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 and diode lasers that are used in numerous 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 our key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. We also manufacture certain 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 the selling price per watt is generally higher for mid-power devices and certain specialty products than for high-power devices and certain pulsed lasers sold in large volumes. The overall cost of high-power lasers may be partially offset by improved absorption of fixed overhead costs associated with sales of larger volumes of higher-power products because they use a greater number of optical components and drive economies of scale in manufacturing. Also, the profit margins on systems can be lower than margins for our laser and amplifier sources, depending on the configuration, volume and competitive forces, 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 increases 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
$6.5 million
and
$4.3 million
for the
three months ended September 30, 2016
and
2015
, respectively, and $15.4 million, $11.3 million and $15.1 million for the years ended December 31,
2015
,
2014
and
2013
, 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 wells 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 technology. 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
21%
for the
nine months ended September 30, 2016
and 25%, 23% and 21% for the full years
2015
,
2014
and
2013
, respectively. None of our customers accounted for more than 10% of our net sales for the
nine months ended September 30, 2016
. Our largest customer accounted for 13% of our net sales for the
nine months ended September 30, 2015
. 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 September 30, 2016
compared to the
three months ended September 30, 2015
Net sales.
Net sales increased by
$22.5
million, or
9.2%
, to
$266.0 million
for the
three months ended September 30, 2016
from
$243.5 million
for the
three months ended September 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
Materials processing
|
|
$
|
246,299
|
|
|
92.6
|
%
|
|
$
|
223,813
|
|
|
91.9
|
%
|
|
$
|
22,486
|
|
|
10.0
|
%
|
Other applications
|
|
19,718
|
|
|
7.4
|
%
|
|
19,728
|
|
|
8.1
|
%
|
|
(10
|
)
|
|
(0.1
|
)%
|
Total
|
|
$
|
266,017
|
|
|
100.0
|
%
|
|
$
|
243,541
|
|
|
100.0
|
%
|
|
$
|
22,476
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
High-Power Continuous Wave ("CW") Lasers
|
|
$
|
153,002
|
|
|
57.5
|
%
|
|
$
|
130,917
|
|
|
53.8
|
%
|
|
$
|
22,085
|
|
|
16.9
|
%
|
Medium-Power CW Lasers
|
|
25,011
|
|
|
9.4
|
%
|
|
26,951
|
|
|
11.1
|
%
|
|
(1,940
|
)
|
|
(7.2
|
)%
|
Low-Power CW Lasers
|
|
2,992
|
|
|
1.1
|
%
|
|
2,960
|
|
|
1.2
|
%
|
|
32
|
|
|
1.1
|
%
|
Pulsed Lasers
|
|
34,429
|
|
|
12.9
|
%
|
|
35,036
|
|
|
14.4
|
%
|
|
(607
|
)
|
|
(1.7
|
)%
|
Quasi-Continuous Wave ("QCW") Lasers
|
|
11,660
|
|
|
4.4
|
%
|
|
19,849
|
|
|
8.2
|
%
|
|
(8,189
|
)
|
|
(41.3
|
)%
|
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
|
|
38,923
|
|
|
14.6
|
%
|
|
27,828
|
|
|
11.4
|
%
|
|
11,095
|
|
|
39.9
|
%
|
Total
|
|
$
|
266,017
|
|
|
100.0
|
%
|
|
$
|
243,541
|
|
|
100.0
|
%
|
|
$
|
22,476
|
|
|
9.2
|
%
|
Sales for materials processing applications increased due to higher sales of high-power lasers and low-power lasers.
|
|
•
|
High-power laser sales increased due to higher demand for cutting, welding and additive manufacturing applications. High-power lasers are continuing to displace CO2 lasers in cutting systems sold by our OEM customers. In addition, OEM's for additive manufacturing equipment are increasing the use of high power lasers instead of medium power lasers. Our additive manufacturing OEM customers are producing systems using lasers with higher output powers in order to improve the speed with which parts are grown.
