e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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o |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33155
IPG PHOTONICS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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04-3444218 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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50 Old Webster Road, Oxford, Massachusetts
(Address of principal executive offices)
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01540
(Zip code) |
(508) 373-1100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data file required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer o |
Accelerated Filer þ |
Non-Accelerated Filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As of May 04, 2011, there were 47,267,143 shares of the registrants common stock issued and
outstanding.
PART IFINANCIAL INFORMATION
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ITEM 1. |
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UNAUDITED INTERIM FINANCIAL STATEMENTS |
IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2011 |
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2010 |
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(In thousands, except share and per |
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share data) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
160,618 |
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$ |
147,860 |
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Accounts receivable, net |
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57,970 |
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|
55,399 |
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Inventories, net |
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88,698 |
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72,470 |
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Income taxes receivable |
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2,376 |
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|
2,663 |
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Prepaid expenses and other current assets |
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17,834 |
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13,816 |
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Deferred income taxes |
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9,314 |
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8,593 |
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|
|
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Total current assets |
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336,810 |
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300,801 |
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DEFERRED INCOME TAXES |
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4,485 |
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4,489 |
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INTANGIBLE ASSETS, NET |
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8,104 |
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7,131 |
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PROPERTY, PLANT AND EQUIPMENT, NET |
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|
131,300 |
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120,683 |
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OTHER ASSETS |
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8,868 |
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|
8,751 |
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TOTAL |
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$ |
489,567 |
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$ |
441,855 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Revolving line-of-credit facilities |
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$ |
6,587 |
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$ |
6,841 |
|
Current portion of long-term debt |
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|
1,531 |
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|
1,333 |
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Accounts payable |
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|
12,526 |
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9,510 |
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Accrued expenses and other liabilities |
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47,512 |
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|
50,105 |
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Deferred income taxes |
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7,557 |
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|
3,387 |
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Income taxes payable |
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7,688 |
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11,594 |
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Total current liabilities |
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83,401 |
|
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|
82,770 |
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DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES |
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2,766 |
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|
1,735 |
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LONG-TERM DEBT, NET OF CURRENT PORTION |
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17,112 |
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15,644 |
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REDEEMABLE NONCONTROLLING INTERESTS |
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25,839 |
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24,903 |
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|
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Total liabilities |
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129,118 |
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|
125,052 |
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COMMITMENTS AND CONTINGENCIES (NOTE 11) |
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IPG PHOTONICS CORPORATION STOCKHOLDERS EQUITY: |
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Common stock, $0.0001 par value, 175,000,000 shares authorized;
47,229,615 shares issued and outstanding at March 31, 2011;
46,988,566 shares issued and outstanding at December 31, 2010 |
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5 |
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|
5 |
|
Additional paid-in capital |
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317,709 |
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|
310,218 |
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Retained earnings |
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28,635 |
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|
5,567 |
|
Accumulated other comprehensive income |
|
|
13,890 |
|
|
|
810 |
|
|
|
|
|
|
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|
Total IPG Photonics Corporation stockholders equity |
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|
360,239 |
|
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|
316,600 |
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NONCONTROLLING INTERESTS |
|
|
210 |
|
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|
203 |
|
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Total stockholders equity |
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360,449 |
|
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316,803 |
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TOTAL |
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$ |
489,567 |
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$ |
441,855 |
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|
See notes to consolidated financial statements.
3
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended March 31, |
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2011 |
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2010 |
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(in thousands, except per share |
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|
data) |
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NET SALES |
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$ |
99,958 |
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$ |
51,204 |
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COST OF SALES |
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46,292 |
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30,657 |
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GROSS PROFIT |
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53,666 |
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20,547 |
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OPERATING EXPENSES: |
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Sales and marketing |
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4,948 |
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4,338 |
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Research and development |
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5,731 |
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4,158 |
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General and administrative |
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8,169 |
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6,828 |
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Loss (gain) on foreign exchange |
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720 |
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(108 |
) |
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Total operating expenses |
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19,568 |
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15,216 |
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OPERATING INCOME |
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34,098 |
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|
5,331 |
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OTHER EXPENSE, Net: |
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Interest expense, net |
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(206 |
) |
|
|
(208 |
) |
Other income (expense), net |
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8 |
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|
(66 |
) |
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Total other expense |
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|
(198 |
) |
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|
(274 |
) |
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INCOME BEFORE PROVISION FOR INCOME TAXES |
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33,900 |
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|
5,057 |
|
PROVISION FOR INCOME TAXES |
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|
(10,522 |
) |
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(1,633 |
) |
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|
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NET INCOME |
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|
23,378 |
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|
3,424 |
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LESS: NET INCOME ATTRIBUTABLE TO
NONCONTROLLING INTERESTS |
|
|
310 |
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27 |
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NET INCOME ATTRIBUTABLE TO IPG PHOTONICS
CORPORATION |
|
$ |
23,068 |
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$ |
3,397 |
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NET INCOME ATTRIBUTABLE TO IPG PHOTONICS
CORPORATION PER SHARE: |
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Basic |
|
$ |
0.49 |
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$ |
0.07 |
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Diluted |
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$ |
0.47 |
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$ |
0.07 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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|
47,099 |
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|
46,098 |
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Diluted |
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|
48,690 |
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|
47,191 |
|
See notes to consolidated financial statements.
