e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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, 2010
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
(State or other jurisdiction of
incorporation or organization)
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04-3444218
(I.R.S. Employer
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 5, 2010, there were 46,213,493 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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2010 |
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2009 |
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(In thousands, except share and per |
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share date) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
84,407 |
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$ |
82,920 |
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Accounts receivable, net |
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30,078 |
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30,356 |
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Inventories, net |
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52,135 |
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52,869 |
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Income taxes receivable |
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3,193 |
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|
2,558 |
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Prepaid expenses and other current assets |
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|
6,095 |
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|
4,653 |
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Deferred income taxes |
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9,253 |
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7,558 |
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Total current assets |
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185,161 |
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180,914 |
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DEFERRED INCOME TAXES |
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4,548 |
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|
4,313 |
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PROPERTY, PLANT AND EQUIPMENT, Net |
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109,639 |
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111,453 |
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OTHER ASSETS |
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15,859 |
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15,956 |
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TOTAL |
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$ |
315,207 |
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$ |
312,636 |
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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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$ |
7,098 |
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$ |
6,007 |
|
Current portion of long-term debt |
|
|
1,333 |
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|
1,333 |
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Accounts payable |
|
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5,824 |
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5,620 |
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Accrued expenses and other liabilities |
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|
25,316 |
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|
21,189 |
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Deferred income taxes |
|
|
322 |
|
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|
503 |
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Income taxes payable |
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4,236 |
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2,179 |
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Total current liabilities |
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44,129 |
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36,831 |
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DEFERRED INCOME TAXES AND OTHER LONG-TERM
LIABILITIES |
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2,293 |
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2,567 |
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LONG-TERM DEBT |
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16,333 |
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16,667 |
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COMMITMENTS AND CONTINGENCIES |
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IPG PHOTONICS CORPORATION STOCKHOLDERS
EQUITY: |
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Common stock, $0.0001 par value,
175,000,000 shares authorized;
46,125,191 shares issued and outstanding
at March 31, 2010; 46,076,472 shares
issued and outstanding at December 31,
2009 |
|
|
5 |
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5 |
|
Additional paid-in capital |
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|
294,724 |
|
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|
293,743 |
|
Accumulated deficit |
|
|
(45,027 |
) |
|
|
(48,424 |
) |
Accumulated other comprehensive income |
|
|
2,582 |
|
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|
11,106 |
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|
|
|
|
|
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|
Total IPG Photonics Corporation
stockholders equity |
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|
252,284 |
|
|
|
256,430 |
|
NONCONTROLLING INTERESTS |
|
|
168 |
|
|
|
141 |
|
|
|
|
|
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Total equity |
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|
252,452 |
|
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|
256,571 |
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TOTAL |
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$ |
315,207 |
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$ |
312,636 |
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|
See notes to consolidated financial statements.
3
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands, except per share data) |
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NET SALES |
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$ |
51,204 |
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$ |
45,408 |
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COST OF SALES |
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30,657 |
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29,547 |
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GROSS PROFIT |
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20,547 |
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15,861 |
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OPERATING EXPENSES: |
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Sales and marketing |
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4,338 |
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3,189 |
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Research and development |
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4,158 |
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4,142 |
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General and administrative |
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6,828 |
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4,990 |
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(Gain) loss on foreign exchange |
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(108 |
) |
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1,515 |
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Total operating expenses |
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15,216 |
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13,836 |
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OPERATING INCOME |
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5,331 |
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2,025 |
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OTHER (EXPENSE) INCOME, NET: |
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Interest expense |
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(208 |
) |
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|
(390 |
) |
Other expense, net |
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(66 |
) |
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|
(148 |
) |
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Total other expense |
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(274 |
) |
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(538 |
) |
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INCOME BEFORE PROVISION FOR INCOME
TAXES |
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|
5,057 |
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|
1,487 |
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PROVISION FOR INCOME TAXES |
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(1,633 |
) |
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(461 |
) |
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|
NET INCOME |
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|
3,424 |
|
|
|
1,026 |
|
LESS: NET INCOME (LOSS)
ATTRIBUTABLE TO NONCONTROLLING
INTERESTS |
|
|
27 |
|
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|
(245 |
) |
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NET INCOME ATTRIBUTABLE TO IPG
PHOTONICS CORPORATION |
|
$ |
3,397 |
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|
$ |
1,271 |
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NET INCOME ATTRIBUTABLE TO IPG
PHOTONICS CORPORATION PER SHARE: |
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Basic |
|
$ |
0.07 |
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$ |
0.03 |
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Diluted |
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$ |
0.07 |
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$ |
0.03 |
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WEIGHTED-AVERAGE SHARES
OUTSTANDING: |
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Basic |
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|
46,098 |
|
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|
45,094 |
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Diluted |
|
|
47,191 |
|
|
|
46,152 |
|
See notes to consolidated financial statements.
