IPG PHOTONICS CORPORATION
You should read the following discussion in conjunction with our condensed
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, manufacture and sell high-performance fiber lasers, fiber amplifiers
and diode lasers that are used for diverse applications, primarily in materials
processing. We also manufacture and sell complementary products used with our
lasers including optical delivery cables, fiber couplers, beam switches, optical
processing heads, in-line sensors and chillers. In addition, we offer
laser-based and non-laser based systems for certain markets and applications.
Our portfolio of laser solutions are used in materials processing,
communications, medical and advanced applications. We sell our products globally
to original equipment manufacturers ("OEMs"), system integrators and end users.
We market our products internationally, primarily through our direct sales
force. Our major manufacturing facilities are located in the United States ,
Germany and Russia . We have sales service offices and applications laboratories
worldwide.
We are vertically integrated such that we design and manufacture most of the key
components used in our finished products, from semiconductor diodes to optical
fiber preforms, finished fiber lasers, amplifiers and complementary products.
Our vertically integrated operations allow us to reduce manufacturing costs,
control quality, rapidly develop and integrate advanced products and protect our
proprietary technology.
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.
COVID-19 Update. In December 2019 , a novel coronavirus disease ("COVID-19") was
reported and in January 2020 , the World Health Organization ("WHO") declared it
a Public Health Emergency of International Concern. On February 28, 2020 , the
WHO raised its assessment of the COVID-19 threat from high to very high at a
global level due to the continued increase in the number of cases and affected
countries, and on March 11, 2020 , the WHO characterized COVID-19 as a pandemic.
In an effort to contain COVID-19 or slow its spread, governments around the
world have enacted various measures, including orders to close all businesses
not deemed "essential," isolate residents in their homes or places of residence,
and practice social distancing at and away from work. These actions and the
global health crisis caused by COVID-19 will negatively impact global business
activity, which will negatively affect our revenue and results of operations.
Each of the areas where we generate a majority of our revenue including Asia ,
Europe and North America have been or continue to be impacted by COVID-19. The
timing and extent of impact related to COVID-19 varies by country and region.
Sales for the quarter ended March 31, 2020 were negatively affected by the
COVID-19 pandemic. The effect of COVID-19 was most significant in Asia during
the quarter ended March 31, 2020 and began impacting Europe and North America
only later in the quarter. While we believe that COVID-19 was a primary cause of
the decline in revenue in the quarter, we also continue to experience declines
in average selling prices due to competition, particularly for high power laser
products in China .
The global demand environment remains very uncertain given the effects of
COVID-19 on manufacturing facilities and customer confidence around the world.
While we have seen a rebound in China -based order volumes in the latter half of
March and April, this has coincided with declining bookings in other regions,
including Western Europe , North America and other countries in Asia . As such,
visibility into a recovery in global demand remains uncertain at this time.
Currently, our three major production facilities in United States , Germany , and
Russia remain open. However, we have scaled back production in Massachusetts and
other U.S. locations to comply with applicable governmental orders. At our
locations we have implemented new employee safety and sanitization protocols
that have impacted productivity and efficiency. We have vertically integrated
manufacturing, and many of the components one facility supplies to another
facility are single sourced internally and not available from third party
suppliers, for example our semiconductor diodes manufactured in Oxford,
Massachusetts . While we have attempted to build safety stock of critical
components at our various locations, the scope, timing and duration of various
government restrictions to address the COVID-19 outbreak could impact our
internal supply chain. We have implemented certain payroll and sick time
policies to help support our employees impacted by COVID-19. These
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measures have and will continue to increase the cost of our operations but the
magnitude and length of time of this impact is difficult to quantify at this
time and may continue to be difficult to estimate in the future. If our revenues
are reduced for an extended period or if our production output falls because of
government restrictions, we may be required to reduce payroll-related costs and
other expenses in the future through layoffs, furloughs or reduced hours, even
though we have not done so to date.
We have not experienced significant supply disruption from third party component
suppliers however we face some supply chain restraints primarily related to
logistics, including available air cargo space and higher freights rates.
