Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IPGP > SEC Filings for IPGP > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for IPG PHOTONICS CORP

Form 10-Q for IPG PHOTONICS CORP


6-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."

Overview

We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used in numerous applications in diverse end markets. 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.

We design and manufacture most of our key components used in our finished products, from semiconductor diodes to optical fibers and other components, finished fiber lasers and amplifiers. We also manufacture certain complementary products used with our lasers, including optical delivery cables, fiber couplers, beam switches, optical heads and chillers. 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. We derive net sales primarily from the sale of fiber lasers and amplifiers. We also sell diode lasers, communications systems, laser systems and complementary products. We sell our products through our direct sales organization and our network of distributors and sales representatives, as well as system integrators. We sell our products to OEMs that supply materials processing laser systems, communications systems and medical laser systems to end users. We also sell our products to end users that build their own systems which incorporate our products or use our products as an energy or light source. Our scientists and engineers work closely with OEMs, systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications. Our sales cycle varies substantially, ranging from a period of a few weeks to as long as one year or more, but is typically several months.

Sales of our products generally are recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments.

We develop our products to standard specifications and use a common set of components within our product architectures. Our major products are based upon a common technology platform. We continually enhance these and other products by improving their components and developing new components and new product designs.

Gross margin. Our total gross margin in any period can be significantly affected by total net sales in any period, by product mix, that is, the percentage of our revenue in the period that is attributable to higher or lower-power products, and by other factors, some of which are not under our control.

Our product mix affects our margins because the selling price per watt is generally higher for low, mid-power devices and certain specialty products than for high-power devices sold in large volumes. The overall cost of high-power lasers may be partially offset by improved absorption of fixed overhead costs associated with sales of larger volumes of higher-power products because they use a greater number of optical components and drive economies of scale in manufacturing.

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 a reduction in 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. 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.


Table of Contents

We also regularly review our inventory for items that are slow-moving, have been rendered obsolete or determined to be excess. Any write-off of such slow-moving, obsolete or excess inventory affects our gross margins. For example, we recorded provisions for inventory totaling $2.5 million and $2.0 million for the three months ended September, 30, 2012 and 2011, respectively, $6.1 million and $4.2 million for the nine months ended September, 30, 2012 and 2011, respectively and $6.1 million, $2.7 million and $5.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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 for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales. As such, we expect that our sales and marketing expenses will increase in the aggregate.

Research and development expense. We plan to continue to invest in research and development to improve our existing components and products and develop new components, products and systems. The amount of research and development expense we incur may vary from period to period. In general, if net sales continue to increase we expect research and development expense to increase in the aggregate.

General and administrative expense. We expect our general and administrative expenses to increase as we continue to invest in systems and resources to support our worldwide operations. Legal expenses vary from quarter to quarter based primarily upon the level of litigation activity.

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 17% for the nine months ended September 30, 2012 and 17%, 19% and 12% for the full years 2011, 2010 and 2009, respectively. 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 September 30, 2012 compared to the three months ended September 30, 2011

Net sales. Net sales increased by $27.3 million, or 21.2%, to $156.4 million for the three months ended September 30, 2012 from $129.1 million for the three months ended September 30, 2011.

                                                   Three Months Ended September 30,
                                                 2012                            2011                       Change
                                                     % of Total                      % of Total
Materials processing                  $ 137,725             88.1 %    $ 114,292             88.6 %    $ 23,433       20.5 %
Other applications                       18,654             11.9 %       14,772             11.4 %       3,882       26.3 %

Total                                 $ 156,379            100.0 %    $ 129,064            100.0 %    $ 27,315       21.2 %

Sales for materials processing applications increased primarily due to higher sales of high power lasers used in cutting and welding applications and pulsed lasers used in marking and engraving applications. We continue to see increased acceptance of the advantages of fiber laser technology. An increasing number of OEM customers have developed cutting systems that use our high power lasers and sales of these systems are gaining sales from gas laser systems. 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. We also increased sales of pulsed lasers used for marking and engraving applications due to increased demand in consumer electronics applications. The increase in sales in other applications was primarily due to increases in sales of high power lasers used for advanced applications.


Table of Contents

Cost of sales and gross margin. Cost of sales increased by $11.8 million, or 20.1%, to $70.4 million for the three months ended September 30, 2012 from $58.6 million for the three months ended September 30, 2011. Our gross margin increased to 55.0% for the three months ended September 30, 2012 from 54.6% for the three months September 30, 2011. Gross margin increased due to product mix and increased absorption of manufacturing costs.

Sales and marketing expense. Sales and marketing expense increased by $0.1 million, or 2.3%, to $5.8 million for the three months ended September 30, 2012 from $5.7 million for the three months ended September 30, 2011, primarily as a result of an increase in amortization of units used for demonstration purposes. As a percentage of sales, sales and marketing expense decreased to 3.7% for the three months ended September 30, 2012 from 4.4% for the three months ended September 30, 2011.