4
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31, |
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2011 |
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2010 |
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(In thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
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|
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Net income |
|
$ |
23,378 |
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|
$ |
3,424 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
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|
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|
|
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|
Depreciation and amortization |
|
|
5,658 |
|
|
|
5,226 |
|
Deferred income taxes |
|
|
5,201 |
|
|
|
(2,409 |
) |
Stock-based compensation |
|
|
2,607 |
|
|
|
770 |
|
Gains (losses) on foreign currency transactions |
|
|
744 |
|
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|
(106 |
) |
Other |
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|
(293 |
) |
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|
(10 |
) |
Provisions for inventory, warranty & bad debt |
|
|
3,806 |
|
|
|
1,718 |
|
Changes in assets and liabilities that provided (used) cash: |
|
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|
|
|
|
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|
Accounts receivable |
|
|
(2,086 |
) |
|
|
(897 |
) |
Inventories |
|
|
(13,720 |
) |
|
|
(3,349 |
) |
Prepaid expenses and other current assets |
|
|
(4,610 |
) |
|
|
38 |
|
Accounts payable |
|
|
3,129 |
|
|
|
(399 |
) |
Accrued expenses and other liabilities |
|
|
(5,975 |
) |
|
|
3,634 |
|
Income and other taxes payable |
|
|
(4,577 |
) |
|
|
236 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
13,262 |
|
|
|
7,876 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
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|
Purchases of property, plant and equipment and intangible assets |
|
|
(9,587 |
) |
|
|
(4,953 |
) |
Acquisition of businesses, net of cash acquired |
|
|
(450 |
) |
|
|
(748 |
) |
Other |
|
|
149 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,888 |
) |
|
|
(5,520 |
) |
|
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|
|
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|
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from line-of-credit facilities |
|
|
3,629 |
|
|
|
4,274 |
|
Payments on line-of-credit facilities |
|
|
(4,044 |
) |
|
|
(3,112 |
) |
Principal payments on long-term borrowings |
|
|
(333 |
) |
|
|
(333 |
) |
Exercise of employee stock options, issuances under employee stock purchase plan
and related tax benefit from exercise |
|
|
4,884 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,136 |
|
|
|
1,040 |
|
|
|
|
|
|
|
|
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
5,248 |
|
|
|
(1,909 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
12,758 |
|
|
|
1,487 |
|
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
147,860 |
|
|
|
82,920 |
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
160,618 |
|
|
$ |
84,407 |
|
|
|
|
|
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|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
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|
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|
Cash paid for interest |
|
$ |
255 |
|
|
$ |
281 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
8,865 |
|
|
$ |
1,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Demonstration units transferred from inventory to other assets |
|
$ |
789 |
|
|
$ |
490 |
|
Amounts related to acquisition of businesses included in accounts payable and accrued expenses and other liabilities |
|
$ |
882 |
|
|
$ |
789 |
|
Additions to property, plant and equipment included in accounts payable |
|
$ |
125 |
|
|
$ |
119 |
|
Property purchase financed with debt |
|
$ |
1,679 |
|
|
$ |
|
|
See notes to consolidated financial statements.
5
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
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|
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|
|
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|
|
|
|
|
|
|
Three Months Ended March 31, |
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|
2011 |
|
|
2010 |
|
|
|
(In thousands, except share and per share data) |
|
|
|
Shares |
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|
Amount |
|
|
Shares |
|
|
Amount |
|
COMMON STOCK |
|
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|
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|
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|
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|
Balance, beginning of year |
|
|
46,988,566 |
|
|
$ |
5 |
|
|
|
46,076,472 |
|
|
$ |
5 |
|
Exercise of stock options |
|
|
239,670 |
|
|
|
|
|
|
|
48,719 |
|
|
|
|
|
Common stock issued under employee stock purchase plan |
|
|
1,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
47,229,615 |
|
|
|
5 |
|
|
|
46,125,191 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
310,218 |
|
|
|
|
|
|
|
293,743 |
|
Stock-based compensation |
|
|
|
|
|
|
2,607 |
|
|
|
|
|
|
|
770 |
|
Exercise of stock options and related tax benefit from exercise |
|
|
|
|
|
|
4,866 |
|
|
|
|
|
|
|
211 |
|
Common stock issued under employee stock purchase plan |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
317,709 |
|
|
|
|
|
|
|
294,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS (ACCUMULATED DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
5,567 |
|
|
|
|
|
|
|
(48,424 |
) |
Net income attributable to IPG Photonics Corporation |
|
|
|
|
|
|
23,068 |
|
|
|
|
|
|
|
3,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
28,635 |
|
|
|
|
|
|
|
(45,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
810 |
|
|
|
|
|
|
|
11,106 |
|
Translation adjustments |
|
|
|
|
|
|
13,599 |
|
|
|
|
|
|
|
(8,452 |
) |
Unrealized gain (loss) on derivatives, net of tax |
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
(72 |
) |
Attribution to noncontrolling interests (NCI) & redeemable NCI |
|
|
|
|
|
|
(634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
13,890 |
|
|
|
|
|
|
|
2,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL IPG PHOTONICS CORPORATION STOCKHOLDERS EQUITY |
|
|
|
|
|
|
360,239 |
|
|
|
|
|
|
|
252,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTERESTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
141 |
|
Net income attributable to NCI |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
27 |
|
Other comprehensive income attributable to NCI |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
|
|
|
|
$ |
360,449 |
|
|
|
|
|
|
$ |
252,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
$ |
23,378 |
|
|
|
|
|
|
$ |
3,424 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
13,599 |
|
|
|
|
|
|
|
(8,452 |
) |
Unrealized gain (loss) on derivatives, net of tax |
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
(72 |
) |
Change in cumulative translation adjustment attributable to NCI & redeemable NCI |
|
|
|
|
|
|
(634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
$ |
36,458 |
|
|
|
|
|
|
$ |
(5,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
6
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by IPG Photonics Corporation, or IPG, we, our, 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 our accounts and those of our 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 our Annual Report on Form 10-K for the year ended
December 31, 2010.