|
|
|
•
|
Medium-power sales decreased due to a decrease in demand for fine cutting and lasers used in sintering/additive manufacturing partially offset by a higher demand for welding applications. The decline in medium-power lasers used for additive manufacturing is due to timing of orders as well as increased use of high-power lasers for this application.
|
|
|
•
|
Low-power laser sales increased due to higher sales for medical applications.
|
|
|
•
|
Pulsed laser sales decreased due to lower sales of low-power pulsed lasers partially offset by an increase in high-power pulsed lasers sales and an increase in green pulsed lasers sales. High-power pulsed sales are driven by ablation and cleaning applications as well as marking and engraving applications. The increase in green pulsed lasers is driven by edge deletion in solar cell manufacturing.
|
|
|
•
|
QCW laser sales decreased due to lower demand from consumer electronics applications.
|
|
|
•
|
Other revenue increased due to higher telecom sales, an increase in parts and service revenue and lower deferred revenue.
|
Sales for other applications decreased slightly due to lower sales for advanced applications offset by greater telecom applications sales. The increase in telecom sales was driven by sales from Menara Networks, Inc ("Menara") which we acquired in the second quarter of 2016.
Cost of sales and gross margin.
Cost of sales increased by
$11.0 million
, or
10.0%
, to
$121.2 million
for the
three months ended September 30, 2016
from
$110.2 million
for the
three months ended September 30, 2015
. Our gross margin
decreased
slightly to
54.4%
for the
three months ended September 30, 2016
from
54.7%
for the
three months ended September 30, 2015
. Gross margin
decreased
due to lower average selling prices, a decrease in absorption of manufacturing costs in the quarter, an increase in the provision for inventory reserves and also due to an increase in expenses related to the amortization of intangibles and the step-up to fair value of inventory acquired in the Menara transaction. These impacts were partially offset by a reduction in the cost of internally manufactured components, increased manufacturing efficiency and product mix which included increased sales of high-power and pulsed lasers with higher average power.
Sales and marketing expense.
Sales and marketing expense
increased
by
$2.8 million
, or
35.5%
, to
$10.5 million
for the
three months ended September 30, 2016
from
$7.7 million
for the
three months ended September 30, 2015
, primarily as a result of an increase in expenses related to personnel, commissions, trade fairs and exhibitions, depreciation and premises. As a
percentage of sales, sales and marketing expense increased to
3.9%
for the
three months ended September 30, 2016
from
3.2%
for
three months ended September 30, 2015
.
Research and development expense.
Research and development expense
increased
by
$4.3 million
, or
26.6%
, to
$20.5 million
for the
three months ended September 30, 2016
, compared to
$16.2 million
for the
three months ended September 30, 2015
, primarily as a result of an increase in expenses related to personnel, stock-based compensation, materials used for research and development projects and depreciation which were partially offset by a decrease in expenses related to outside contractors. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components. 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 as well as accessories such as welding and cutting heads. We enhance the performance of existing products and components by increasing electrical efficiency and output power. We improve manufacturing processes by increasing yields and productivity. In addition we are developing manufacturing capability for new components such as crystals to support both current and new products. As a percentage of sales, research and development expense
increased
to
7.7%
for the
three months ended September 30, 2016
from
6.7%
for the
three months ended September 30, 2015
.
General and administrative expense.
General and administrative expense
increased
by
$2.1 million
, or
14.4%
, to
$16.8 million
for the
three months ended September 30, 2016
from
$14.7 million
for the
three months ended September 30, 2015
. This was primarily as a result of increased personnel expense, stock-based compensation, accounting, legal and information technology costs partially offset by decreases in premises expense. As a percentage of sales, general and administrative expense was
6.3%
for the
three months ended September 30, 2016
and
6.0%
for the
three months ended September 30, 2015
.
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
63
, Japanese Yen
122
and Chinese Yuan
6.28
, respectively, we would have expected net sales to be
$2.0 million
higher, gross profit to be
$1.1 million
higher and total operating expenses would have been
$0.1 million
higher.
