within our product architectures. Our major products are based upon a common technology platform. We continually enhance these and other products by improving their components and developing new components and new product designs.
The average selling prices of our products generally decrease as the products mature. These decreases result from factors such as decreased manufacturing costs and increases in unit volumes, increased competition, the introduction of new products and market share considerations. In the past, we have lowered our selling prices in order to penetrate new markets and applications. Furthermore, we may negotiate discounted selling prices from time to time with certain customers that purchase multiple units.
Gross margin
. Our total gross margin in any period can be significantly affected by total net sales in any period, by product mix, that is, the percentage of our revenue in the period that is attributable to higher or lower-power products and the mix of sales between laser and amplifier sources and complete systems, by sales mix between OEM customers who purchase devices from us in high unit volumes and other customers, by mix of sales in different geographies and by other factors, some of which are not under our control.
Our product mix affects our margins because gross margin is generally higher in each product line for products with higher average output power. Certain specialty products also have higher gross margins. Also, the profit margins on systems can be lower than margins for our laser and amplifier sources, depending on the configuration, volume and availability of competitive products, among other factors.
The mix of sales between OEM customers and other customers can affect gross margin because we provide sales price discounts on products based on the number of units ordered. As the number of OEM customers increase and the number of units ordered increases, the average sales price per unit will be reduced. We expect that the impact of reduced sales price per unit will be offset by the manufacturing efficiency provided by high unit volume orders, but the timing and extent of achieving these efficiencies may not always match the mix of sales in any given time period or be realized at all.
We also regularly review our inventory for items that are slow-moving, have been rendered obsolete or determined to be excess. Any write-off of such slow-moving, obsolete or excess inventory affects our gross margins. For example, we recorded provisions for inventory totaling
$5.4 million
and
$5.8 million
for the
three months ended June 30, 2017
and
2016
, respectively, and $22.8 million, $15.4 million and $11.3 million for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Sales and marketing expense.
We expect to continue to expand our worldwide direct sales organization, build and expand applications centers, hire additional sales and marketing personnel at our existing and new geographic locations as well as to support sales of new product lines, increase the number of units for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales. As such, we expect that our sales and marketing expenses will increase in the aggregate.
Research and development expense.
We plan to continue to invest in research and development to improve our existing components and products and develop new components, products, systems and applications technologies. The amount of research and development expense we incur may vary from period to period. In general, if net sales continue to increase we expect research and development expense to increase in the aggregate.
General and administrative expense.
We expect our general and administrative expenses to increase as we continue to invest in systems and resources in management, finance, legal, information technology, human resources and administration to support our worldwide operations. Legal expenses vary from quarter to quarter based primarily upon the level of litigation and transaction activities.
Foreign Exchange.
Because we are a U.S. based company doing business globally, we have both translational and transactional exposure to fluctuations in foreign currency exchange rates. Changes in the relative exchange rate between the U.S. dollar and the foreign currencies in which our subsidiaries operate directly affects our sales, costs and earnings. Differences in the relative exchange rates between where we sell our products and where we incur manufacturing and other operating costs (primarily in the U.S., Germany and Russia) also affects our costs and earnings. Certain currencies experiencing significant exchange rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen and Chinese Yuan have had and could have an additional significant impact on our sales, costs and earnings. Our ability to adjust the foreign currency selling prices of products in response to changes in exchange rates is limited and may not offset the impact of the changes in exchange rates on the translated value of sales or costs. In addition, if we increase the selling price of our products in local currencies this could have a negative impact on the demand for our products.
Major customers.
While we have historically depended on a few customers for a large percentage of our annual net sales, the composition of this group can change from year to year. Net sales derived from our five largest customers as a percentage of our net sales was
27%
for the
six months ended June 30, 2017
and 22%, 25% and 23% for the full years
2016
,
2015
and
2014
, respectively. One of our customers accounted for
15%
of our net sales for the
six months ended June 30, 2017
. None of our customers accounted for more than 10% of our net sales for the
six months ended June 30, 2016
. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our significant customers will continue to change. If any of our significant customers substantially reduced their purchases from us, our results would be adversely affected.
Results of Operations for the
three months ended June 30, 2017
compared to the
three months ended June 30, 2016
Net sales.