In the opinion of our management, the unaudited financial information for the
interim periods presented reflects all adjustments necessary for a fair presentation
of our 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.
We have evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q with the SEC.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board issued new accounting
guidance for revenue recognition related to multiple element arrangements. This
guidance established a selling price hierarchy, which allows the use of estimated
selling prices to allocate arrangement consideration to deliverables in cases where
neither vendor-specific objective evidence nor third-party evidence is available.
The new guidance is effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning in the first quarter of fiscal 2011.
The adoption of this accounting guidance did not have a material impact on the
Companys consolidated financial statements and is not expected to have a material
effect on the Companys consolidated financial statements in subsequent periods.
Revenue from orders with multiple deliverables is divided into separate units of
accounting when certain criteria are met. These separate units generally consist of
equipment and installation. The consideration for the arrangement is then allocated
to the separate units of accounting based on their relative selling prices. The
selling price of equipment is based on vendor specific objective evidence and the
selling price of installation is based on third party evidence. Applicable revenue
recognition criteria are then applied separately for each separate unit of
accounting. Equipment revenue is generally recognized upon the transfer of ownership
which is typically at the time of shipment. Installation revenue is recognized upon
completion of the installation service which is typically completed within 30 to 90
days of delivery. Returns and customer credits are infrequent and are recorded as a
reduction to revenue. Rights of return are generally not included in sales
arrangements.
3. INVENTORIES, NET
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Components and raw materials |
|
$ |
29,772 |
|
|
$ |
25,126 |
|
Work-in-process |
|
|
30,666 |
|
|
|
24,392 |
|
Finished goods |
|
|
28,260 |
|
|
|
22,952 |
|
|
|
|
|
|
|
|
Total |
|
$ |
88,698 |
|
|
$ |
72,470 |
|
|
|
|
|
|
|
|
The Company recorded inventory provisions totaling $1.0 million and $0.6
million for the three months ended March 31, 2011 and 2010, respectively. These provisions
related 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 goods.
4. FINANCING ARRANGEMENTS
The Companys borrowings under existing financing arrangements consist of the following
(in thousands):
7
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Revolving Line-of-Credit Facilities: |
|
|
|
|
|
|
|
|
Euro Overdraft Facilities |
|
$ |
2,551 |
|
|
$ |
1,882 |
|
Foreign subsidiary drawings on U.S. Line of Credit |
|
|
4,036 |
|
|
|
4,959 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,587 |
|
|
$ |
6,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Debt: |
|
|
|
|
|
|
|
|
U.S. Long-Term Note |
|
$ |
16,333 |
|
|
$ |
16,666 |
|
Other Notes payable |
|
|
2,310 |
|
|
|
311 |
|
Less: current portion |
|
|
(1,531 |
) |
|
|
(1,333 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
17,112 |
|
|
$ |
15,644 |
|
|
|
|
|
|
|
|
The U.S. line of credit is available to certain foreign subsidiaries and
allows for borrowings in the local currencies of those subsidiaries.
5. 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 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net income attributable to IPG Photonics Corporation |
|
$ |
23,068 |
|
|
$ |
3,397 |
|
Weighted average shares |
|
|
47,099 |
|
|
|
46,098 |
|
Dilutive effect of common stock equivalents |
|
|
1,591 |
|
|
|
1,093 |
|
|
|
|
|
|
|
|
Diluted weighted average common shares |
|
|
48,690 |
|
|
|
47,191 |
|
|
|
|
|
|
|
|
Basic net income attributable to IPG Photonics
Corporation per share |
|
$ |
0.49 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Diluted net income attributable to IPG Photonics
Corporation per share |
|
$ |
0.47 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
The computation of diluted weighted average common shares excludes
options to purchase 250,000 and 492,000 shares for the three months ended March
31, 2011 and 2010, respectively, because these options were out-of-the-money.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary market exposures are to interest rates and foreign exchange rates. We
use certain derivative financial instruments to help manage these exposures. We
execute these instruments with financial institutions we judge to be credit-worthy. We
do not hold or issue derivative financial instruments for trading or speculative
purposes.
We recognize all derivative financial instruments as either assets or liabilities
at fair value in the consolidated balance sheets. We have used foreign currency
forward contracts as cash flow hedges of forecasted intercompany settlements
denominated in foreign currencies of major industrial countries. We have no
outstanding foreign currency forward contracts. We have interest rate swaps that are
classified as a cash flow hedge of our variable rate debt. We have no derivatives that
are not accounted for as a hedging instrument.