Available cargo space on flights between the U.S. and Europe and Europe and Asia
is limited as a result of COVID-19, increase shipping time and cost. In
addition, shipments within Europe to countries more severely impacted by
COVID-19 are restricted and we are experiencing delays due to additional checks
at border crossings. We believe we have the ability to meet the near-term demand
for our products, but the situation is fluid and subject to change.
We continue to monitor the rapidly evolving conditions and circumstances as well
as guidance from international and domestic authorities, including public health
authorities, and we may need to take additional actions based on their
recommendations. There is considerable uncertainty regarding the impact on our
business stemming from current measures and potential future measures that could
restrict access to our facilities, limit our manufacturing and support
operations and place restrictions on our workforce and suppliers, The measures
implemented by various authorities related to the COVID-19 outbreak have caused
us to change our business practices including those related to where employees
work, the distance between employees in our facilities, limitations on in person
meetings between employees and with customers, suppliers, service providers, and
stakeholders as well as restrictions on business travel to domestic and
international locations or to attend trade shows, investor conferences and other
events.
The COVID-19 pandemic has increased economic uncertainty and decreased demand
for our products in many markets we serve and could continue for an unknown
period of time. In these circumstances, there may be developments outside of our
control, including the length and extent of the COVID-19 outbreak and
government-imposed measures that may require us to adjust our operating plans.
As such, given the dynamic nature of this situation, we cannot reasonably
estimate the future impacts of COVID-19 on our financial condition, results of
operations or cash flows. However, we do expect that it will have an adverse
impact on our revenue as well as our overall profitability and may lead to an
increase in inventory provisions, allowances for credit losses, and a volatile
effective tax rate driven by changes in the mix of earnings across the Company's
markets. Additionally, if the business impacts of COVID-19 carry on for an
extended period, it could cause us to recognize impairments for goodwill and
certain long-lived assets including amortizable intangible assets or
right-of-use assets.
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, competitive pressures,
acquisitions, economic and political conditions in a certain country or region
and seasonal factors such as the purchasing patterns and levels of activity
throughout the year in the regions where we operate. 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. 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. 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 penetrate new markets or obtain new customers.
Our business depends substantially upon capital expenditures by end users,
particularly by manufacturers using our products for materials processing, which
includes general manufacturing, automotive, other transportation, aerospace,
heavy industry, consumer, semiconductor and electronics. Approximately 87% of
our revenues for the first quarter of 2020 and 94% of our revenues for the full
2019 fiscal year were from customers using our products for materials
processing. Although applications within materials processing are broad, the
capital equipment market in general is cyclical and historically has experienced
sudden and severe downturns. For the foreseeable future, our operations will
continue to depend upon capital expenditures by end users of materials
processing equipment and will be subject to the broader fluctuations of capital
equipment spending.
In recent years, our net sales have been negatively impacted by tariffs and
trade policy. New tariffs and other changes in U.S. trade policy could trigger
retaliatory actions by affected countries, and certain foreign governments. The
Chinese government has imposed retaliatory tariffs on a range of U.S. goods
including certain optical and electronic products and components, which has
impacted demand for our products, particularly for materials processing.
The average selling prices of our products generally decrease as the products
mature. These decreases result from factors such as increased competition,
decreased manufacturing costs and increases in unit volumes. We may also reduce
selling prices
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in order to penetrate new markets and applications. Furthermore, we may
negotiate discounted selling prices from time to time with certain customers
that place high unit-volume orders.
The secular shift to fiber laser technology in large materials processing
applications, such as cutting applications, had a positive effect on our sales
trends in the past such that our sales trends were often better than other
capital equipment manufacturers in both positive and negative economic cycles.
As the secular shift to fiber laser technology matures in such applications, our
sales trends are more susceptible to economic cycles which affect other capital
equipment manufacturers.
Gross margin. Our total gross margin in any period can be significantly affected
by total net sales in any period, by competitive factors, by product mix, and by
other factors such as changes in foreign exchange rates relative to the U.S.