Loss (gain) on foreign exchange.
We incurred a foreign exchange
loss
of
$2.9 million
for the
three months ended September 30, 2016
as compared to a
$5.1 million
loss
for the
three months ended September 30, 2015
. Foreign exchange losses for the
three months ended September 30, 2016
were primarily attributable to the appreciation of the Euro and Russian Ruble as compared to the U.S. Dollar and the depreciation of the Chinese Yuan as compared to the U.S. Dollar. Foreign exchange losses for the
three months ended September 30, 2015
were primarily attributable to the depreciation of the Chinese Yuan compared to the U.S. dollar which was partially offset by the depreciation of the Russian Ruble compared to the U.S. dollar and appreciation of the Japanese Yen compared to the Euro.
Interest income (expense), net.
Interest income (expense), increased to
$0.4 million
of income for the
three months ended September 30, 2016
from
$0.0 million
of expense for the
three months ended September 30, 2015
as a result of higher yielding interest on investments.
Other income, net.
Other income, remained relatively flat for the
three months ended September 30, 2016
and
2015
.
Provision for income taxes.
Provision for income taxes was
$25.4 million
for the
three months ended September 30, 2016
compared to
$26.9 million
for the
three months ended September 30, 2015
. The effective tax rates were
26.9%
and
30.0%
for the
three months ended September 30, 2016
and
2015
, respectively. The
decrease
in the effective rate was primarily due to the release of income tax reserves upon the completion of a tax audit as well as an increase in the benefit related to research and development tax credits. The legislation enabling research and development credits in the United States was permanently re-enacted at the end of 2015. As it was not permanently re-enacted until the end of the year, there was no benefit related to research and development credits for the
three months ended September 30, 2015
.
Net income attributable to IPG Photonics Corporation.
Net income attributable to IPG Photonics Corporation
increased
by
$6.4 million
to
$69.2 million
for the
three months ended September 30, 2016
compared to
$62.8 million
for the
three months ended September 30, 2015
. Net income attributable to IPG Photonics Corporation as a percentage of our net sales
increased
by
0.2
percentage points to
26.0%
for the
three months ended September 30, 2016
from
25.8%
for the
three months ended September 30, 2015
due to the factors described above.
Results of Operations for the
nine months ended September 30, 2016
compared to the
nine months ended September 30, 2015
Net sales.
Net sales increased by
$48.4 million
, or
7.1%
, to
$726.1 million
for the
nine months ended September 30, 2016
from
$677.6 million
for the
nine months ended September 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
Materials processing
|
|
$
|
683,562
|
|
|
94.1
|
%
|
|
$
|
640,302
|
|
|
94.5
|
%
|
|
$
|
43,260
|
|
|
6.8
|
%
|
Other applications
|
|
42,490
|
|
|
5.9
|
%
|
|
37,337
|
|
|
5.5
|
%
|
|
5,153
|
|
|
13.8
|
%
|
Total
|
|
$
|
726,052
|
|
|
100.0
|
%
|
|
$
|
677,639
|
|
|
100.0
|
%
|
|
$
|
48,413
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
|
High-Power CW Lasers
|
|
$
|
412,628
|
|
|
56.8
|
%
|
|
$
|
377,058
|
|
|
55.6
|
%
|
|
$
|
35,570
|
|
|
9.4
|
%
|
Medium-Power CW Lasers
|
|
74,739
|
|
|
10.3
|
%
|
|
75,467
|
|
|
11.1
|
%
|
|
(728
|
)
|
|
(1.0
|
)%
|
Low-Power CW Lasers
|
|
9,053
|
|
|
1.2
|
%
|
|
10,190
|
|
|
1.5
|
%
|
|
(1,137
|
)
|
|
(11.2
|
)%
|
Pulsed Lasers
|
|
99,687
|
|
|
13.7
|
%
|
|
97,017
|
|
|
14.3
|
%
|
|
2,670
|
|
|
2.8
|
%
|
QCW Lasers
|
|
36,484
|
|
|
5.0
|
%
|
|
45,592
|
|
|
6.7
|
%
|
|
(9,108
|
)
|
|
(20.0
|
)%
|
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
|
|
93,461
|
|
|
12.9
|
%
|
|
72,315
|
|
|
10.7
|
%
|
|
21,146
|
|
|
29.2
|
%
|
Total
|
|
$
|
726,052
|
|
|
100.0
|
%
|
|
$
|
677,639
|
|
|
100.0
|
%
|
|
$
|
48,413
|
|
|
7.1
|
%
|
Sales for materials processing applications increased due to higher sales of high-power lasers, pulsed lasers and laser systems.