Cash
flow hedges Our cash flow hedges are interest rate swaps under which we pay
fixed rates of interest. The fair value amounts in the consolidated balance sheet were (in
thousands):
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes and Other |
|
|
|
Notional Amounts1 |
|
|
Other Assets |
|
|
Long-Term Liabilities |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Interest rate swap(s) |
|
$ |
16,333 |
|
|
$ |
16,666 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
972 |
|
|
$ |
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,333 |
|
|
$ |
16,666 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
972 |
|
|
$ |
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Notional amounts represent the gross contract/notional amount of the derivatives outstanding |
The derivative gains (losses) in the consolidated statements of income related to
our interest rate swap contracts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2011 |
|
2010 |
Effective portion recognized in other comprehensive (loss)
gain, pretax: |
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
339 |
|
|
$ |
59 |
|
Effective portion reclassified from other comprehensive
(loss) gain to interest expense, pretax: |
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
(155 |
) |
|
$ |
(176 |
) |
Ineffective portion recognized in income: |
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
|
|
|
$ |
|
|
7. FAIR VALUE MEASUREMENTS
Our financial instruments consist of accounts receivable, auction rate securities,
accounts payable, drawings on revolving lines of credit, long-term debt and certain
derivative instruments.
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 accounts receivable, accounts payable and drawings on revolving
lines of credit are considered reasonable estimates of their fair market value, due to the
short maturity of these instruments or as a result of the competitive market interest rates,
which have been negotiated.
The following table presents information about our assets and liabilities measured at
fair value (in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
6,384 |
|
|
$ |
6,384 |
|
|
$ |
|
|
|
$ |
|
|
Treasury bills |
|
|
44,581 |
|
|
|
44,581 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
51,835 |
|
|
$ |
50,965 |
|
|
$ |
|
|
|
$ |
870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase consideration |
|
$ |
1,023 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,023 |
|
Warrant |
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
180 |
|
Interest rate swaps |
|
|
972 |
|
|
|
|
|
|
|
972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
2,175 |
|
|
$ |
|
|
|
$ |
972 |
|
|
$ |
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
4,223 |
|
|
$ |
4,223 |
|
|
$ |
|
|
|
$ |
|
|
Treasury bills |
|
|
55,679 |
|
|
|
55,679 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
921 |
|
|
|
|
|
|
|
|
|
|
|
921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
60,823 |
|
|
$ |
59,902 |
|
|
$ |
|
|
|
$ |
921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase consideration |
|
$ |
685 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
685 |
|
Warrant |
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
180 |
|
Interest rate swaps |
|
|
1,156 |
|
|
|
|
|
|
|
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
2,021 |
|
|
$ |
|
|
|
$ |
1,156 |
|
|
$ |
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the auction rate considered, among other items, the creditworthiness
of the counterparty, the timing of expected future cash flows, and the expectation of the
next time the security is expected to have a successful auction. The auction rate securities
were also compared to other indirectly observable market data with similar characteristics
to the securities held by the Company.
The fair value of the accrued contingent 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 consideration.
As of March 31, 2011, the Company has accrued a liability of $1.0 million for the estimated
fair value of contingent considerations expected to be payable upon the acquired company
reaching specific performance metrics over the next three years of operation. As of March
31, 2011, the ranges of outcomes and key assumptions have not changed
materially.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate |
|
|
Contingent |
|
|
|
|
|
|
Securities |
|
|
Consideration |
|
|
Warrant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
921 |
|
|
$ |
685 |
|
|
$ |
180 |
|
2011 transactions |
|
|
|
|
|
|
282 |
|
|
|
|
|
Change in fair value |
|
|
(51 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
$ |
870 |
|
|
$ |
1,023 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
8. INTANGIBLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Weighted- |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Weighted- |
(In thousands) |
|
Amount |
|
Amortization |
|
Amount |
|
Average Lives |
|
Amount |
|
Amortization |
|
Amount |
|
Average Lives |
|
|
|
|
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
$ |
4,664 |
|
|
$ |
(2,590 |
) |
|
$ |
2,074 |
|
|
6 Years |
|
$ |
4,664 |
|
|
$ |
(2,361 |
) |
|
$ |
2,303 |
|
|
6 Years |
Customer relationships |
|
|
3,845 |
|
|
|
(1,214 |
) |
|
|
2,631 |
|
|
5 Years |
|
|
3,633 |
|
|
|
(998 |
) |
|
|
2,635 |
|
|
5 Years |
Production know-how |
|
|
3,882 |
|
|
|
(494 |
) |
|
|
3,388 |
|
|
7 Years |
|
|
2,518 |
|
|
|
(335 |
) |
|
|
2,183 |
|
|
9 Years |
Other identifiable intangibles |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,402 |
|
|
$ |
(4,298 |
) |
|
$ |
8,104 |
|
|
|
|
|
|
$ |
10,825 |
|
|
$ |
(3,694 |
) |
|
$ |
7,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company completed an acquisition through its Italian subsidiary in the
first quarter of 2011. Consideration included cash payments aggregating $0.9 million and
contingent consideration with an aggregate fair value of $0.3 million on a preliminary basis
subject to finalization of the purchase price and valution. Net assets acquired primarily
consisted of intangible assets (production know-how with weighted-average estimated useful
life of 4 years) aggregating $1.2 million.
The Company completed two acquisitions in 2010, one in the U.S. in the first quarter
and one in Germany in the second quarter. Consideration paid included cash payments
aggregating $4.5 million and contingent consideration and seller provided financing with an
aggregate fair value of $1.0 million. Net assets acquired primarily consisted of intangible
assets (patents, customer relationships, and production know-how with weighted-average
estimated useful lives of 10 years, 5 years and 8 years, respectively) aggregating $5.2
million.
The estimated future amortization expense for intangibles as of March 31, 2011 for the
remainder of 2011 and subsequent years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
$1,750 |
|
$ |
2,052 |
|
|
$ |
1,440 |
|
|
$ |
1,186 |
|
|
$ |
1,676 |
|
9.