Dollar, some of which are not under our control. For instance,
•As our products mature, we have experienced an increase in competition which
has decreased average selling prices and reduced gross margin;
•Our gross margin can be significantly affected by product mix. Within each of
our product categories, the gross margin is generally higher for devices with
greater average power. These higher power products often have better
performance, more difficult specifications to attain and fewer competing
products in the marketplace;
•Higher power lasers also use a greater number of optical components, improving
absorption of fixed overhead costs and enabling economies of scale in
manufacturing;
•The gross margin for certain specialty products may be higher because there are
fewer or sometimes no equivalent competing products;
•Customers that purchase devices in greater unit volumes generally are provided
a lower price per device than customers that purchase fewer units. In general,
lower selling prices to high unit volume customers reduce gross margin although
this may be partially offset by improved absorption of fixed overhead costs
associated with larger product volumes, which drive economies of scale in
manufacturing; and
•Gross margin on systems and communication components can be lower than the
gross margin for our laser and amplifier sources, depending on the
configuration, volume and competitive forces, among other factors.
We expect that some new technologies, products and systems will have returns
above our cost of capital but may have gross margins below our corporate
average. If we are able to develop opportunities that are significant in size,
competitively advantageous or leverage our existing technology base and
leadership, our current gross margin levels may not be maintained. Instead, we
aim to deliver industry-leading gross margin by growing sales by taking market
share in existing markets or by developing new applications and markets we
address, by reducing the cost of our products and by optimizing the efficiency
of our manufacturing operations
A high proportion of our costs is fixed so costs are generally difficult to
adjust or may take time to adjust in response to changes in demand. In addition,
our fixed costs increase as we expand our capacity. If we expand capacity faster
than is required by sales growth, gross margins could be negatively affected.
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. 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, our gross margins will be negatively affected.
We also regularly review our inventory for items that are slow-moving, have been
rendered obsolete or determined to be excess. Any provision for such
slow-moving, obsolete or excess inventory affects our gross margins. For
example, we recorded provisions for slow-moving, obsolete or excess inventory
totaling $8.5 million and $4.8 million for the three months ended March 31, 2020
and 2019, respectively.
Selling and general and administrative expenses. In the past, we have invested
in selling and general and administrative costs in order to support continued
growth in the Company. As the secular shift to fiber laser technology matures,
our sales growth becomes more susceptible to the cyclical trends typical of
capital equipment manufacturers. Accordingly, our future management of and
investments in selling and general and administrative expenses will also be
influenced by these trends, although we may still invest in selling or general
and administrative functions to support certain initiatives even in economic
down cycles. Certain general and administrative expenses are not related to the
level of sales and may vary quarter to quarter based primarily upon the level of
acquisitions and litigation.
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Research and development expenses. We plan to continue to invest in research and
development to improve our existing components and products and develop new
components, products, systems and applications technology. We believe that these
investments will sustain our position as a leader in the fiber laser industry
and will support development of new products that can address new markets and
growth opportunities. The amount of research and development expense we incur
may vary from period to period.
Goodwill and Long-lived assets impairments. We review our intangible assets and
property, plant and equipment for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. Negative industry or
economic trends, including reduced estimates of future cash flows, disruptions
to our business, slower growth rates, lack of growth in our relevant business
units or differences in the estimated product acceptance rates could lead to
impairment charges against our long-lived assets, including goodwill and other
intangible assets.
Our valuation methodology for assessing impairment requires management to make
significant judgments and assumptions based on historical experience and to rely
heavily on projections of future operating performance at many points during the
analysis. Also, the process of evaluating the potential impairment of goodwill
is subjective. We operate in a highly competitive environment and projections of
future operating results and cash flows may vary significantly from actual
results.
As discussed above, we are also monitoring the effect of the COVID-19 pandemic
on our business and the potential affect it may have on the recoverability of
our long-lived assets. The effect of COVID-19 on our business during the quarter
ended March 31, 2020 did not constitute a triggering event causing us to
evaluate the fair value of our amortizing long lived assets, nor did it provide
an indication that the carrying value of our goodwill was more than fair value.
Accordingly, there were no charges recorded during the three months ended March
31, 2020 . The future effects of COVID-19 remain uncertain. If the future effects
of COVID-19 accumulate and become larger or if our ability to predict the impact
becomes more certain, it may become a triggering event which would cause us to
evaluate the carrying value of our amortizable long-lived assets or to evaluate
the carrying value of goodwill prior to the annual assessment date. If our
analysis indicates potential impairment to goodwill, amortizable intangibles or
right-of-use assets in one or more of our reporting units, we may be required to
record charges to earnings in our financial statements, which could negatively
affect our results of operations.