|
|
•
|
High-power laser sales increased due to higher demand for cutting, cladding, laser sintering and heating and annealing applications partially offset by a decline in automotive related welding applications and decreases in average selling prices. High-power lasers are continuing to displace CO2 lasers in cutting systems sold by our OEM customers. We are also seeing increased use of high-power lasers for deposition applications like cladding and laser sintering which is used in additive manufacturing. Our additive manufacturing OEM customers are producing systems using lasers with higher output powers in order to improve the speed with which parts are grown. The increase in heat treatment and annealing applications was due to a large order from one customer.
|
|
|
•
|
Medium-power sales decreased due to a decrease in demand for fine cutting and lasers used in sintering/additive manufacturing partially offset by a higher demand for welding applications. As discussed above, our additive manufacturing OEM customers are increasingly using high-power lasers instead of medium-power lasers in their systems.
|
|
|
•
|
Low-power laser sales decreased due to lower sales for medical applications.
|
|
|
•
|
Pulsed laser sales increased due to higher demand for marking and engraving applications. Marking and engraving applications are increasing due to increased demand in consumer electronics and packaging and due to increased performance offered by our high-power pulsed products.
|
|
|
•
|
QCW laser sales decreased due to lower demand from consumer electronics applications.
|
|
|
•
|
The increase in laser system sales contributed to the increase in other revenue detailed above. Increased sales in laser systems are due to increased demand for customized laser system solutions as a result of the investments we have made to develop laser systems for various applications and in the sales and distribution network to support this product line.
|
Sales for other applications increased due to higher sales for advanced applications and telecom applications. The increase in sales for advanced applications was driven by government and aerospace applications and contributed to increased high-power laser sales and sales of certain components included in other revenue detailed above. The increase in telecom sales was driven by sales from 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. These sales increases were partially offset by a decrease in medical application sales.
Cost of sales and gross margin.
Cost of sales
increased
by
$21.3 million
, or
6.9%
, to
$329.1 million
for the
nine months ended September 30, 2016
from
$307.8 million
for the
nine months ended September 30, 2015
. Our gross margin
increased
slightly to
54.7%
from
54.6%
for the
nine months ended September 30, 2016
and
2015
, respectively. Gross margin
increased
due to decreases in the cost of internally manufactured components and increased manufacturing efficiency which have offset 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. These benefits were partially offset by a decrease in absorption of manufacturing costs, increased provision for inventory reserves and also due to an increase in expenses related to the amortization of intangibles and the step-up to fair value of inventory acquired in the Menara transaction..
Sales and marketing expense.
Sales and marketing expense
increased
by
$5.0 million
, or
21.3%
, to
$28.2 million
for the
nine months ended September 30, 2016
from
$23.2 million
for the
nine months ended September 30, 2015
, primarily as a result of increased expenses for personnel, commissions, trade show and exhibitions and premises. As a percentage of sales, sales and marketing expense increased to
3.9%
for the
nine months ended September 30, 2016
from
3.4%
for the
nine months ended September 30, 2015
.
Research and development expense.