PRODUCT WARRANTIES
The Company typically provides one to three-year parts and service warranties on lasers
and amplifiers. Most of the companys 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 activity recorded during the three months
ended March 31, 2011 and 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Balance at January 1 |
|
$ |
6,917 |
|
|
$ |
3,886 |
|
Provision for warranty accrual |
|
|
1,648 |
|
|
|
891 |
|
Warranty claims and other reductions |
|
|
(521 |
) |
|
|
(856 |
) |
Foreign currency translation |
|
|
372 |
|
|
|
(140 |
) |
|
|
|
|
|
|
|
Balance at March 31 |
|
$ |
8,416 |
|
|
$ |
3,781 |
|
|
|
|
|
|
|
|
11
10. INCOME TAXES
A reconciliation of the total amounts of unrecognized tax benefits is as follows (in
thousands):
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
Beginning balance January 1 |
|
$ |
2,951 |
|
Gross decreases tax positions in prior periods |
|
|
|
|
Gross increases tax positions in prior periods |
|
|
|
|
|
|
|
|
Ending balance March 31 |
|
$ |
2,951 |
|
|
|
|
|
Substantially all of the liability for uncertain tax benefits related to various
federal, state and foreign income tax matters, would benefit the Companys effective tax
rate, if recognized.
11. COMMITMENTS AND CONTINGENCIES
In November 2006, the Company was sued for patent infringement relating to certain
products, including but not limited to fiber lasers and fiber amplifiers. The plaintiff
filed a complaint for damages of over $10 million, treble damages for alleged willful
infringement and injunctive relief. The postponed August 2010 trial date has now been
rescheduled for September 2011. The Company believes it has meritorious defenses and is
vigorously contesting the claims. No loss is deemed probable at March 31, 2011 and no
amounts have been accrued in respect of this contingency.
ITEM 2. MANAGEMENTS 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
managements 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 for diverse applications in numerous markets. Our diverse
lines of low, mid and high-power lasers and amplifiers are used in materials
processing, advanced, communications and medical applications. We sell our products
globally to original equipment manufacturers, or OEMs, system
integrators and end users. We market our products internationally primarily through
our direct sales force and also through agreements with independent sales
representatives and distributors.
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. Since our formation in 1990, we have
been focused on developing and manufacturing high-power fiber lasers and amplifiers.
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. Our net sales have historically fluctuated from quarter to quarter.
The increase or decrease in sales from a prior quarter can be affected by the timing
of orders received from customers, the shipment, installation and acceptance of
products at our customers facilities, the mix of OEM orders and one-time orders for
products with large purchase prices, and seasonal factors such as the purchasing
patterns and levels of activity throughout the year in the regions where we operate.
Historically, our net sales have been higher in the second half of the year than in
the first half of the year. Furthermore, net sales can be affected by the time taken
to qualify our products for use in new applications in the end markets that we serve.
The adoption of our products by a new customer or qualification of a new application
can lead to an increase in net sales for a period, which may then slow until we
further penetrate new markets or obtain new customers. Our net sales can also be
affected from quarter to quarter by the general level of worldwide economic activity,
including economic expansion or contraction, and expenditures on capital equipment. In
general, increases in worldwide economic activity have a positive effect on our sales
and decreases in economic activity have a negative effect our sales.
Gross margin. Our total gross margin in any period can be affected by total net sales in any
period, product mix, that is, the percentage of our revenue in that period that is attributable to
higher or lower-power products, production volumes, changes to the sales prices of our products in
response to the competitive environment and other factors, some of which are
12
not under our control. Our product mix affects our margins because the selling
price per watt is higher for low-power and mid-power devices than for high-power
devices. 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.
A high proportion of our costs is fixed so they are generally difficult or slow to
adjust in response to changes in demand. In addition, our fixed costs increase as we
expand our capacity. Gross margins generally decline if production volumes are lower as
a result of a decrease in sales or inventory because the absorption of fixed
manufacturing costs will be reduced. Gross margins generally improve when the opposite
occurs. In addition, absorption of fixed costs can benefit gross margins due to an
increase in production that is not sold and placed into inventory. If both sales and
inventory decrease in the same period, the decline in gross margin may be greater if we
cannot reduce fixed costs or choose not to reduce fixed costs to match the decrease in
the level of production. We also regularly review our inventory for items that are
slow-moving, have been rendered obsolete or determined to be excess. If we experience a
decline in sales that reduces absorption of our fixed costs, or if we have production
issues or inventory write-downs, our gross margins will be negatively affected.
Sales and marketing expense. We expect to continue to expand our worldwide direct
sales organization, build and expand applications centers, hire additional personnel
involved in marketing in our existing and new geographic locations, increase the number
of units used 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
and products. We plan to increase the personnel involved in research and development and
expect to increase other research and development expenses. As such, we expect that our
research and development expenses will increase in the aggregate.
General and administrative expense. We expect our general and administrative
expenses to increase moderately as we continue to invest in systems and resources to
support our worldwide operations. Legal expenses vary from quarter to quarter based upon
the stage of litigation, including patent re-examinations and termination of litigation
stays, but could increase in response to any future litigation or due to a change in
status of current intellectual property matters. The timing and amount of legal expenses
may vary substantially from quarter to quarter.
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 were 15% for the three months ended March 31, 2011, 19% during 2010, 12% in 2009
and 17% in 2008. 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 were to substantially reduce
their purchases from us, our results would be adversely affected.