4
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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March 31, |
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|
2010 |
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2009 |
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(In thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
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|
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Net income |
|
$ |
3,424 |
|
|
$ |
1,026 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
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|
Depreciation and amortization |
|
|
5,226 |
|
|
|
4,380 |
|
Deferred income taxes |
|
|
(2,409 |
) |
|
|
(4,174 |
) |
Stock-based compensation |
|
|
770 |
|
|
|
635 |
|
Unrealized (gains) losses on foreign currency transactions |
|
|
(106 |
) |
|
|
1,513 |
|
Other |
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|
(10 |
) |
|
|
(31 |
) |
Provisions for inventory, warranty and bad debt |
|
|
1,718 |
|
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|
3,728 |
|
Changes in assets and liabilities that provided (used) cash: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(897 |
) |
|
|
10,281 |
|
Inventories |
|
|
(3,349 |
) |
|
|
859 |
|
Prepaid expenses and other current assets |
|
|
38 |
|
|
|
(1,626 |
) |
Accounts payable |
|
|
(399 |
) |
|
|
(1,156 |
) |
Accrued expenses and other liabilities |
|
|
3,634 |
|
|
|
(697 |
) |
Income and other taxes payable |
|
|
236 |
|
|
|
2,772 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,876 |
|
|
|
17,510 |
|
|
|
|
|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property, plant, equipment and intangible assets |
|
|
(4,953 |
) |
|
|
(4,686 |
) |
Acquisition of business, net of cash acquired |
|
|
(748 |
) |
|
|
|
|
Other |
|
|
181 |
|
|
|
22 |
|
|
|
|
|
|
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|
Net cash used in investing activities |
|
|
(5,520 |
) |
|
|
(4,664 |
) |
|
|
|
|
|
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|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from line-of-credit facilities |
|
|
4,274 |
|
|
|
13,528 |
|
Payments on line-of-credit facilities |
|
|
(3,112 |
) |
|
|
(3,298 |
) |
Purchases of noncontrolling interests |
|
|
|
|
|
|
(455 |
) |
Principal payments on long-term borrowings |
|
|
(333 |
) |
|
|
(344 |
) |
Exercise of employee stock options and related tax benefit from exercise |
|
|
211 |
|
|
|
137 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,040 |
|
|
|
9,568 |
|
|
|
|
|
|
|
|
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
(1,909 |
) |
|
|
(2,096 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
1,487 |
|
|
|
20,318 |
|
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
82,920 |
|
|
|
51,283 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
84,407 |
|
|
$ |
71,601 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
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|
Cash paid for interest |
|
$ |
281 |
|
|
$ |
403 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
1,445 |
|
|
$ |
2,795 |
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Amounts related to acquisition of business included in accounts payable and
accrued expenses and other liabilities |
|
$ |
789 |
|
|
$ |
|
|
Additions to property, plant and equipment included in accounts payable |
|
$ |
119 |
|
|
$ |
365 |
|
Purchases of noncontrolling interests in exchange for Common Stock |
|
$ |
|
|
|
$ |
2,190 |
|
See notes to consolidated financial statements.
5
IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Three Months Ended March 31, |
|
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|
2010 |
|
|
2009 |
|
|
|
(In thousands, except share and per share data) |
|
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|
Shares |
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|
Amount |
|
|
Shares |
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|
Amount |
|
COMMON STOCK |
|
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|
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|
|
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|
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|
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|
Balance, beginning of year |
|
|
46,076,472 |
|
|
$ |
5 |
|
|
|
44,965,960 |
|
|
$ |
4 |
|
Common stock issued in purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
293,146 |
|
|
|
1 |
|
Exercise of stock options |
|
|
48,719 |
|
|
|
|
|
|
|
92,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
46,125,191 |
|
|
|
5 |
|
|
|
45,352,033 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
293,743 |
|
|
|
|
|
|
|
283,217 |
|
Common stock issued in purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190 |
|
Discount on purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,028 |
|
Exercise of stock options and related tax benefit from exercise |
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
137 |
|
Stock-based compensation |
|
|
|
|
|
|
770 |
|
|
|
|
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
294,724 |
|
|
|
|
|
|
|
288,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
(48,424 |
) |
|
|
|
|
|
|
(53,843 |
) |
Net income attributable to IPG Photonics Corporation |
|
|
|
|
|
|
3,397 |
|
|
|
|
|
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
(45,027 |
) |
|
|
|
|
|
|
(52,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
11,106 |
|
|
|
|
|
|
|
8,794 |
|
Translation adjustments |
|
|
|
|
|
|
(8,452 |
) |
|
|
|
|
|
|
(6,939 |
) |
Unrealized (loss) gain on derivatives, net of tax |
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
2,582 |
|
|
|
|
|
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL IPG PHONTONICS CORPORATION STOCKHOLDERS EQUITY |
|
|
|
|
|
|
252,284 |
|
|
|
|
|
|
|
237,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTERESTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
5,127 |
|
Net income (loss) attributable to noncontrolling interests |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
(245 |
) |
Purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,645 |
) |
Discount on purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY |
|
|
|
|
|
$ |
252,452 |
|
|
|
|
|
|
$ |
237,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
6
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim 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 generally accepted accounting principles in the United States of
America have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. 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, 2009.