Net sales increased by
$116.6
million, or
46.1%
, to
$369.4 million
for the
three months ended June 30, 2017
from
$252.8 million
for the
three months ended June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
Materials processing
|
|
$
|
353,065
|
|
|
95.6
|
%
|
|
$
|
239,056
|
|
|
94.6
|
%
|
|
$
|
114,009
|
|
|
47.7
|
%
|
Other applications
|
|
16,308
|
|
|
4.4
|
%
|
|
13,731
|
|
|
5.4
|
%
|
|
2,577
|
|
|
18.8
|
%
|
Total
|
|
$
|
369,373
|
|
|
100.0
|
%
|
|
$
|
252,787
|
|
|
100.0
|
%
|
|
$
|
116,586
|
|
|
46.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Product
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
High-Power Continuous Wave ("CW") Lasers
|
|
$
|
222,204
|
|
|
60.2
|
%
|
|
$
|
141,406
|
|
|
55.9
|
%
|
|
$
|
80,798
|
|
|
57.1
|
%
|
Medium-Power CW Lasers
|
|
29,988
|
|
|
8.1
|
%
|
|
27,121
|
|
|
10.7
|
%
|
|
2,867
|
|
|
10.6
|
%
|
Low-Power CW Lasers
|
|
3,285
|
|
|
0.9
|
%
|
|
3,057
|
|
|
1.2
|
%
|
|
228
|
|
|
7.5
|
%
|
Pulsed Lasers
|
|
41,106
|
|
|
11.1
|
%
|
|
36,632
|
|
|
14.5
|
%
|
|
4,474
|
|
|
12.2
|
%
|
Quasi-Continuous Wave ("QCW") Lasers
|
|
29,482
|
|
|
8.0
|
%
|
|
16,225
|
|
|
6.5
|
%
|
|
13,257
|
|
|
81.7
|
%
|
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
|
|
43,308
|
|
|
11.7
|
%
|
|
28,346
|
|
|
11.2
|
%
|
|
14,962
|
|
|
52.8
|
%
|
Total
|
|
$
|
369,373
|
|
|
100.0
|
%
|
|
$
|
252,787
|
|
|
100.0
|
%
|
|
$
|
116,586
|
|
|
46.1
|
%
|
Materials processing
Sales for materials processing applications increased due to higher sales of high-power lasers, medium-power lasers, pulsed lasers, QCW lasers and laser systems.
|
|
•
|
The increase in high-power laser sales related to growth in cutting and welding applications. High-power lasers continue to displace CO2 lasers. We believe this transition has also benefited from an accelerated replacement cycle for older CO2 based cutting systems and from displacement of non-laser technologies which has resulted in higher demand for the fiber based cutting and welding systems sold by our OEM customers. Within the cutting applications, we continue to see a migration to lasers with higher output powers which improve processing speeds and enable processing of thicker materials. The shift towards lasers with higher output powers has also benefited sales due to their higher average selling prices. The growth in high-power welding sales relates primarily to automotive applications.
|
|
|
•
|
The increase in medium-power sales related to fine cutting, sintering and semiconductor wafer-inspection applications, partially offset by declines in average selling prices due to increased competition.
|
|
|
•
|
Low-power laser sales increased slightly due to the increase in scientific and semiconductor applications, partially offset by a decrease in low-power laser sales for medical applications.
|
|
|
•
|
Pulsed laser sales increased due to higher demand for marking and engraving applications. Within the pulsed laser category, increased sales of high-power pulsed lasers and green pulsed lasers were partially offset by decreased sales of pulsed lasers with lower average power.
|
|
|
•
|
QCW laser sales increased due to the demand for welding and percussion hole drilling applications. The increase in demand for QCW in welding is primarily related to consumer electronics.
|
|
|
•
|
Materials processing sales also increased as a result of higher laser systems and parts and service sales, which are included in Other Revenue in the Sales by Product chart above.
|
Other Applications
Sales for other applications increased due to higher sales for telecom partially offset by lower sales for advanced applications. The increase in telecom sales was driven by sales from Menara Networks, Inc. ("Menara"), which we acquired in the second quarter of 2016, and an increase in amplifier sales used for last mile fiber access to the home applications. Sales of telecom products are included in Other Revenue in the Sales by Product chart above. Advanced application sales are typically uneven from quarter to quarter.
Cost of sales and gross margin.
Cost of sales increased by
$48.0 million
, or
41.7%
, to
$163.1 million
for the
three months ended June 30, 2017
from
$115.1 million
for the
three months ended June 30, 2016
. Our gross margin
increased
to
55.9%
for the
three months ended June 30, 2017
from
54.5%
for the
three months ended June 30, 2016
. Gross margin
increased
due to a decrease in the cost of internally manufactured components, increased manufacturing efficiency and product mix which included increased sales of high-power, QCW and pulsed lasers with higher average powers. These increases in gross margin were partially offset by lower average selling prices.