Results of Operations for the three months ended March 31, 2011 compared to the three months
ended March 31, 2010
Net sales. Net sales increased by $48.8 million, or 95.2%, to $100.0 million for the three
months ended March 31, 2010 from $51.2 million for the three months ended March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2011 |
|
2010 |
|
Change |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials processing |
|
$ |
86,397 |
|
|
|
86.4 |
% |
|
$ |
42,740 |
|
|
|
83.5 |
% |
|
$ |
43,657 |
|
|
|
102.1 |
% |
Advanced applications |
|
|
8,232 |
|
|
|
8.2 |
% |
|
|
4,684 |
|
|
|
9.1 |
% |
|
|
3,548 |
|
|
|
75.7 |
% |
Communications |
|
|
3,202 |
|
|
|
3.2 |
% |
|
|
1,854 |
|
|
|
3.6 |
% |
|
|
1,348 |
|
|
|
72.7 |
% |
Medical |
|
|
2,127 |
|
|
|
2.1 |
% |
|
|
1,926 |
|
|
|
3.8 |
% |
|
|
200 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
99,958 |
|
|
|
100.0 |
% |
|
$ |
51,204 |
|
|
|
100.0 |
% |
|
$ |
48,753 |
|
|
|
95.2 |
% |
|
|
|
|
|
|
|
Sales for materials processing applications increased due to substantially increased
sales of high power lasers used in cutting and welding applications and pulsed lasers used in
marking and engraving applications both due to the continued economic recovery
and increased acceptance of the advantages of fiber laser technology. An increasing number
of OEM customers have developed
13
cutting systems that use our high power lasers and sales of
these systems are gaining market share from gas laser systems because fiber laser systems cut
a more diverse number of metals faster and at a lower cost. In addition, new welding
processes using fiber lasers have been developed increasing sales of lasers for this
application which are replacing traditional laser and non-laser welding technologies due to
the faster welding speeds and improved weld quality. The increase in sales of advanced
applications was due to increased sales for optical pumping and research and development
applications and higher sales of high-power lasers used in government applications. Sales for
communications applications increased due to increased sales of amplifiers in Russia. Sales
for medical applications increased due to increased demand from our established customer in
the United States and sales to new customers in Europe and Asia.
Cost of sales and gross margin. Cost of sales increased by $15.6 million, or 51.0%, to
$46.3 million for the three months ended March 31, 2011 from $30.7 million for the three
months ended March 31, 2010. Our gross margin increased to 53.7% for the three months ended
March 31, 2011 from 40.1% for the three months ended March 30, 2010. Gross margin increased
due to an improvement in manufacturing efficiency because the increase in manufacturing
expenses was less than the increase in net sales. Absorption of our fixed manufacturing
costs was also more favorable due to an increase in production volume part of which was sold
and part of which was placed in inventory. In addition, cost of sales benefited from a
reduction in the cost per watt of our diodes and a decrease in the cost of internally
manufactured optical components and accessories. Expenses related to inventory reserves and
other valuation adjustments increased by $0.4 million to $1.0 million, or 1.0% of sales for
the three months ended March 31, 2011, as compared to $0.6 million, or 1.2% of sales for the
three months ended March 31, 2010.
Sales and marketing expense. Sales and marketing expense increased by $0.6 million, or
14.1%, to $4.9 million for the three months ended March 31, 2011 from $4.3 million for the
three months ended March 31, 2010, primarily as a result of an increase in personnel costs
due to an increase in headcount, stock based compensation and bonus accruals, partially
offset by a decrease in amortization of units used for demonstration purposes. Bonus
accruals increased due to an increase in net sales. Stock based compensation increased in
part due to changes in assumptions made during the quarter regarding how expense is
recognized over the service period. As a percentage of sales, sales and marketing expense
decreased to 5.0% for the three months ended March 31, 2011 from 8.5% for the three months
ended March 31, 2010.
Research and development expense. Research and development expense increased $1.5 million,
or 37.8%, to $5.7 million for the three months ended March 31, 2011, compared to $4.2 million
for the three months ended March 31, 2010, primarily as a result of an increase in personnel
costs. Research and development activity continues to focus on enhancing the performance of
our internally manufactured components, refining production processes to improve
manufacturing yields, the development of new products operating at different wavelengths and
higher output powers and new complementary accessories to be used with our products. As a
percentage of sales, research and development expense decreased to 5.7% for the three months
ended March 31, 2011 from 8.1% for the three months ended March 31, 2010.
General and administrative expense. General and administrative expense increased by $1.4
million, or 19.6%, to $8.2 million for the three months ended March 31, 2011 from $6.8
million for the three months ended March 31, 2010, primarily due to an increase in personnel
costs resulting from an increase in headcount, stock based compensation and accruals for
bonuses, partially offset by a decrease in legal fees related to a patent infringement action
brought against us and lower bad debt expense. We will continue to incur significant legal
expenses as we prepare for the trial which is scheduled for September 2011.
Bonus compensation increased due to an improvement in our financial results. Stock based
compensation increased in part due to changes in assumptions made during the quarter
regarding how expense is recognized over the service period. As a percentage of sales,
general and administrative expense decreased to 8.2% for the three months ended March 31,
2011 from 13.3% for the three months ended March 31, 2010.
Effect of exchange rates on net sales, gross profit and operating expenses. We estimate that
if exchange rates had been the same as one year ago, net sales for the three months ended
March 31, 2011 would have been $1.2 million lower, gross profit would have been $0.1 million
higher and total operating expenses would have been $0.1million lower.
Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $0.7 million for the
three months ended March 31, 2011 as compared to an exchange gain of $0.1 million for the
three months ended March 31, 2010. At the end of the first quarter our primary exposure to
foreign exchange risk was due to our net dollar denominated assets held by subsidiaries with
a Euro functional currency.
Interest expense, net. Interest expense, net remained consistent at $0.2 million for the
three months ended March 31, 2011 and for the three months ended March 31, 2010.
14
Provision for income taxes. Provision for income taxes was $10.5 million for the three
months ended March 31, 2011 compared to $1.6 million for the three months ended March 31,
2010, representing an effective tax rate of 31.0% and 32.3% for the three months ended March
31, 2011 and 2010, respectively. The increase in the provision for income taxes was
primarily the result of increased income before provision for income taxes. The decrease in
effective rate was due primarily to the mix of income earned in various tax jurisdictions and
because we provided additional amounts for uncertain tax positions in the first quarter of
2010.
Net income attributable to IPG Photonics Corporation. Net income attributable to IPG
Photonics Corporation increased by $19.7 million to $23.1 million for the three months ended
March 31, 2011 compared to $3.4 million for the three months ended March 31, 2010. Net income
attributable to IPG Photonics Corporation as a percentage of our net sales increased by 16.5
percentage points to 23.1% for the three months ended March 31, 2011 from 6.6% for the three
months ended March 31, 2010 due to the factors described above.
Liquidity and Capital Resources
Our principal sources of liquidity as of March 31, 2011 consisted of cash and cash
equivalents of $160.6 million, unused credit lines and overdraft facilities of $53.2 million
and working capital (excluding cash) of $92.8 million. This compares to cash and cash
equivalents of $147.9 million, unused credit lines and overdraft facilities of $51.5 million
and working capital (excluding cash) of $70.2 million as of December 31, 2010. The increase
in cash and cash equivalents of $12.7 million from December 31, 2010 relates primarily to
cash provided by operating activities in the three months ended March 31, 2011 of $13.3
million and financing activities in the three months ended March 31, 2011 of $9.9 million,
partially offset by cash outflows related to capital expenditures of $9.6 million.
Our long-term debt consists primarily of a $16.3 million secured variable-rate note, of which
$1.3 million is the current portion. During the second quarter of 2010 we renegotiated the
terms of this note, extending its maturity from August 2013 to June 2015, at which time the
outstanding debt balance would be $10.7 million. The variable interest rate was fixed by
means of an interest rate swap through the original maturity date and that swap is still in
place. In October 2010, we fixed the interest rate on this debt for the period from the
original maturity date to the extended maturity date by means of a forward starting interest
rate swap. The note is secured by a mortgage on real estate and buildings that we own in
Massachusetts. In January 2011 we entered into a 10 year Euro 1.4 million ($2.0 million)
mortgage obligation to fund the purchase of a new building in Italy, of which $0.2 million is
the current portion. The interest on this mortgage obligation is fixed at 4.96% and it
amortizes in full over the term of the obligation. The remaining long term debt consists of
Euro 0.2 million ($0.3 million) seller provided financing relating to the purchase of
Cosytronic, KG in 2010.
We expect that our existing cash and marketable securities, our cash flows from operations
and our existing lines of credit will be sufficient to meet our liquidity and capital needs
for the foreseeable future. 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, the timing and introductions of new products, the need to
ensure access to adequate manufacturing capacity and the continuing market acceptance of our
products. We have made no arrangements to obtain additional financing, and there is no
assurance that such additional financing, if required or desired, will be available in
amounts or on terms acceptable to us, if at all.
The following table details our line-of-credit facilities as of March 31, 2011:
|
|
|
|
|
|
|
|
|
Description |
|
Available Principal |
|
Interest Rate |
|
Maturity |
|
Security |
|
|
|
|
|
|
|
|
|
U.S.
Revolving Line of Credit (1)
|
|
Up to $35 million
|
|
LIBOR plus 0.125% to
1.625%, depending on
our performance
|
|
July 2015
|
|
Unsecured |
|
|
|
|
|
|
|
|
|
Euro
Credit Facility (Germany)(2)
|
|
Euro 15.0 million
($21.1 million)
|
|
Euribor + 0.85% or
EONIA 1.2%
|
|
June 2012
|
|
Unsecured, guaranteed
by parent company |
|
|
|
|
|
|
|
|
|
Euro
Overdraft Facilities
|
|
Euro 2.6 million
($3.7
million)
|
|
2.0%-6.5%
|
|
Between July 2011 and
February 2012
|
|
Common pool of assets
of German and Italian
subsidiaries |
|
|
|
(1) |
|
$15.0 million of this credit facility is available to our foreign subsidiaries in
their respective local currencies, including India, Italy, China, Japan and South Korea.
Total drawings at March 31, 2011 were $4.0 million with a weighted average interest
rate of 1.3%. |
15
|
|
|
(2) |
|
$4.4 million of this credit facility is available to our Russian subsidiary and
$4.4 million is available to our Italian subsidiary. Total drawing at March 31, 2011 was
$1.4 million with an interest rate of 2.0%. |
Our largest committed credit lines are with Bank of America and Deutsche Bank in the amounts
of $35.0 million and $21.1 million, 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 facilities. 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 greater than 1.5:1. Debt
service is defined as required principal and interest payments during the period. Cash flow
is defined as EBITDA less unfunded capital expenditures. For trailing twelve month periods
until March 2011, up to $15.0 million of our capital expenditures are treated as funded from
the proceeds of our initial public offering. The funded debt to EBITDA covenant requires that
the sum of all indebtedness for borrowed money on a consolidated basis shall be less than two
times our trailing twelve months EBITDA. We were in compliance with all such financial
covenants as of and for the three months ended March 31, 2011.