Effective January 1, 2010, the functional currency of our Russian subsidiary was
changed from the U.S. Dollar to the Russian Ruble due to other than temporary changes
in the business that made the local currency the predominate transactional currency.
As a result of this change in functional currency, the Company was required to change the
method of translation of the financial statements of this business into U.S. dollars.
From the effective date forward, the Company translates all assets and liabilities of the business into U.S. dollars using the exchange rate at the end of the
period, income statement items are translated using rates in effect at the date that
the transactions are recorded, and related translation adjustments are accumulated and charge to accumulated
other comprehensive income.
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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, an updated accounting guidance was issued related to the
separation criteria used to determine the unit of accounting for multiple element
arrangements. This update removes the objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting, replaces
references to fair value with selling price to distinguish from the fair value
measurements required under the Fair Value Measurements and Disclosures guidance,
provides a hierarchy that entities must use to estimate the selling price, eliminates
the use of the residual method for allocation and expands the ongoing disclosure
requirements. This guidance is effective for us beginning January 1, 2011, although
early adoption is permitted, and adoption can be applied prospectively or
retrospectively. We are currently evaluating the effect that implementation of this
update will have, if any, on our consolidated financial position and results of
operations upon adoption.
3. INVENTORIES
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Components and raw materials |
|
$ |
17,092 |
|
|
$ |
17,801 |
|
Work-in-process |
|
|
22,089 |
|
|
|
21,375 |
|
Finished goods |
|
|
12,954 |
|
|
|
13,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
52,135 |
|
|
$ |
52,869 |
|
|
|
|
|
|
|
|
The Company recorded inventory provisions totaling $617,000 and $1,390,000 for the three
months ended March 31, 2010 and 2009, respectively. These provisions were recorded as a
result of changes in market prices of certain components, the realizable value of those
inventories through finished product sales and uncertainties 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. In
addition, we recorded a $1.3 million reduction in value of certain components in inventory in
the three months ended March 31, 2009. This charge was related to a change in the standard
cost of these components.
7
4. FINANCING ARRANGEMENTS
The Companys borrowings under existing financing arrangements consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Revolving Line-of-Credit Facilities: |
|
|
|
|
|
|
|
|
Euro Credit and Overdraft Facilities |
|
$ |
1,031 |
|
|
$ |
977 |
|
U.S. Line of Credit |
|
|
6,067 |
|
|
|
5,030 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,098 |
|
|
$ |
6,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Debt: |
|
|
|
|
|
|
|
|
U.S. Long-Term Note |
|
|
17,666 |
|
|
|
18,000 |
|
Less current portion |
|
|
(1,333 |
) |
|
|
(1,333 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
16,333 |
|
|
$ |
16,667 |
|
|
|
|
|
|
|
|
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, |
|
|
|
2010 |
|
|
2009 |
|
Net income attributable to IPG
Photonics Corporation |
|
$ |
3,397 |
|
|
$ |
1,271 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
46,098 |
|
|
|
45,094 |
|
Dilutive effect of common stock
equivalents |
|
|
1,093 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
Diluted weighted average common shares |
|
|
47,191 |
|
|
|
46,152 |
|
|
|
|
|
|
|
|
Basic net income attributable to IPG
Photonics Corporation per share |
|
$ |
0.07 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Diluted net income attributable to IPG
Photonics Corporation per share |
|
$ |
0.07 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
The computation of diluted weighted average common shares excludes 492,000 and
1,399,000 shares for the three months ended March 31, 2010 and 2009, respectively,
because the effect on net income attributable to IPG Photonics Corporation per share
would have been anti-dilutive.
6. COMPREHENSIVE INCOME
Total comprehensive income (loss) and its components were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Net income attributable to IPG Photonics
Corporation |
|
$ |
3,397 |
|
|
$ |
1,271 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized loss on derivatives, net of tax |
|
|
(72 |
) |
|
|
31 |
|
Foreign currency translation adjustment |
|
|
(8,452 |
) |
|
|
(6,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(5,127 |
) |
|
$ |
(5,637 |
) |
|
|
|
|
|
|
|
8
7. 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 sheet. 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 an interest rate swap that is classified as a cash
flow hedge of our variable rate debt.