Sales and marketing expense.
Sales and marketing expense
increased
by
$2.5 million
, or
25.3%
, to
$12.1 million
for the
three months ended June 30, 2017
from
$9.7 million
for the
three months ended June 30, 2016
. This change was primarily a result of increases in personnel, commissions, travel and depreciation expenses. As a percentage of sales, sales and marketing expense
decreased
to
3.3%
for the
three months ended June 30, 2017
from
3.8%
for
three months ended June 30, 2016
.
Research and development expense.
Research and development expense
increased
by
$7.5 million
, or
41.0%
, to
$26.0 million
for the
three months ended June 30, 2017
, compared to
$18.4 million
for the
three months ended June 30, 2016
. This change was primarily a result of increases in personnel, contractors and consultants expense as well as materials used for research and development projects and depreciation. Research and development continues to focus on developing new products, enhancing the performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as ultra-violet, visible and mid-infrared; lasers with ultra-fast pulses; laser-based systems for material processing, projection, display and medical; new telecom products including pluggable transceivers; and laser accessories such as welding and cutting heads. In addition to new products, research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense
decreased
to
7.0%
for the
three months ended June 30, 2017
from
7.3%
for the
three months ended June 30, 2016
.
General and administrative expense.
General and administrative expense
increased
by
$3.7 million
, or
23.1%
, to
$19.9 million
for the
three months ended June 30, 2017
from
$16.2 million
for the
three months ended June 30, 2016
. This change was primarily as a result of increases in personnel expense, stock-based compensation, travel, accounting, legal, information systems, recruitment, outside services, insurance and repairs and maintenance. As a percentage of sales, general and administrative expense
decreased
to
5.4%
for the
three months ended June 30, 2017
from
6.4%
for the
three months ended June 30, 2016
.
Effect of exchange rates on net sales, gross profit and operating expenses.
We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro
0.89
, Russian Ruble
66
, Japanese Yen
108
and Chinese Yuan
6.53
, respectively, we would have expected net sales to be
$11.4 million
higher, gross profit to be
$7.9 million
higher and total operating expenses would have been
$0.5 million
lower.
Loss (gain) on foreign exchange.
We incurred a foreign exchange
loss
of
$7.2 million
for the
three months ended June 30, 2017
as compared to a
$1.6 million
gain
for the
three months ended June 30, 2016
. Foreign exchange losses for the
three months ended June 30, 2017
were primarily attributable to the appreciation of the Euro as compared to the U.S. Dollar. Foreign exchange gains for the
three months ended June 30, 2016
were primarily attributable to the appreciation of U.S. Dollar compared to the Euro and the appreciation of the Japanese Yen compared to the U.S. Dollar partially offset by the appreciation of the U.S. Dollar compared to the Russian Ruble and Chinese Yuan.
Interest income, net.
Interest income, net, increased to
$0.5 million
of income for the
three months ended June 30, 2017
from
$0.3 million
for the
three months ended June 30, 2016
as a result of higher interest yields.
Other income (expense), net.
Other income (expense), net, decreased slightly to
$23 thousand
of income for the
three months ended June 30, 2017
from
$0.1 million
for the
three months ended June 30, 2016
.
Provision for income taxes.
Provision for income taxes was
$37.5 million
for the
three months ended June 30, 2017
compared to
$28.4 million
for the
three months ended June 30, 2016
. The effective tax rates were
26.5%
and
29.8%
for the
three months ended June 30, 2017
and
2016
, respectively. The
decrease
in the effective rate was primarily due to the release of reserves related to uncertain tax positions of
$2.2 million
following the completion of a tax audit and
$3.4 million
of excess tax benefits related to exercise of stock options and release of restricted stock units which vested during the quarter. Effective as of the beginning of 2017, the accounting standard related to excess tax benefits and deficits changed, and these items are now recognized in the provision for income taxes whereas previously they were accounted for within additional paid-in capital..
Net income attributable to IPG Photonics Corporation.
Net income attributable to IPG Photonics Corporation
increased
by
$37.1 million
to
$104.1 million
for the
three months ended June 30, 2017
compared to
$67.1 million
for the
three months ended June 30, 2016
. Net income attributable to IPG Photonics Corporation as a percentage of our net sales
increased
by
1.7
percentage points to
28.2%
for the
three months ended June 30, 2017
from
26.5%
for the
three months ended June 30, 2016
due to the factors described above.