The financial covenants in our loan documents may cause us to not take or to delay
investments and actions that we might otherwise undertake because of limits on capital
expenditures and amounts that we can borrow or lease. In the event that we do not comply with
any one of these covenants, we would be in default under the loan agreement or loan
agreements, which may result in acceleration of the debt, cross-defaults on other debt or a
reduction in available liquidity, any of which could harm our results of operations and
financial condition.
Operating activities. Net cash provided by operating activities increased by $5.4 million
to $13.3 million for the three months ended March 31, 2011 from $7.9 million for the three
months ended March 31, 2010, primarily resulting from:
|
|
|
An increase in cash provided by net income after adding back non-cash
charges of $32.5 million in the three months ended March 31, 2011 as compared to
the same period in 2010; partially offset by |
|
|
|
|
An increase in inventory of $13.7 million in the three months ended
March 31, 2011 compared to an increase of inventory of $3.3 million in the three
months ended March 31, 2010; |
|
|
|
|
A decrease in accrued expenses and other liabilities of $6.0 million
in the three months ended March 31, 2010 compared to an increase of $3.6 million
in the three months ended March 31, 2010. |
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 used in investing activities was $9.9 million and $5.5
million in the three months ended March 31, 2011 and 2010, respectively. The cash used in
investing activities in 2011 related to the purchase of new buildings in Germany and Japan
and start of the construction of a new building in Russia. In the three months ended March
31, 2010, cash used in investing activities was related to the purchase of a new building in
South Korea to house a new laser application center, the acquisitions of Photonics
Innovations Inc. and Cosytronic, KG and purchases of equipment primarily in the United States
and Germany.
We expect to incur approximately $50 million in capital expenditures, including acquisitions,
in 2011. 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 $4.1 million in the
three months ended March 31, 2011 as compared to net cash used in financing activities of
$1.0 million in the three months ended March 31, 2010. The cash provided by
16
financing activities in 2011 was primarily related to cash provided by the exercise of stock
options. The cash provided by financing activities in 2010 was primarily related to net
drawings on 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,
2010. 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 October 2009, the Financial Accounting Standards Board issued new accounting
guidance for revenue recognition related to multiple element arrangements. This
guidance established a selling price hierarchy, which allows the use of estimated
selling prices to allocate arrangement consideration to deliverables in cases where
neither vendor-specific objective evidence nor third-party evidence is available. The
new guidance is effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning in the first quarter of fiscal 2011. The
adoption of this accounting guidance did not have a material impact on the Companys
consolidated financial statements and is not expected to have a material effect on the
Companys consolidated financial statements in subsequent periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the ordinary course of business, which consists
primarily of interest rate risk associated with our cash and cash equivalents and our debt
and foreign exchange rate risk.
Interest rate risk. Our investments have limited exposure to market risk. To minimize
this risk, we maintain a portfolio of cash, cash equivalents and short-term investments,
consisting primarily of bank deposits, money market funds and short-term government funds.
The interest rates are variable and fluctuate with current market conditions. Because of the
short-term nature of these instruments, a sudden change in market interest rates would not be
expected to have a material impact on our financial condition or results of operations.
We are also exposed to market risk as a result of increases or decreases in the amount
of interest expense we must pay on our bank debt and borrowings on our bank credit
facilities. Our interest obligations on our long-term debt are fixed by means of interest
rate swap agreements. Although our U.S. revolving line of credit and our Euro credit
facility have variable rates, we do not believe that a 10% change in market interest rates
would have a material impact on our financial position or results of operations.
Exchange rates. Due to our international operations, a significant portion of our net
sales, cost of sales and operating expenses are denominated in currencies other than the U.S.
dollar, principally the Euro, the Japanese Yen, the Russian Ruble, and Chinese Yuan. As a
result, our international operations give rise to transactional market risk associated with
exchange rate movements of the U.S. dollar, the Euro, the Japanese Yen and the Russian Ruble.
Gains and losses on foreign exchange transactions totaled $0.7 million loss and $0.1 million
gain for the three months ended March 31, 2011 and 2010, respectively. Management believes
that the use of foreign currency hedging instruments reduces the risks of certain foreign
currency transactions; however, these
17
instruments provide only limited protection. We have foreign currency hedges as of March 31,
2011, however, we will continue to analyze our exposure to currency exchange rate
fluctuations and may engage in additional financial hedging techniques in the future to
attempt to minimize the effect of these potential fluctuations. Exchange rate fluctuations
may adversely affect our financial results in the future.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of our chief executive officer and our chief financial
officer, our management has evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)),
as of the end of the period covered by this Quarterly Report on Form 10-Q (the
Evaluation Date). Based upon that evaluation, our chief executive officer and our
chief financial officer have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that occurred during
the last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings and other disputes
incidental to our business. There have been no material developments in the first
quarter of 2011 with respect to those proceedings previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2010, except that the trial date for
the IMRA America litigation has been set to September 2011.
ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
12.1
|
|
Statement Re Computation of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 |
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
|
|
IPG PHOTONICS CORPORATION
|
|
Date: May 9, 2011 |
By: |
/s/ Valentin P. Gapontsev
|
|
|
|
Valentin P. Gapontsev |
|
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 9, 2011 |
By: |
/s/ Timothy P.V. Mammen
|
|
|
|
Timothy P.V. Mammen |
|
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
20