Foreign exchange. Because we are a U.S. based company doing business globally,
we have both translational and transactional exposure to fluctuations in foreign
currency exchange rates. Changes in the relative exchange rate between the U.S.
dollar and the foreign currencies in which our subsidiaries operate directly
affects our sales, costs and earnings. Differences in the relative exchange
rates between where we sell our products and where we incur manufacturing and
other operating costs (primarily in the U.S. , Germany and Russia ) also affects
our costs and earnings. Certain currencies experiencing significant exchange
rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen and Chinese
Yuan have had and could have an additional significant impact on our sales,
costs and earnings. The COVID-19 pandemic and related impact on oil prices have
caused a significant depreciation of the Russian Ruble in the quarter ended
March 31, 2020 , and the U.S. dollar has generally appreciated more moderately
against the Euro, Japanese Yen and Chinese Yuan. The depreciation of the Russian
Ruble created a foreign exchange gain in the quarter ended March 31, 2020 ,
because our Russian subsidiary has certain net assets denominated in U.S.
Dollars. Additionally, the depreciation of the Russian Ruble was the primary
driver of a charge to other comprehensive income during the quarter, based on
the translation of Ruble denominated assets and liabilities into U.S. dollars.
Ongoing volatility of foreign exchange rates relative to the U.S. Dollar could
continue to result in significant foreign exchange gains and losses related to
transactions and charges or benefits to other comprehensive income. Our ability
to adjust the foreign currency selling prices of products in response to changes
in exchange rates is limited and may not offset the impact of the changes in
exchange rates on the translated value of sales or costs. In addition, if we
increase the selling price of our products in local currencies, this could have
a negative impact on the demand for our products.
Major customers. While we have historically depended on a few customers for a
large percentage of our annual net sales, the composition of this group can
change from year to year. Net sales derived from our five largest customers as a
percentage of our net sales was 21% for the three months ended March 31, 2020
and 21%, 26% and 28% for the full years 2019, 2018 and 2017, respectively. One
of our customers accounted for 23% and 24% of our net accounts receivable as of
March 31, 2020 and December 31, 2019 , 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 substantially reduced their purchases from us, our results
would be adversely affected.
Results of Operations for the three months ended March 31, 2020 compared to the
three months ended March 31, 2019
Net sales. Net sales decreased by $65.8 million , or 20.9%, to $249.2 million for
the three months ended March 31, 2020 from $315.0 million for the three months
ended March 31, 2019 . The impact of COVID-19 on sales was most significant in
Asia . Sales in Asia declined 35%, and sales in China , specifically, declined
40%. In China , the revenue impact was most
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significant in February, however sales in China rebounded in March there. In
other regions of the world COVID-19 impacts started later in mid to late March.
The table below sets forth sales by application:
Three Months Ended March 31,
2020 2019 Change
(In thousands, except for percentages)
Sales by Application % of Total % of Total
Materials processing $ 218,074 87.5 % $ 301,085 95.6 % $ (83,011) (27.6) %
Other applications 31,168 12.5 % 13,962 4.4 % 17,206 123.2 %
Total $ 249,242 100.0 % $ 315,047 100.0 % $ (65,805) (20.9) %
The table below sets forth sales by type of product and other revenue:
Three Months Ended
2020 2019 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power Continuous Wave ("CW") Lasers $ 119,316 47.9 % $ 179,019 56.8 % $ (59,703) (33.4) %
Medium Power CW Lasers 11,253 4.5 % 15,598 5.0 % (4,345) (27.9) %
Pulsed Lasers 31,839 12.8 % 31,437 10.0 % 402 1.3 %
Quasi-Continuous Wave ("QCW") Lasers 9,873 4.0 % 14,166 4.5 % (4,293) (30.3) %
Laser and Non-Laser Systems 18,634 7.5 % 32,631 10.4 % (13,997) (42.9) %
Other Revenue including Amplifiers, Service,
Parts, Accessories and Change in Deferred
Revenue 58,327 23.3 % 42,196 13.3 % 16,131 38.2 %
Total $ 249,242 100.0 % $ 315,047 100.0 % $ (65,805) (20.9) %
Materials processing
Sales for materials processing applications decreased due to lower sales from
high power lasers, medium power lasers, QCW lasers, laser and non-laser systems,
offset by increased revenue from other laser products and pulsed lasers. Sales
for material processing applications were generally negatively affected by the
COVID-19 pandemic. The effect of COVID-19 was most significant in Asia during
the quarter ended March 31, 2020 and began impacting Europe and North America
only later in the quarter. While we believe that COVID-19 was a primary cause of
the declines in revenue in materials processing in the quarter, we also continue
to experience declines in average selling prices due to competition,
particularly for high power laser products in China . Additional analysis by
product is as follows:
•The decline in high power lasers related to the decrease in sales of lasers
used for metal cutting and welding. Within cutting applications, decreased sales
were attributable to a weaker global demand environment primarily in Asia as a
result of COVID-19 and continued competition affecting average selling prices.