Results of Operations for the
six months ended June 30, 2017
compared to the
six months ended June 30, 2016
Net sales.
Net sales increased by
$195.2 million
, or
42.4%
, to
$655.2 million
for the
six months ended June 30, 2017
from
$460.0 million
for the
six months ended June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
Materials processing
|
|
$
|
617,196
|
|
|
94.2
|
%
|
|
$
|
437,263
|
|
|
95.0
|
%
|
|
$
|
179,933
|
|
|
41.1
|
%
|
Other applications
|
|
38,023
|
|
|
5.8
|
%
|
|
22,772
|
|
|
5.0
|
%
|
|
15,251
|
|
|
67.0
|
%
|
Total
|
|
$
|
655,219
|
|
|
100.0
|
%
|
|
$
|
460,035
|
|
|
100.0
|
%
|
|
$
|
195,184
|
|
|
42.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
High-Power CW Lasers
|
|
$
|
390,148
|
|
|
59.5
|
%
|
|
$
|
259,626
|
|
|
56.4
|
%
|
|
$
|
130,522
|
|
|
50.3
|
%
|
Medium-Power CW Lasers
|
|
49,729
|
|
|
7.6
|
%
|
|
49,727
|
|
|
10.8
|
%
|
|
2
|
|
|
—
|
%
|
Low-Power CW Lasers
|
|
6,680
|
|
|
1.0
|
%
|
|
6,061
|
|
|
1.3
|
%
|
|
619
|
|
|
10.2
|
%
|
Pulsed Lasers
|
|
73,561
|
|
|
11.2
|
%
|
|
65,258
|
|
|
14.2
|
%
|
|
8,303
|
|
|
12.7
|
%
|
QCW Lasers
|
|
50,850
|
|
|
7.8
|
%
|
|
24,825
|
|
|
5.4
|
%
|
|
26,025
|
|
|
104.8
|
%
|
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
|
|
84,251
|
|
|
12.9
|
%
|
|
54,538
|
|
|
11.9
|
%
|
|
29,713
|
|
|
54.5
|
%
|
Total
|
|
$
|
655,219
|
|
|
100.0
|
%
|
|
$
|
460,035
|
|
|
100.0
|
%
|
|
$
|
195,184
|
|
|
42.4
|
%
|
Materials processing
Sales for materials processing applications increased due to higher sales of high-power lasers, pulsed lasers, QCW lasers and laser systems.
|
|
•
|
The increase in high-power laser sales related to growth in cutting and welding applications partially offset by decreases in heat treating and annealing applications. High-power lasers continue to displace CO2 lasers. We believe this transition has also benefited from an accelerated replacement cycle for older CO2 based cutting systems and from displacement of non-laser technologies which has resulted in higher demand for the fiber based cutting and welding systems sold by our OEM customers. Within cutting applications, we continue to see a migration to lasers with higher output powers which improve processing speeds and enable processing of thicker materials. The shift towards lasers with higher output powers has also benefited sales due to their higher average selling prices. The growth in high power welding sales relates primarily to automotive applications.
|
|
|
•
|
Medium-power sales were essentially flat. Within the medium-power category, increases in sales for fine welding and semiconductor inspection applications were offset by decreases in sales for fine cutting and laser sintering applications. Average selling prices for medium-power lasers also declined.
|
|
|
•
|
Low-power laser sales increased slightly due to the increase in scientific and semiconductor applications which was partially offset by a decrease in low-power used in medical applications.
|
|
|
•
|
Pulsed laser sales increased due to higher increased sales for marking and engraving applications and cleaning and stripping applications. Within the pulsed laser category, increased sales of high-power pulsed lasers and green pulsed lasers were partially offset by decreased sales of pulsed lasers with lower average power.
|
|
|
•
|
QCW laser sales increased due to the demand for welding and percussion hole drilling applications. Welding applications for QCW lasers are primarily related to consumer electronics.
|
|
|
•
|
Materials processing sales also increased as a result of higher laser systems and parts and service sales, which are included in Other Revenue in the Sales by Product chart above.
|
Other Applications
Sales for other applications increased due to higher sales for telecom and advanced applications. The increase in telecom sales was driven by sales from Menara and an increase in amplifier sales used for last mile fiber access to the home applications. Sales of telecom products are included in Other Revenue in the Sales by Product chart above. Advanced application sales are typically uneven from quarter to quarter. The increase in advanced applications sales was driven by
increase in demand from defense, semiconductor and scientific applications. The increase in advanced application sales contributed to the increase in high-power laser sales and the increase in Other Revenue in the Sales by Product chart above.