Research and development expense. Research and development expense increased $1.3 million, or 19.4%, to $7.8 million for the three months ended September 30, 2012, compared to $6.5 million for the three months ended September 30, 2011, primarily as a result of an increase in salaries and benefits as we expanded personnel for research and development and material expenses. Research and development activity continues to focus on enhancing the performance of our internally manufactured components, refining production processes to improve manufacturing yields, developing new products operating at different wavelengths and higher output powers and new accessories to be used with our products. As a percentage of sales, research and development expense remained consistent at 5.0% for the three months ended September 30, 2012 and 2011.

General and administrative expense. General and administrative expense decreased slightly by $0.4 million, or 3.5%, to $10.6 million for the three months ended September 30, 2012 from $11.0 million for the three months ended September 30, 2011, primarily due to decreases in legal expenses offset by increases in provision for potentially uncollectible accounts. As a percentage of sales, general and administrative expense decreased to 6.8% for the three months ended September 30, 2012 from 8.5% for the three months ended September 30, 2011.

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 September 30, 2012 would have been $7.8 million higher, gross profit would have been $5.0 million higher and total operating expenses would have been $1.2 million higher.

Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $1.8 million for the three months ended September 30, 2012 as compared to $1.9 million gain for the three months ended September 30, 2011. At the end of the third 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 income (expense), net.Interest income (expense), net increased to $0.1 million of income for the three months ended September 30, 2012 compared to $0.2 million of expense for the three months ended September 30, 2011. The increase of income is the result of increases in interest bearing deposits during the period.

Provision for income taxes. Provision for income taxes was $17.8 million for the three months ended September 30, 2012 compared to $14.9 million for the three months ended September 30, 2011, representing an effective tax rates of 29.6% and 30.3% for the three months ended September 30, 2012 and 2011, 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.

Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation increased by $9.6 million to $42.4 million, or 29.1% for the three months ended September 30, 2012 compared to $32.9 million for the three months ended September 30, 2011. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 1.6 percentage points to 27.1% for the three months ended September 30, 2012 from 25.5% for the three months ended September 30, 2011 due to the factors described above.

Results of Operations for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Net sales. Net sales increased by $66.5 million, or 19.0%, to $417.5 million for the nine months ended September 30, 2012 from $351.0 million for the nine months ended September 30, 2011.


Table of Contents
                                                   Nine Months Ended September 30,
                                                 2012                            2011                       Change
                                                     % of Total                      % of Total
Materials processing                  $ 365,525             87.6 %    $ 308,542             87.9 %    $ 56,983       18.5 %
Other applications                       51,973             12.4 %       42,416             12.1 %       9,557       22.5 %

Total                                 $ 417,498            100.0 %    $ 350,958            100.0 %    $ 66,540       19.0 %

Sales for materials processing applications increased primarily due to higher sales of high power and medium power lasers used in cutting and welding applications and pulsed lasers used in marking and engraving applications. We continue to see increased acceptance of the advantages of fiber laser technology. An increasing number of OEM customers have developed cutting systems that use our high power lasers and sales of these systems are gaining sales from gas laser systems. 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. We also increased sales of pulsed lasers used for marking and engraving applications due to increased demand in consumer electronics applications. The increase in other applications sales relates primarily to an increase in sales of high-power lasers used in advanced applications.

Cost of sales and gross margin. Cost of sales increased by $27.8 million, or 17.4%, to $188.0 million for the nine months ended September 30, 2012 from $160.1 million for the nine months ended September 30, 2011. Our gross margin increased to 55.0% for the nine months ended September 30, 2012 from 54.4% for the nine months ended September 30, 2011. Gross margin increased due to product mix and increased absorption of manufacturing costs.

Sales and marketing expense. Sales and marketing expense increased by $0.3 million, or 1.9%, to $16.8 million for the nine months ended September 30, 2012 from $16.5 million for the nine months ended September 30, 2011, primarily as a result of an increase in expenses for advertising and trade shows. As a percentage of sales, sales and marketing expense decreased to 4.0% for the nine months ended September 30, 2012 from 4.7% for the nine months ended September 30, 2011.

Research and development expense. Research and development expense increased $3.3 million, or 17.5%, to $22.1 million for the nine months ended September 30, 2012, compared to $18.8 million for the nine months ended September 30, 2011, primarily as a result of an increase in material expenses and 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 slightly to 5.3% for the nine months ended September 30, 2012 from 5.4% for the nine months ended September 30, 2011.

General and administrative expense. General and administrative expense increased by $1.8 million, or 6.5%, to $29.3 million for the nine months ended September 30, 2012 from $27.5 million for the nine months ended September 30, 2011, primarily due to consulting expenses, higher bad debt expense, increased recruitment costs and increased travel expenses. As a percentage of sales, general and administrative expense decreased to 7.0% for the nine months ended September 30, 2012 from 7.8% for the nine months ended September 30, 2011.

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 nine months ended September 30, 2012 would have been $13.0 million higher, gross profit would have been $7.7 million higher and total operating expenses would have been $2.0 million higher.

Gain on foreign exchange. We incurred a foreign exchange gain of $0.3 million for the nine months ended September 30, 2012 as compared to $1.4 million gain for the nine months ended September 30, 2011. At the end of the third 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 income (expense), net. Interest income (expense), net was $0.5 million of income for the nine months ended September 30, 2012 compared to $0.6 million of expense for the nine months ended September 30, 2011. The increase of income is the result of increases in interest bearing deposits during the period.