Cash flow hedges Our cash flow hedge is an interest rate swap under which we agree to
pay fixed rates of interest. We have no derivatives that are not accounted for as a hedging
instrument. The fair value amounts in the consolidated balance sheet at March 31, 2010 were
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
Fair |
|
|
|
|
Fair |
|
|
|
Balance Sheet Location |
|
Value |
|
|
Balance Sheet Location |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other Assets |
|
$ |
|
|
|
Deferred income taxes and other long-term liabilities |
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
|
|
|
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
The derivative gains and losses in the consolidated statement of operations
for the three months ended March 31, 2010, related to our interest rate swap contract were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Gain |
|
Pretax Loss on Effective |
|
|
|
|
Recognized in |
|
Portion of Derivative |
|
Ineffective Portion of Gain on |
|
|
Other Comprehensive |
|
Reclassified from |
|
Derivative and Amount Excluded |
Derivatives in Cash Flow |
|
Income on Effective |
|
Accumulated Other |
|
from Effectiveness Testing |
Hedging Relationships |
|
Portion of Derivative |
|
Comprehensive Loss |
|
Recognized in Income |
|
|
Amount |
|
Location |
|
Amount |
|
Location |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
59 |
|
|
|
Interest Expense |
|
|
$ |
176 |
|
|
|
|
|
|
$ |
|
|
The notional amount of the outstanding interest rate swap was $17,666,000. We made no
adjustments to the fair value of this derivative as a result of evaluating counterparty risk.
8. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities that are measured at fair value
on a recurring basis as of March 31, 2010 and December 31, 2009, and are categorized using
the fair value hierarchy. The fair value hierarchy has three levels based on the reliability
of the inputs used to determine fair value. Level 1 refers to fair values determined based on
quoted prices in active markets for identical assets. Level 2 refers to fair values estimated
using significant other observable inputs, and Level 3 includes fair values estimated using
significant non-observable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
4,192 |
|
|
$ |
4,192 |
|
|
$ |
|
|
|
$ |
|
|
Treasury bills |
|
|
40,681 |
|
|
|
40,681 |
|
|
|
|
|
|
|
|
|
German Treasury bills |
|
|
4,034 |
|
|
|
4,034 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
1,284 |
|
|
|
|
|
|
|
|
|
|
|
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
50,191 |
|
|
$ |
48,907 |
|
|
$ |
|
|
|
$ |
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
1,242 |
|
|
$ |
|
|
|
$ |
1,242 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
1,242 |
|
|
$ |
|
|
|
$ |
1,242 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
9,431 |
|
|
$ |
9,431 |
|
|
$ |
|
|
|
$ |
|
|
Treasury bills |
|
|
28,678 |
|
|
|
28,678 |
|
|
|
|
|
|
|
|
|
German Treasury bills |
|
|
4,299 |
|
|
|
4,299 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
1,284 |
|
|
|
|
|
|
|
|
|
|
|
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,692 |
|
|
$ |
42,408 |
|
|
$ |
|
|
|
$ |
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
1,125 |
|
|
$ |
|
|
|
$ |
1,125 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
1,125 |
|
|
$ |
|
|
|
$ |
1,125 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the auction rate securities was estimated utilizing a
discounted cash flow analysis. The discounted cash flow analysis 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 observable market data with similar
characteristics to the securities held by the Company.
9. INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
Patents |
|
$ |
4,643 |
|
|
$ |
3,650 |
|
Customer relationships |
|
|
1,811 |
|
|
|
1,934 |
|
Production know-how |
|
|
683 |
|
|
|
|
|
Other identifiable intangibles |
|
|
86 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
7,223 |
|
|
|
5,693 |
|
Accumulated amortization |
|
|
(2,272 |
) |
|
|
(1,922 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,951 |
|
|
$ |
3,771 |
|
|
|
|
|
|
|
|
The estimated future amortization expense for intangibles as of March 31, 2010 for the
remainder of 2010 and subsequent years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
$1,109
|
|
$1,423
|
|
$1,142
|
|
$522
|
|
$258
|
|
$497 |
10. PRODUCT WARRANTIES
The company typically provides one to three-year parts and service warranties on lasers
and amplifiers. Most of the 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, 2010 and 2009 (in thousands).
10
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Beginning balance January 1 |
|
$ |
3,886 |
|
|
$ |
3,224 |
|
Additions for current year deliveries |
|
|
891 |
|
|
|
603 |
|
Reductions for payments made |
|
|
(856 |
) |
|
|
(389 |
) |
Impact of foreign currency fluctuation |
|
|
(140 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
Ending balance March 31 |
|
$ |
3,781 |
|
|
$ |
3,344 |
|
|
|
|
|
|
|
|
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 has
made a complaint for damages of over $10 million, treble damages for alleged willful
infringement and injunctive relief. A trial is scheduled for August 2010.
In February 2008, the Company was sued for patent infringement relating to two product
lines used in medical laser applications. The plaintiff has filed a complaint for unspecified
damages, treble damages for alleged willful infringement and injunctive relief. The patent
asserted in the lawsuit expired in April 2007. The case is in the discovery stage..