Cost of sales and gross margin.
Cost of sales
increased
by
$83.7 million
, or
40.3%
, to
$291.7 million
for the
six months ended June 30, 2017
from
$207.9 million
for the
six months ended June 30, 2016
. Our gross margin
increased
to
55.5%
from
54.8%
for the
six months ended June 30, 2017
and
2016
, respectively. Gross margin
increased
due to decreases in the cost of internally manufactured components and increased manufacturing efficiency which were partially offset by decreases in average selling prices. Gross margin also benefited from product mix, including increased sales of high-power and pulsed lasers with higher output power.
Sales and marketing expense.
Sales and marketing expense
increased
by
$5.2 million
, or
29.6%
, to
$23.0 million
for the
six months ended June 30, 2017
from
$17.7 million
for the
six months ended June 30, 2016
, primarily as a result of increased expenses for personnel, commissions, trade show and exhibitions, travel, premises and depreciation. As a percentage of sales, sales and marketing expense
decreased
to
3.5%
for the
six months ended June 30, 2017
from
3.9%
for the
six months ended June 30, 2016
.
Research and development expense.
Research and development expense
increased
by
$12.8 million
, or
35.8%
, to
$48.7 million
for the
six months ended June 30, 2017
, compared to
$35.9 million
for the
six months ended June 30, 2016
, primarily as a result of an increase in expenses related to personnel, stock-based compensation, contractors, consultants, materials used for research and development projects and depreciation. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as ultra-violet, visible and mid-infrared; lasers with ultra-fast pulses; laser-based systems for material processing, projection, display and medical; new telecom products including pluggable transceivers; and laser accessories such as welding and cutting heads. In addition to new products research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense
decreased
to
7.4%
for the
six months ended June 30, 2017
from
7.8%
for the
six months ended June 30, 2016
.
General and administrative expense.
General and administrative expense
increased
by
$7.5 million
, or
25.1%
, to
$37.6 million
for the
six months ended June 30, 2017
from
$30.1 million
for the
six months ended June 30, 2016
, primarily as a result of increased expenses for personnel, stock-based compensation, fees and subscriptions, information technology, insurance, travel, accounting, legal, and increased bad debt provisions. As a percentage of sales, general and administrative expense
decreased
to
5.7%
for the
six months ended June 30, 2017
from
6.5%
for the
six months ended June 30, 2016
.
Effect of exchange rates on net sales, gross profit and operating expenses.
We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro
0.90
, Russian Ruble
70
, Japanese Yen
112
and Chinese Yuan
6.54
, respectively, we would have expected net sales for the
six months ended June 30, 2017
to be
$21.0 million
higher, gross profit to be
$15.0 million
higher and total operating expenses would have been
$1.4 million
lower.
Loss (gain) on foreign exchange.
We incurred a foreign exchange loss of
$11.6 million
for the
six months ended June 30, 2017
as compared to
$3.4 million
for the
six months ended June 30, 2016
. The loss for the
six months ended June 30, 2017
was primarily attributable to appreciation of the Euro as compared to the U.S. Dollar. The loss for the
six months ended June 30, 2016
was primarily attributable to the appreciation of the Euro compared to the U.S. Dollar partially offset by the appreciation of the U.S. Dollar compared to the Russian Ruble and Chinese Yuan.
Interest income, net.
Interest income, net, increased to
$0.8 million
of income for the
six months ended June 30, 2017
from
$0.5 million
for the
six months ended June 30, 2016
as a result of higher interest yields on investments.
Other income (expense), net.
Other income (expense), net decreased to
$0.5 million
of
expense
for the
six months ended June 30, 2017
compared to approximately
$0.1 million
of income for the
six months ended June 30, 2016
as a result of the loss incurred upon sale of available-for-sale-securities being partially offset by net rental income from a building in the United States purchased in the second quarter of 2016 that is partially leased to third parties.
Provision for income taxes.