Research and development expense
increased
by
$10.8 million
, or
23.9%
, to
$56.4 million
for the
nine months ended September 30, 2016
, compared to
$45.6 million
for the
nine months ended September 30, 2015
, primarily as a result of an increase in personnel expense, stock-based compensation, premises, travel, depreciation and materials used for research and development. These increases were partially offset by decreased expenses related to outside research and development contracts. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components. 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 as well as 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. Other research and development activities include enhancing and reducing the cost of our internally manufactured components, developing new components such as crystals and refining production processes to improve manufacturing yields and productivity.As a percentage of sales, research and development expense
increased
to
7.8%
for the
nine months ended September 30, 2016
from
6.7%
for the
nine months ended September 30, 2015
.
General and administrative expense.
General and administrative expense
increased
by
$4.3 million
, or
10.3%
, to
$46.8 million
for the
nine months ended September 30, 2016
from
$42.5 million
for the
nine months ended September 30, 2015
, primarily as a result of increased expenses for personnel, stock-based compensation, fees and subscriptions, information technology , insurance, travel, legal and consulting, partially offset by lower bad debt provisions and lower expenses for premises and depreciation. As a percentage of sales, general and administrative expense
increased
to
6.5%
for the
nine months ended September 30, 2016
from
6.3%
for the
nine months ended September 30, 2015
.
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
60
, Japanese Yen
121
and Chinese Yuan
6.19
, respectively, we would have expected net sales for the
nine months ended September 30, 2016
to be
$10.6 million
higher, gross profit to be
$5.0 million
higher and total operating expenses would have been
$2.2 million
higher.
Loss (gain) on foreign exchange.
We incurred a foreign exchange loss of
$6.3 million
for the
nine months ended September 30, 2016
as compared to a
$0.5 million
gain for the
nine months ended September 30, 2015
. The loss for the
nine months ended September 30, 2016
was primarily attributable to appreciation of the Russian Ruble as compared to the U.S. Dollar and depreciation of the Chinese Yuan as compared to the U.S. Dollar. The gain for the
nine months ended September 30, 2015
was primarily attributable to depreciation of the Euro and Russian Ruble as compared to the U.S. Dollar which was partially offset by the depreciation of the Chinese Yuan as compared to the U.S. Dollar.
Interest income (expense), net.
Interest income (expense), increased to
$0.8 million
of income for the
nine months ended September 30, 2016
from
$0.3 million
of expense for the
nine months ended September 30, 2015
as a result of higher yielding interest on investments.
Other income, net.
Other income, net decreased to
$0.3 million
of
income
for the
nine months ended September 30, 2016
compared to approximately
$0.4 million
of income for the
nine months ended September 30, 2015
.
Provision for income taxes.
Provision for income taxes was
$74.7 million
for the
nine months ended September 30, 2016
compared to
$77.7 million
for the
nine months ended September 30, 2015
, representing an effective tax rate of
28.7%
and
30.0%
for the
nine months ended September 30, 2016
and
2015
, respectively. The
decrease
in the effective rate was primarily due to the the release of income tax reserves upon the completion of a tax audit, the mix of income earned in various tax jurisdictions, and an increase in the benefit related toresearch and development tax credits. The legislation enabling research
and development credits in the United States was permanently enacted at the end of 2015. As it was not permanently re-enacted until the end of the year, there was no benefit related to research and development credits for the
nine months ended September 30, 2015
.
Net income attributable to IPG Photonics Corporation.
Net income attributable to IPG Photonics Corporation increased by
$4.2 million
to
$185.6 million
, or
2.3%
for the
nine months ended September 30, 2016
compared to
$181.5 million
for the
nine months ended September 30, 2015
. Net income attributable to IPG Photonics Corporation as a percentage of our net sales
decreased
by
1.2
percentage points to
25.6%
for the
nine months ended September 30, 2016
from
26.8%
for the
nine months ended September 30, 2015
due to the factors described above.