The Company believes it has meritorious defenses and intends to vigorously contest the
claims. No loss is deemed probable at March 31, 2010 and no amounts have been accrued in
respect of these contingencies.
We are currently undergoing an examination by the German tax authorities for the years
2003 to 2008. We expect that this examination will be completed during 2010. We do not have
sufficient information to estimate the range of potential outcomes of this examination.
|
|
|
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 in 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
11
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 by other
factors, some of which are 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.
Due to the fact that a high proportion of our costs are fixed, 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 magnified if
we cannot reduce fixed costs or chose 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 annual
net sales were 18% for the three months ended March 31, 2010, 12% in 2009, 17% in 2008
and 20% in 2007. We seek to add new customers and to expand our relationships with
existing customers. We anticipate that the composition of our net sales to 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. Our sales have been affected recently by a substantial reduction in purchases
of pulsed lasers from several customers, including one that was formerly our largest
customer for several years.
Results of Operations for the three months ended March 31, 2010 compared to the three
months ended March 31, 2009
Net sales. Net sales increased by $5.8 million, or 12.8%, to $51.2 million for the
three months ended March 31, 2010 from $45.4 million for the three months ended March
31, 2009. The growth in net sales was attributable to an increase in sales of fiber
lasers used in materials processing applications, where net sales increased by $8.0
million or 22.9%, and medical
applications, where net sales increased by $1.1 million or over 100%. These increases
were partially offset by a decrease in sales of fiber lasers used in advanced
applications, where net sales decreased by $2.4 million, or 34.3%, and a decrease in
sales of fiber amplifiers for communications applications, where net sales decreased by
$0.8 million or 30.5%. The increase in materials processing applications sales resulted
from substantially increased sales of pulsed lasers and low-power lasers used in marking
and engraving applications and high power laser used in cutting applications. The
increase in medical
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application sales is due to increased demand from our established
customer in the U.S. and new OEM customers in Germany and Asia. The decrease in
communications applications sales resulted primarily from decreased sales of amplifiers,
particularly in Russia. The decrease in sales of advanced applications was due to lower
sales of high-power lasers used in government and defense research.
Cost of sales and gross margin. Cost of sales increased by $1.1 million, or 3.8%, to
$30.7 million for the three months ended March 31, 2010 from $29.5 million for the three
months ended March 31, 2009. Our gross margin increased to 40.1% for the three months
ended March 31, 2010 from 34.9% for the three months ended March 31, 2009. The increase
in gross margin was the result of more favorable absorption of our fixed manufacturing
costs due to an increase in sales volume and more favorable product mix due to
proportionately higher sales of pulsed and low-power lasers. Expenses related to
inventory reserves and other valuation adjustments decreased by $2.1 million to $0.6
million, or 1.2% of sales for the three months ended March 31, 2010 as compared to $2.7
million, or 6.0%, of sales for the three months ended March 31, 2009. Inventory
reserves and other valuation adjustments for the three months ended March 31, 2009 were
higher because of charges related to the change in cost and excess quantities of
internally manufactured diodes and other parts identified as obsolete and in excess of
requirements as a result of lower rates of consumption due to the decrease in net sales
occurring in 2009 from the economic recession..
Sales and marketing expense. Sales and marketing expense increased by $1.2 million, or
36.0%, to $4.3 million for the three months ended March 31, 2010 from $3.2 million for
the three months ended March 31, 2009, primarily as a result of an increase in personnel
costs due to an increase in headcount and bonus accruals and, to a lesser extent, an
increase in depreciation expense related to products used for demonstration purposes. As
a percentage of sales, sales and marketing expense increased to 8.5% for the three
months ended March 31, 2010 from 7.0% for the three months ended March 31, 2009.
Research and development expense. Research and development expense was $4.2 million
for the three months ended March 31, 2010 compared to $4.1 million for the three months
ended March 31, 2009. 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 used with our
products. As a percentage of sales, research and development expense decreased to 8.1%
for the three months ended March 31, 2010 from 9.1% for the three months ended March 31,
2009.
General and administrative expense. General and administrative expense increased by
$1.8 million, or 36.8%, to $6.8 million for the three months ended March 31, 2010 from
$5.0 million for the three months ended March 31, 2010, primarily due to legal fees
related to two patent litigations and to a lesser extent an increase in personnel costs
due to an increase in accruals related to bonuses. We expect that legal fees will
continue at high quarterly levels while the litigations are ongoing Bonus accruals
increased due to an improvement in our financial results. As a percentage of sales,
general and administrative expense increased to 13.3% for the three months ended March
31, 2010 from 11.0% for the three months ended March 31, 2009.