Provision for income taxes was
$63.9 million
for the
six months ended June 30, 2017
compared to
$49.3 million
for the
six months ended June 30, 2016
, representing an effective tax rate of
26.3%
and
29.7%
for the
six months ended June 30, 2017
and
2016
, respectively. The
decrease
in the effective rate was primarily due to the release of reserves related to uncertain tax positions of
$2.2 million
following the completion of a tax audit and
$7.5 million
of excess tax benefits related to exercise of stock options and release of restricted stock units which vested during the period. Effective as of the beginning of 2017, the accounting standard related to excess tax benefits and deficits changed, and these items are now recognized in the provision for income taxes whereas previously they were accounted for within additional paid-in capital. The
tax effects of the accounting for share-based compensation will increase or decrease our effective rate based upon the difference between our share-based compensation expense and the benefits taken on our tax return which depends on the share price at the time of employee award vesting. Additionally, we recognize excess tax benefits on a discrete basis and we anticipate that our effective rate will vary from quarter to quarter depending on our share price in each period. If our share price remains constant to the June 30, 2017 price, we anticipate that our effective rate will increase in the remaining quarters throughout the year and our full year rate will be higher than the rate in the first half of 2017.
Net income attributable to IPG Photonics Corporation.
Net income attributable to IPG Photonics Corporation increased by
$62.7 million
to
$179.1 million
, or
53.9%
for the
six months ended June 30, 2017
compared to
$116.4 million
for the
six months ended June 30, 2016
. Net income attributable to IPG Photonics Corporation as a percentage of our net sales
increased
by
2.0
percentage points to
27.3%
for the
six months ended June 30, 2017
from
25.3%
for the
six months ended June 30, 2016
due to the factors described above.
Liquidity and Capital Resources
Our principal sources of liquidity as of
June 30, 2017
consisted of cash and cash equivalents of
$808.1
million, short-term investments of
$122.3 million
, unused credit lines and overdraft facilities of
$75.3 million
and other working capital (excluding cash and cash equivalents and short-term investments) of
$423.6
million. This compares to cash and cash equivalents of
$623.9
million, short-term investments of
$206.8 million
, unused credit lines and overdraft facilities of
$71.5 million
and other working capital (excluding cash and cash equivalents and short-term investments) of
$312.1
million as of
December 31, 2016
. The increase in cash and cash equivalents of
$184.3
million relates primarily to cash provided by operating activities in the
six months ended June 30, 2017
of
$133.1
million and cash provided by investing activities of
$44.7 million
. The increase was partially offset by cash used in financing activities of
$25.4 million
. In addition, the effect of exchange rates increased cash and cash equivalents by
$31.9 million
.
Short-term investments consist of liquid investments including U.S. government and government agency notes, corporate
notes, commercial paper and certificates of deposit with original maturities of greater than three months but less than one year.
Our long-term debt consists of one unsecured note with an outstanding balance at
June 30, 2017
of
$22.6 million
of which
$1.2 million
is the current portion. The interest on this unsecured note is variable at 1.20% above LIBOR and is fixed using an interest rate swap at 2.85% per annum. The unsecured note matures in May 2023, at which time the outstanding debt balance will be $15.4 million. The long-term note secured by our corporate aircraft was paid off during the second quarter in connection with the sale of the aircraft. Subsequent to June 30, 2017, we closed on our purchase of a new corporate aircraft for $28.0 million. We financed the entire purchase with proceeds from a new long-term note that is secured by the aircraft with a fixed interest rate of 2.75% that matures in July 2022, at which time the outstanding debt balance will be $15.4 million.
We believe that our existing cash and cash equivalents, short-term investments, our cash flows from operations and our existing lines of credit provide us with the financial flexibility to meet our liquidity and capital needs, as well as to complete certain acquisitions of businesses and technologies. We intend to continue to pursue acquisition opportunities based upon market conditions and the strategic importance and valuation of the target company. We may consider issuing debt to finance acquisitions depending on the timing and size of the acquisition. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of the economic environment on our sales growth, the timing and extent of spending to support development efforts, the expansion of the global sales and marketing activities, government regulation including trade sanctions, the timing and introductions of new products, the need to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products.