Liquidity and Capital Resources
Our principal sources of liquidity as of
September 30, 2016
consisted of cash and cash equivalents of
$645.6
million, short-term investments of
$127.0 million
, unused credit lines and overdraft facilities of
$77.7 million
and other working capital (excluding cash and cash equivalents and short-term investments) of
$348.3
million. This compares to cash and cash equivalents of
$582.5
million, short-term investments of
$106.6 million
, unused credit lines and overdraft facilities of
$73.9 million
and other working capital (excluding cash and cash equivalents and short-term investments) of
$288.8
million as of
December 31, 2015
. The increase in cash and cash equivalents of
$63.0
million relates primarily to cash provided by operating activities in the
nine months ended September 30, 2016
of
$193.0
million, cash provided by financing activities of
$29.6 million
and effect of exchange rates on cash of
$7.4 million
which was partially offset by cash used in investing activities of
$166.9 million
which was primarily related to capital expenditures, the acquisition of Menara Networks and an increase in short-term investments.
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 two long-term notes totaling
$41.6 million
of which
$3.2 million
is the current portion. We have an unsecured note with an outstanding balance at
September 30, 2016
of
$23.5 million
of which
$1.2 million
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 $15.4 million. The Company has another note that is secured by the Company's corporate aircraft. The outstanding balance on this secured note at
September 30, 2016
was
$18.2 million
of which
$2.0 million
is the current portion. The interest rate on this secured note is fixed at 2.81% per annum and it matures in October 2019, at which time the outstanding debt balance will be $12.0 million.
We believe that our existing cash and marketable securities, our cash flows from operations and our existing lines of credit provides us with the financial flexibility to meet our liquidity and capital needs and to complete potential acquisitions of businesses and technologies. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of economic environment on our sales levels, 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
September 30, 2016
:
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Description
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Total Facility
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Interest Rate
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Maturity
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Security
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U.S. Revolving Line of Credit (1)
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Up to $50.0 million
|
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LIBOR plus 0.80% to 1.20%, depending on our performance
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April 2020
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Unsecured
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Euro Credit Facilities (Germany) (2)
|
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Euro 30.0 million ($33.6 million)
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Euribor plus 1.00% or EONIA 1.25%
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July 2017
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Unsecured, guaranteed by parent company and Germany subsidiary
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Euro Overdraft Facilities (3)
|
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Euro 2.0 million
($2.2 million)
|
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1.0%-6.5%
|
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October 2016
|
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Common pool of assets of Italian subsidiary
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(1)
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This facility is available to certain foreign subsidiaries in their respective local currencies. At
September 30, 2016
, there were no drawings however, there were
$0.2 million
of guarantees issued against the facility which reduces the amount of the facility available to draw.
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(2)
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This facility is also available to certain foreign subsidiaries in their respective local currencies. At
September 30, 2016
, there were no drawings however, there were
$8.0 million
of guarantees issued against the facility which reduces the amount of the facility available to draw.
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(3)
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At
September 30, 2016
, there were no drawings.
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Our largest committed credit lines are with Bank of America N.A. and Deutsche Bank AG in the amounts of $50.0 million and
$33.6 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
September 30, 2016
.
Operating activities.
Net cash provided by operating activities decreased by
$1.6 million
to
$193.0 million
for the
nine months ended September 30, 2016
from
$194.6 million
for the
nine months ended September 30, 2015
. Net cash provided by operating activities is generally driven by cash provided by net income after adding back non-cash charges 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. The relatively high level of investment in inventory is primarily attributable to the amount of value that is added internally which is primarily due to our vertically integrated manufacturing. 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 decrease in cash flow from operating activities for the
nine months ended September 30, 2016
primarily resulted from:
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•
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An increase in cash provided by net income after adding back non-cash charges of
$22.2 million
to
$267.0 million
for the
nine months ended September 30, 2016
as compared to
$244.9 million
for the same period in
2015
mainly resulting from an increase in depreciation and amortization and stock-based compensation which was partially offset by a decrease in net income and changes in deferred income taxes between the two periods;
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•
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An increase in accounts receivable of
$10.9 million
for the
nine months ended September 30, 2016
as compared to an increase of
$20.0 million
for the same period in
2015
;
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•
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An increase in inventory of
$42.8 million
for the
nine months ended September 30, 2016
as compared to an increase of
$52.2 million
for the same period in
2015
;
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•
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The benefits to cash flow from operating activities described above were offset by a decrease in income taxes payable of
$7.4 million
for the
nine months ended September 30, 2016
as compared to an increase in income taxes payable of
$17.5 million
for the same period in
2015
. The decrease in income taxes payable was primarily attributable to an increase in cash taxes paid in Germany as a result of an increase in estimated tax payments due for the year ended December 31, 2015 and estimated tax payments for the current year. The estimated tax payments were increased after we filed our 2014 German tax return.