Effect of exchange rates on sales, gross margin and operating expenses. We estimate
that if exchange rates had been the same as one year ago, sales in 2010 would have been
$1.2 million lower, gross margin would have been $0.4 million lower and operating
expenses in total would have been $0.5 million lower. The exchange rates used in this
analysis for the three months ended March 31, 2010 and 2009, respectively were US$1=
Euro 0.77, US$1 = Japanese Yen 93 and US$1 = Russian Ruble 34.
(Gain) loss on foreign exchange. We incurred a foreign exchange gain of $0.1 million for
the three months ended March 31, 2010 as compared to a loss of $1.5 million for the
three months ended March 31, 2009. The change was primarily attributable to the
relative stability of the Russian Ruble against the US Dollar in the first quarter of
2010 as compared to the Russian Ruble weakening in the same period last year. At the
end of the first quarter our primary exposure to foreign exchange risk is our net dollar
denominated assets in subsidiaries with a Euro functional currency.
Interest expense, net. Interest expense, net was $0.2 million for the three months
ended March 31, 2010 compared to $0.4 million for the three months ended March 31, 2009.
Provision for income taxes. Provision for income taxes was $1.6 million for the three
months ended March 31, 2010 compared to $0.5 million for the three months ended March
31, 2009, representing an effective tax rate of 32.3% and 31.0% for the three months
ended March 31, 2010 and 2009, respectively. The increase in effective rate was due
primarily to the
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mix of income earned in various tax jurisdictions as well as an
increase in the effective tax rate in China as certain tax incentives begin to expire.
Net income. Net income attributable to IPG Photonics Corporation increased by $2.1
million to $3.4 million for the three months ended March 31, 2010 from $1.3 million for
the three months ended March 31, 2009. Net income attributable to IPG Photonics
Corporation as a percentage of our net sales increased by 3.8 percentage points to 6.6%
for the three months ended March 31, 2010 from 2.8% for the three months ended March 31,
2009 due to the factors described above.
Liquidity and Capital Resources
Our principal sources of liquidity as of March 31, 2010 consisted of cash and cash
equivalents of $84.4 million, unused credit lines and overdraft facilities of $53.4
million and working capital (excluding cash) of $56.6 million. This compares to cash and
cash equivalents of $82.9 million, unused credit lines and overdraft facilities of $54.3
million and working capital (excluding cash) of $61.2 million as of December 31, 2009.
The increase in cash and cash equivalents of $1.5 million from December 31, 2009 relates
primarily to cash provided by operating activities in the three months ended March 31,
2010 of $7.9 million and credit line drawings of $1.2 million, offset by cash outflows
related to capital expenditures and other investing activities of $5.5 million.
We held approximately $1.3 million in auction-rate securities (ARSs) at March 31, 2010,
all of which are included in other long-term assets and are classified as long-term
available for sale securities.
Our long-term debt consists of a $17.7 million secured variable-rate note that
matures in July 2013. The note is secured by a mortgage on real estate and buildings
that we own in Massachusetts.
We expect that the 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 recessions
on our sales levels, the timing and extent of spending to support development efforts,
the expansion of our 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, 2010:
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Available |
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Description |
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Principal |
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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 $35 million
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LIBOR plus 0.8% to 1.2%,
depending on our
performance
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July 2011
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Unsecured |
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Euro Credit Facility
(Germany)(2)
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Euro 15.0 million
($20.2 million)
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Euribor + 1.0% or EONIA
+ 1.5%
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June 2010
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Unsecured,
guaranteed by
parent company |
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Euro Overdraft
Facilities
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Euro 2.5 million
($3.3 million)
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1.7%-6.5%
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Between July 2010
and February 2011
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Common pool of
assets of German
and Italian
subsidiaries |
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(1) |
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$12.0 million of this credit facility is available to foreign subsidiaries including India, China, Japan and Korea.
Total drawings at March 31, 2010 were $6.1 million with a weighted average interest rate of 4.5% |
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$4.0 million of this credit facility is available to our Russian subsidiary and $1.3 million is available to our
Italian subsidiary |
Our largest committed credit lines are with Bank of America and Deutsche Bank in the
amounts of $35.0 million and $20.2 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 June 2010, up to $15.0 million of
our capital expenditures are treated as being 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, 2010.
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.
In January 2010, we completed the acquisition of Photonics Innovations, Inc., a maker of
active and passive laser materials and tunable lasers for scientific, biomedical,
technological, and eye-safe range-finding applications. The acquisition of Photonics
Innovations, Inc was not material to our liquidity or financial position.
Operating activities. Net cash provided by operating activities decreased by $9.6
million to $7.9 million for the three months ended March 31, 2010 from $17.5 million for
the three months ended March 31, 2009, primarily resulting from:
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An increase in accounts receivable of $0.9 million in
the three months ended March 31, 2010 compared to a decrease of $10.3
million in the three months ended March 31, 2009; partially offset by |
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A increase in inventory of $3.3 million in the three
months ended March 31, 2010 compared to an decrease of inventory of $0.9
million the three months ended March 31, 2009; |
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An increase in cash provided by net income after adding
back non-cash charges of $1.5 million in the three months ended March 31,
2010 as compared to the same period in 2009. |
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 product, the rate at which we turn
inventory has historically been 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.