The following table details our line-of-credit facilities as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Total Facility
|
|
Interest Rate
|
|
Maturity
|
|
Security
|
U.S. Revolving Line of Credit (1)
|
|
Up to $50.0 million
|
|
LIBOR plus 0.80% to 1.20%, depending on our performance
|
|
April 2020
|
|
Unsecured
|
Euro Credit Facility (Germany) (2)
|
|
Euro 30.0 million ($34.3 million)
|
|
Euribor plus 1.00% or EONIA 1.25%
|
|
July 2017
|
|
Unsecured, guaranteed by parent company and German subsidiary
|
Euro Overdraft Facilities (3)
|
|
Euro 2.0 million
($2.3 million)
|
|
1.0%-6.5%
|
|
October 2017
|
|
Common pool of assets of Italian subsidiary
|
|
|
(1)
|
This facility is available to certain foreign subsidiaries in their respective local currencies. At
June 30, 2017
, there were no drawings on this facility, however, there were
$0.1 million
of guarantees issued against the facility which reduces the amount of the facility available to draw.
|
|
|
(2)
|
This facility is also available to certain foreign subsidiaries in their respective local currencies. At
June 30, 2017
, there were no drawings on this facility, however, there were
$11.1 million
of guarantees issued against the facility which reduces the amount of the facility available to draw. Subsequent to June 30, 2017, we entered into a new Euro credit facility, which replaced this facility and increased the available line-of-credit to Euro 50 million from Euro 30 million.
|
|
|
(3)
|
At
June 30, 2017
, there were no drawings on these facilities.
|
Our largest committed credit lines are with Bank of America N.A. and Deutsche Bank AG in the amounts of $50.0 million and
$34.3 million
(or 30 million Euro as described above), respectively, and neither of them is syndicated.
We are required to meet certain financial covenants associated with our U.S. revolving line of credit and long-term debt facility. These covenants, tested quarterly, include a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. The debt service coverage covenant requires that we maintain a trailing twelve month ratio of cash flow to debt service that is at least 1.5:1. Debt service is defined as required principal and interest payments during the period. Debt service in the calculation is decreased by our cash held in the U.S.A. in excess of $50 million up to a maximum of $250 million. Cash flow is defined as EBITDA less unfunded capital expenditures. The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than three times our trailing twelve months EBITDA. We were in compliance with all such financial covenants as of and for the three months ended
June 30, 2017
.
Operating activities.
Net cash provided by operating activities increased by
$24.8 million
to
$133.1 million
for the
six months ended June 30, 2017
from
$108.3 million
for the
six months ended June 30, 2016
. As the business and net income has grown, cash provided by net income after adding back non-cash charges has increased. For the
six months ended June 30, 2017
, this increase was partially offset by continued growth in working capital to support the growth of the business. Our largest working capital items are inventory and accounts receivable. Items such as accounts payable to third parties, prepaid expenses and other current assets and accrued expenses and other liabilities are not as significant as our working capital investment in accounts receivable and inventory because of the amount of value added within IPG due to our vertically integrated structure. Accruals and payables for personnel costs including bonuses and income and other taxes payable are largely dependent on the timing of payments for those items. The increase in cash flow from operating activities for the
six months ended June 30, 2017
primarily resulted from:
|
|
•
|
An increase of
$89.1 million
in cash provided by net income after adding back non-cash charges to
$253.3 million
for the
six months ended June 30, 2017
as compared to
$164.2 million
for the same period in
2016
;
|
|
|
•
|
A decrease in the cash used for inventory. Cash used for inventory was
$25.8 million
for the
six months ended June 30, 2017
as compared to
$34.7 million
for the same period in
2016
; partially offset by
|
|
|
•
|
An increase in cash used by accounts receivable of
$73.6 million
for the
six months ended June 30, 2017
as compared to a decrease of
$2.9 million
for the same period in
2016
due to an increase in sales and the timing of sales in the quarter; and
|
|
|
•
|
An increase in cash used for income taxes. Cash used for income and other taxes payable was
$22.0 million
for the
six months ended June 30, 2017
as compared to cash used for income and other taxes payable of
$10.7 million
for the same period in
2016
.
|
Given our vertical integration, rigorous and time-consuming testing procedures for both internally manufactured and externally purchased components and the lead time required to manufacture components used in our finished products, the rate at which we turn inventory has historically been comparatively low when compared to our cost of sales. Also, our historic growth rates required investment in inventories to support future sales and enable us to quote short delivery times to our customers, providing what we believe is a competitive advantage. Furthermore, if there was a disruption to the manufacturing capacity of any of our key technologies, our inventories of components should enable us to continue to build finished products for a period of time. We believe that we will continue to maintain a relatively high level of inventory compared to our cost of sales. As a result, we expect to have a significant amount of working capital invested in inventory. A reduction in our level of net sales or the rate of growth of our net sales from their current levels would mean that the rate at which we are able to convert our inventory into cash would decrease.