The decrease in sales of high power lasers used in welding applications was
driven by lower sales into the traditional automotive industry.
•The decrease in medium power sales related to ongoing transition to kilowatt
scale cutting lasers and decreased demand in laser sintering for metal-based
additive manufacturing.
•The increase in pulsed laser sales was due to growth in sales of high power
pulsed lasers used for ablative and battery processing applications, partially
offset by decreased demand of pulsed lasers used for marking and engraving
applications.
•QCW laser sales decreased due to lower demand for fine processing and consumer
electronics applications.
•The decrease in laser and non-laser systems sales was due to lower demand of
both laser systems and non-laser systems. The reduced revenue in laser systems
was related to lower demand of systems used for cutting and welding
applications, partially offset by laser systems used for medical device
manufacturing. The reduction of revenue in non-laser systems was attributable to
lower demand in the transportation sector.
•Other Revenue for materials processing increased due to an increase in service
revenue, partially offset by lower sales of options and accessories.
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Other applications
Sales from other applications increased due to increased demand of laser sales
used for medical procedures, government applications, and semiconductor
applications, partially offset by lower sales in products used for telecom.
Cost of sales and gross margin. Cost of sales decreased by $19.7 million , or
11.9%, to $146.4 million for the three months ended March 31, 2020 from $166.1
million for the three months ended March 31, 2019 . Our gross margin decreased to
41.3% for the three months ended March 31, 2020 from 47.3% for the three months
ended March 31, 2019 . Gross margin decreased mainly due to lower revenue and
higher inventory provisions in the first quarter of 2020 versus the year ago
period. In addition, gross margin was impacted by an increase in unabsorbed
manufacturing expense as a percentage of revenue versus the year ago period.
Sales and marketing expense. Sales and marketing expense decreased by $0.6
million , or 3.1%, to $18.7 million for the three months ended March 31, 2020
compared with $19.3 million for the three months ended March 31, 2019 . This
change was primarily a result of decreases in trade fair and exhibits,
personnel, and other selling expense. As a percentage of sales, sales and
marketing expense increased to 7.5% for the three months ended March 31, 2020
from 6.1% for the three months ended March 31, 2019 .
Research and development expense. Research and development expense decreased by
$0.7 million , or 2.2%, to $31.8 million for the three months ended March 31,
2020 , compared to $32.5 million for the three months ended March 31, 2019 . This
change was primarily a result of decreases in R&D materials and consultants,
partially offset by increases in personnel and other R&D expense. Research and
development continues to focus on developing new products, enhancing performance
of existing components, improving production processes and developing
manufacturing of new components such as crystals and refining production
processes to improve manufacturing yields and productivity. New products include
lasers that operate at different wavelengths such as UV, visible and mid-IR,
lasers with ultrafast pulses, laser based systems for material processing,
projection, display and medical as well as accessories such as welding and
cutting heads. In addition to new products, research and development is focused
on enhancing the performance of our existing products by improving their
electrical efficiency and increasing their average power. As a percentage of
sales, research and development expense increased to 12.8% for the three months
ended March 31, 2020 from 10.3% for the three months ended March 31, 2019 .