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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 reasonable 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 used in investing activities was
$166.9 million
and
$55.4 million
in the
nine months ended September 30, 2016
and
2015
, respectively. The cash used in investing activities in
2016
related to
$100.0 million
for the construction of new buildings in the United States, Germany and Russia, purchases of machinery and equipment and the purchase of a building in Marlborough, MA. Additionally, cash used for investing activities in the
nine months ended September 30, 2016
included
$46.5 million
for the purchase of Menara Networks, net of cash acquired and
$20.6 million
of net purchases of short-term investments. The cash used in investing activities in
2015
related to
$50.8 million
for the construction and purchase of new buildings in the United States, Germany and Russia, purchases of machinery and equipment and
$5.0 million
for the the purchase of a majority interest in a company.
We expect to incur between
$110 million
and
$125 million
in capital expenditures, excluding acquisitions, in
2016
, as we continue to upgrade facilities and equipment to add capacity worldwide to support anticipated revenue growth. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. 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 provided by financing activities was
$29.6 million
and
$1.2 million
in the
nine months ended September 30, 2016
and
2015
, respectively. The cash provided by financing activities in
2016
was primarily related to proceeds of
$23.8 million
from financing related to the purchase of a building in Marlborough, MA, as well as cash provided by the exercise of stock options, sales of shares under our employee stock purchase plan and the related tax benefits of the exercises partially offset by the purchase of treasury stock of
$3.5 million
and payments on our long-term borrowings and net payments of line-of-credit facilities. The cash provided by financing activities in
2015
was primarily related to the cash provided by the exercise of stock options, sales of shares under our employee stock purchase plan and the related tax benefits of the exercises 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, 2015
. 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
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The impact that the standard will have on our consolidated financial statements will depend upon certain criteria including the timing of the exercise and release of equity instruments, the value realized upon exercise or release of equity instruments and the fair value of the equity instruments when they were granted. The excess tax benefit from the exercise of equity instruments was
$2.8 million
and
$5.8 million
for the
nine months ended September 30, 2016
and
2015
, respectively.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The standard 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 currently evaluating the impact that the standard will have and do not expect it to have a material impact 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"). The standard 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 and do not expect it to have a material impact on our consolidated financial statements upon adoption.
In November 2015, the FASB issued amended guidance that clarifies that in a classified statement of financial position, an entity shall classify deferred tax liabilities and assets as non-current amounts. The new guidance supersedes ASC 740-10-45-5 which required the deferred tax assets and liabilities for a particular tax jurisdiction be allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro rata basis. The new standard will become effective for our fiscal year beginning January 1, 2017. We have determined that the standard will not have a material impact on our consolidated financial statements upon adoption. Current deferred tax assets at
September 30, 2016
and
December 31, 2015
were
$24.6 million
and
$20.3 million
, respectively. Current deferred tax liabilities at
September 30, 2016
and
December 31, 2015
were
$4.0 million
and
$3.2 million
, respectively.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 ("ASU 2014-09") "Revenue from Contracts with Customers." 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. As currently issued and
amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements and do not expect it to have a material impact on our consolidated financial statements upon adoption.