Investing activities.
Net cash provided by investing activities was
$44.7 million
for the
six months ended June 30, 2017
as compared to cash used in investing activities of
$137.6 million
in
2016
. The cash provided by investing activities in
2017
related to
$84.9 million
of net proceeds from sales of short-term investments and
$15.3 million
of proceeds from sales of property, plant and equipment, which primarily relates to our corporate aircraft, partially offset by
$43.6 million
of capital expenditures and
$11.3 million
, net of cash acquired for the acquisition of OptiGrate. The cash used in investing activities in
2016
related to
$70.9 million
of capital expenditures,
$46.5 million
for the acquisition of Menara and
$20.5 million
of net purchases of short-term investments.
We expect to incur between
$90 million
and
$100 million
in net capital expenditures, excluding acquisitions. Capital expenditures include investments in facilities and equipment to add capacity worldwide to support anticipated revenue growth and the incremental cost to upgrade of our corporate aircraft. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. If we obtain financing for certain projects, our cash expenditures would be reduced in the year of expenditure. Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer to a later period.
Financing activities.
Net cash used in financing activities was
$25.4 million
for the
six months ended June 30, 2017
as compared to net cash provided by financing activities of
$30.4 million
in
2016
. The cash used in financing activities in
2017
was primarily related to the purchase of treasury stock of
$24.1 million
and
$18.3 million
payments on our long-term borrowings, the majority of which related to repayment of the long-term note secured by our corporate aircraft. These uses of cash were partially offset by proceeds from the exercise of stock options and shares issued under our employee stock purchase plan net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units. The cash provided by financing activities in
2016
was primarily related to the cash provided by debt issued to finance the purchase of a building, the exercise of stock options, issuances under employee stock purchase plan and shares withheld to cover employee restricted stock taxes partially offset by the payments on our long-term borrowings and net payments of line-of-credit facilities.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, "Business" and Item 1A, "Risk Factors" of Part I of our Annual Report on Form 10-K for the year ended
December 31, 2016
. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that such results will be achieved, and readers are cautioned not to rely on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Recent Accounting Pronouncements
Adoption of New Accounting Pronouncement
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805)" ("ASU 2017-01"). ASU 2017-01 revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for public companies for annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. Early application generally is allowed for transactions that have not been reported in financial statements which have been issued or made available for issuance. We have elected to early adopt this standard, and it did not have an effect on our consolidated financial statements upon adoption.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 amends ASC Topic 718 to better define what constitutes a modification of a share-based payment award by defining criteria that must be met for change to a share-based payment award to not qualify as a modification. Changes to a share-based payment award must be accounted for as a modification under ASC Topic 718 unless all the newly defined criteria are met. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, which would be our fiscal year ending December 31, 2018. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 was issued in conjunction with ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), to clarify guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new guidance clarifies what constitutes an "in substance nonfinancial asset" and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments should be applied at the same time as those in ASU 2014-09 with interim and annual reporting periods beginning after December 15, 2017, which would be our fiscal year ending December 31, 2018. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350)" ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. ASU 2017-04 is effective for public companies for annual reporting periods beginning after December 15, 2020, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date and require a disclosure as to the nature of and reason for the change in accounting principle upon transition. Early adoption is allowed for all entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets other than Inventory" ("ASU 2016-16"). ASU 2016-16 eliminates the current exception that prohibits the recognition of current and deferred income tax consequences for intra-entity asset transfers (other than inventory) until the asset has been sold to an outside party. The amendments will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. Deferred tax assets should be assessed to determine if realizable. Disclosures will be required for the (i) reason for and notice of change, (ii) effect of change on income from continuing operations and (iii) cumulative effect of change on retained earnings. Public entities will apply these changes in annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. Early adoption is permitted. We are continuing to evaluate the standard but do not expect that it will have a material effect on our consolidated financial statements upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are continuing to evaluate the standard but do not expect that it will have a material effect on our consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. We are currently evaluating the impact that the standard will have but do not expect it to have a material effect on our consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date," which defers the effective date of ASU 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. In May 2016, the FASB also issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," to provide additional clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered "completed" for purposes of applying the transition guidance.We have completed an initial assessment of the new guidance and are in the process of completing documentation of this assessment. We do not expect the standard will have a material impact on the amount and timing of revenue recognized in our consolidated financial statements. We have elected to use the modified retrospective application approach for transition to the new standard.