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Investing activities. Net cash used in investing activities was $5.5 million and $4.7
million in the three months ended March 31, 2010 and 2009, respectively. The cash used
in investing activities in 2010 related to the purchase of a new building in Korea to
house a new and expanding laser application center, the acquisition of Photonics
Innovations Inc. and purchases of equipment primarily in the United States and Germany.
In 2009 cash used in investing activities was related to capital expenditures on
property, plant and equipment in the United States, Germany and Russia for facilities
and equipment for diode wafer growth, burn-in test stations and packaging as well as new
fiber and component production facilities.
We expect to incur approximately $25 million in capital expenditures, including
acquisitions, in 2010. 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 $1.0 million in
the three months ended March 31, 2010 as compared to net cash provided by financing
activities of $9.6 million in the three months ended March 31, 2009. The cash provided
by financing activities in both 2010 and 2009 was primarily related to the use of our
credit lines.
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 period ended December 31,
2008. 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, an update was issued to the accounting guidance related to the
separation criteria used to determine the unit of accounting for multiple element
arrangements. This update removes the objective-and-reliable-evidence-of-fair-value criterion
from the separation criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, replaces references to fair value
with selling price to distinguish from the fair value measurements required under the Fair
Value Measurements and Disclosures guidance, provides a hierarchy that entities must use to
estimate the selling price, eliminates the use of the residual method for allocation and
expands the ongoing disclosure requirements. This guidance is effective for us beginning
January 1, 2011, although early adoption is permitted, and adoption can be applied
prospectively or retrospectively. We are currently evaluating
the effect that implementation of this update will have, if any, on our consolidated
financial position and results of operations upon adoption.
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ITEM 3. |
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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.
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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.
Our exposure to market risk also relates to the increase or decrease in the amount of
interest expense we must pay on our bank debt and borrowings on our bank credit facilities.
The interest rate on our existing bank debt is currently fixed except for our U.S. revolving
line of credit and our Euro credit facility. The rates on our Euro overdraft facilities in
Germany and Italy and our Japanese Yen overdraft facility are fixed for twelve-month periods.
Approximately 39% of our outstanding debt had a fixed rate of interest as of March 31, 2009.
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 and the Russian Ruble. 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 a $0.1 million gain, and a $1.5 million loss
for the three months ended March 31, 2010 and 2009, respectively. Management believes that
the use of foreign currency financial instruments reduces the risks of certain foreign
currency transactions, however, these instruments provide only limited protection. 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.
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ITEM 4. |
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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
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ITEM 1. |
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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 2010 with respect to those proceedings previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2009, except as follows:
CardioFocus Inc. abandoned all of
the clains in one of the patents CardioFocus alleged that we infringe. In April 2010,
the U.S. District Court for the District of Massachusetts lifted the stay on the
litigation and discovery has recommenced.
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2009, which could materially affect our
business, financial condition or future results. The risks described in our Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks facing our
Company. Additional risks and uncertainties not
17
currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
We are subject to litigation alleging that we are infringing third-party intellectual property
rights. Intellectual property claims could result in costly litigation and harm our business.
In recent years, there has been significant litigation involving intellectual property rights
in many technology-based industries, including our own. We face risks and uncertainties in
connection with such litigation, including the risk that patents issued to others may harm our
ability to do business; that there could be existing patents of which we are unaware that could be
pertinent to our business; and that it is not possible for us to know whether there are patent
applications pending that our products might infringe upon, since patent applications often are not
disclosed until a patent is issued or published. Moreover, the frequency with which new patents are
granted and the diversity of jurisdictions in which they are granted make it impractical and
expensive for us to monitor all patents that may be relevant to our business.
From time to time, we have been notified of allegations and claims that we may be infringing
patents or intellectual property rights owned by third parties. In 2007, we settled two patent
infringement lawsuits filed against us. We are presently defending two patent infringement
lawsuits.