Provision for income taxes. Provision for income taxes was $48.4 million for the nine months ended September 30, 2012 compared to $39.2 million for the nine months ended September 30, 2011, representing an effective tax rate of 30.0% and 30.6% for the nine months ended September 30, 2012 and 2011, 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.


Table of Contents

Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation increased by $23.4 million to $110.1 million, or 27.0% for the nine months ended September 30, 2012 compared to $86.7 million for the nine months ended September 30, 2011. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 1.7 percentage points to 26.4% for the nine months ended September 30, 2012 from 24.7% for the nine months ended September 30, 2011 due to the factors described above.

Liquidity and Capital Resources

Our principal sources of liquidity as of September 30, 2012 consisted of cash and cash equivalents of $372.6 million, unused credit lines and overdraft facilities of $58.2 million and working capital (excluding cash and cash equivalents) of $167.3 million. This compares to cash and cash equivalents of $180.2 million, short-term investments of $25.5 million, unused credit lines and overdraft facilities of $49.8 million and working capital (excluding cash and cash equivalents and short-term investments) of $135.1 million as of December 31, 2011. The increase in cash and cash equivalents of $192.3 million from December 31, 2011 relates primarily to net cash received in the follow-on public stock offering of $168.0 million, net of offering expenses during the first quarter and the maturity of short-term investments of $25.5 million during the nine months ended September 30, 2012. Also, cash provided by operating activities in the nine months ended September 30, 2012 was $116.5 million. These increases were partially offset by capital expenditures of $51.7 million and the repurchase of the redeemable noncontrolling interest of $55.4 million. Operating cash flow in the fourth quarter of 2012 will be reduced by cash payments for corporation taxes in Germany. These payments relate to taxes for fiscal year 2011 that will become due when we file our fiscal year 2011 German tax return and interim tax payments for fiscal year 2012 which will increase when we submit last year's tax return. In the fourth quarter of 2012, we expect cash payments for corporation tax in Germany to be more than $30.0 million as compared to $7.4 million for the nine months ended September 30, 2012.

Our long-term debt consists primarily of a $14.3 million secured variable-rate note, of which $1.3 million is the current portion. This debt matures in 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 and is currently 5.0%. 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 ($1.8 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. In the first quarter of 2012, we made the final payment of $1.8 million relating to the 2010 purchase of a technology company.

In June 2012, our German subsidiary entered into a new credit facility with Deutsche Bank AG (the "Euro Credit Facility") to replace the prior credit facility that expired on June 30, 2012. The Euro Credit Facility makes available Euro 20.0 million ($25.7 million) and will expire on June 30, 2014.

Our existing cash and marketable securities, our cash flows from operations and our existing lines of credit provides us with the financial flexibility to meet our liquidity and capital needs, as well as to complete acquisitions of complementary businesses and technologies. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of economic environment on our sales levels, the timing and extent of spending to support development efforts, the expansion of the global sales and marketing activities, the timing and introductions of new products, the need to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. The following table details our line-of-credit facilities as of September 30, 2012:

                    Available
Description         Principal       Interest Rate         Maturity          Security
U.S. Revolving     Up to $35.0        LIBOR plus         June 2015          Unsecured
Line of Credit       million          1.125% to
(1)                                    1.625%,
                                   depending on our
                                     performance

Euro Credit           Euro         Euribor + 1.25%       June 2014         Unsecured,
Facility          20.0 million      or EONIA 1.50%                        guaranteed by
(Germany)(2)     ($25.7 million)                                         parent company

Euro Overdraft      Euro 1.9          2.4%-6.5%         October 2012     Common pool of
Facilities           million                                                assets of
                 ($2.4 million)                                            German and
                                                                             Italian
                                                                          subsidiaries


Table of Contents
(1) $14.1 million of this credit facility is available to our foreign subsidiaries in their respective local currencies, including India, China, Japan and South Korea. Total drawings at September 30, 2012 were $1.2 million with an interest rate of 1.3%

(2) $16.7 million of this credit facility is available to our German subsidiary, $3.9 million is available to our Russian subsidiary and $5.1 million is available to our Italian subsidiary. Total drawing at September 30, 2012 was $2.8 million with and interest rate of 1.6%.

Our largest committed credit lines are with Bank of America and Deutsche Bank in the amounts of $35.0 million and $25.7 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. 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 September 30, 2012.

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 December 2010 and June 2011, we sold a 22.5% minority interest (the "Minority Interest") of our Russian subsidiary, NTO IRE-Polus ("NTO"), to the Russian Corporation for Nanotechnologies ("Rusnano") for $45.0 million. In addition, we had a call option commencing in December 2013 to buy back the Minority Interest at a predetermined value and Rusnano had a warrant to purchase an additional 2.5% interest in NTO and a put option commencing in December 2015 to sell its Minority Interest to us at a predetermined value. On June 29, 2012, we repurchased the Minority Interest for $55.4 million cash and, under the terms of . . .

  Add IPGP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IPGP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.