In November 2006, IMRA America, Inc. filed an action against us alleging that certain products
we produce, including but not limited to our continuous wave and pulsed fiber lasers and fiber
amplifiers, which account for a significant portion of our revenues, infringe one U.S. patent
allegedly owned by IMRA America. IMRA America alleges willful infringement and seeks damages of at
least $10 million, treble damages and injunctive relief. IMRA America also alleges inducement of
infringement and contributory infringement. We filed an answer in which we denied infringement and
raised additional defenses that the patent is invalid and unenforceable. In addition, we filed
declaratory judgment counterclaims based on these three defenses. This lawsuit concerns products
made, used, sold or offered for sale in or imported into the United States and therefore the
lawsuit affects products that account for a substantial portion of our revenues. This lawsuit does
not affect revenues that are derived from products that are not made, used, sold or offered for
sale in or imported into the United States. IMRA America has informed us that it has patents and
applications in foreign jurisdictions directed to similar subject matter as the patent subject to
this lawsuit, but has not asserted them against us. In June 2008, the U.S. Patent and Trademark
Office (USPTO) ordered re-examination of the patent claims asserted by IMRA America against the
Company based on several prior art references that we submitted in an ex parte re-examination
request. In July 2009, the USPTO confirmed the patentability of all of the claims in the IMRA
America patent over the prior art cited in the re-examination, as well as of new claims added
during the re-examination. In August 2009, IPG submitted an additional re-examination request,
which was denied by the USPTO. The USPTO issued a re-examination certificate in October 2009. As a
result, the U.S. District Court for the Eastern District of Michigan lifted the stay on the
litigation. A trial is scheduled for August 2010.
In February 2008, CardioFocus Inc. filed an action against us and other co-defendants alleging
that our erbium and thulium fiber lasers infringe one patent allegedly owned by CardioFocus and
seeking unspecified damages, treble damages and attorneys fees for alleged willful infringement.
CardioFocus also alleges inducement of infringement. The patent claims generally relate to a system
for transmitting laser energy via an optical fiber to a surgical site. The patent expired in April
2007. We filed an answer in which we denied infringement and raised additional defenses that the
patent is invalid and unenforceable. In addition, we filed declaratory judgment counterclaims based
on these three defenses. CardioFocus subsequently alleged that the Company infringes claims of two
additional patents. We and several of our co-defendants filed re-examination requests, which were
granted by the USPTO. As a result of three separate office actions in the second half of 2009, the
USPTO rejected a substantial number of claims in two patents, many of which CardioFocus disclaimed,
and the USPTO confirmed the patentability of several other claims of these patents. In addition,
CardioFocus disclaimed all of the claims in one of the three patents. The U.S. District Court for
the District of Massachusetts lifted the stay of the litigation in April 2010 and discovery has
recommenced. No trial date has been set.
There can be no assurance that we will be able to dispose without a material effect the
litigations with IMRA America or CardioFocus, claims or other allegations made against us and
claims that may be asserted in the future. The outcome of any litigation, including the pending
litigation, is uncertain. Even if we ultimately are successful on the merits of any such litigation, legal and administrative proceedings related to intellectual property are typically expensive and
time-consuming, generate negative publicity and divert financial and managerial resources. Some
litigants may have greater financial resources than we have and may be able to sustain the costs of
complex intellectual property litigation more easily than we can.
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If we do not prevail in any intellectual property litigation brought against us, including the
lawsuits brought by IMRA America and CardioFocus, it could affect our ability to sell our products
and materially harm our business, financial condition and results of operations. These developments
could adversely affect our ability to compete for customers and increase our revenues. Plaintiffs
in intellectual property cases often seek, and sometimes obtain, injunctive relief. Intellectual
property litigation commenced against us, including the lawsuits brought by IMRA America and
CardioFocus that we are presently defending, could force us to take actions that could be harmful
to our business, competitive position, results of operations and financial condition, including the
following:
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stop selling our products or using the technology that contains the
allegedly infringing intellectual property; |
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pay actual monetary damages, royalties, lost profits or increased
damages and the plaintiffs attorneys fees, which individually or in
the aggregate may be substantial; |
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attempt to obtain a license to use the relevant intellectual property,
which may not be available on reasonable terms or at all; and |
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attempt to redesign the products that allegedly infringed upon
intellectual property of others, which may be costly or impractical. |
In addition, intellectual property lawsuits can be brought by third parties against OEMs and
end users that incorporate our products into their systems or processes. In some cases, we
indemnify OEMs against third-party infringement claims relating to our products and we often make
representations affirming, among other things, that our products do not infringe on the
intellectual property rights of others. As a result, we may incur liabilities in connection with
lawsuits against our customers. Any such lawsuits, whether or not they have merit, could be
time-consuming to defend, damage our reputation or result in substantial and unanticipated costs.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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ITEM 5. |
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OTHER INFORMATION |
None.
(a) Exhibits
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Exhibit |
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No. |
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Description |
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12.1
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Statement Re Computation of
Earnings to Fixed Charges |
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
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32
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 |
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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.
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IPG PHOTONICS CORPORATION
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Date: May 10, 2010 |
By: |
/s/ Valentin P. Gapontsev
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Valentin P. Gapontsev |
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Chairman and Chief Executive Officer
(Principal Executive Officer) |
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Date: May 10, 2010 |
By: |
/s/ Timothy P.V. Mammen
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Timothy P.V. Mammen |
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Vice President and Chief Financial Officer
(Principal Financial Officer) |
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20