General and administrative expense. General and administrative expense decreased
by $0.1 million , or 0.4%, to $27.1 million for the three months ended March 31,
2020 from $27.2 million for the three months ended March 31, 2019 . This change
was primarily a result of reductions in bad debt expense, partially offset by
increases in personnel. As a percentage of sales, general and administrative
expense increased to 10.9% for the three months ended March 31, 2020 from 8.6%
for the three months ended March 31, 2019 .
Effect of exchange rates on net sales, gross profit and operating expenses. We
estimate that, if exchange rates relative to the U.S. Dollar had been the same
as one year ago, which were on average Euro 0.88 , Russian Ruble 66 , Japanese Yen
110 and Chinese Yuan 6.75 , respectively, we would have expected net sales to be
$5.4 million higher, gross profit to be $2.6 million higher and total operating
expenses to be $0.9 million higher.
(Gain) loss on foreign exchange. We incurred a foreign exchange gain of $19.6
million for the three months ended March 31, 2020 as compared to a $1.6 million
loss for the three months ended March 31, 2019 . The foreign exchange gain for
the three months ended March 31, 2020 was primarily attributable to depreciation
of the Russian Ruble and Euro, partially offset by a loss attributed to the
depreciation of the Chinese Yuan as compared to the U.S. Dollar. The foreign
exchange loss for the three months ended March 31, 2019 was primarily
attributable to the appreciation of the Russian Ruble offset by gains
attributable to the appreciation of the Chinese Yuan and depreciation of the
Euro as compared to the U.S. Dollar.
Interest income (expense), net. Interest income (expense), net decreased to $3.1
million of income for the three months ended March 31, 2020 as compared to $4.0
million of income for the three months ended March 31, 2019 .
Provision for income taxes. Provision for income taxes was $11.3 million (23.5%
of pre-tax income) for the three months ended March 31, 2020 compared to $17.3
million (24.0% of pre-tax income) for the three months ended March 31, 2019 .
There were net discrete tax benefits of $2.8 million and $2.3 million for the
three months ended March 31, 2020 and 2019, respectively, primarily related to
the tax deductions for equity-based compensation that exceeded compensation
expense recognized.
Net income attributable to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation decreased by $18.8 million to $36.4 million for the
three months ended March 31, 2020 compared to $55.2 million for the three months
ended March 31, 2019 . Net income attributable to IPG Photonics Corporation as a
percentage of our net sales decreased by 2.9
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percentage points to 14.6% for the three months ended March 31, 2020 from 17.5%
for the three months ended March 31, 2019 due to the factors described above.
Liquidity and Capital Resources
The following table presents our principal sources of liquidity:
March 31, December 31,
2020 2019
(In thousands)
Cash and cash equivalents $ 570,058 $ 680,070
Short-term investments 625,085 502,546
Unused credit lines and overdraft facilities 129,172 105,469
Working capital (excluding cash, cash equivalents, restricted cash and short-term investments)
483,951 522,114
Short-term investments at March 31, 2020 , consist of liquid investments
including corporate notes, commercial paper and certificates of deposit with
original maturities of greater than three months but less than one year. We also
hold long-term investments, included in other assets on the condensed
consolidated balance sheets, which consist of auction rate securities totaling
$0.6 million . See Note 5, "Fair Value Measurements" in the notes to the
condensed consolidated financial statements for further information about our
short and long-term investments.
The COVID-19 pandemic is likely to reduce cash from operations from previous
levels due to a decrease in net income and because we may choose not to or be
able to reduce working capital. Investment in working capital might need to be
maintained or increased due to a need to maintain a higher level of inventory
because of supply chain disruptions and an increase in accounts receivable days
if customers delay payments. In addition, cash from operations could be affected
by various risks and uncertainties, including, but not limited to, the effects
of the COVID-19 pandemic and other risks detailed in Item 8.01 of the Current
Report on Form 8-K filed with the SEC on May 5, 2020 and "Management's
Discussion and Analysis - Factors and Trends that Affect our Operations and
Financial Results" in this Quarterly Report on Form 10-Q. Although we expect the
COVID pandemic to adversely affect our cash flow from operations, we believe
that our existing cash, cash equivalents and investment balances, anticipated
cash flows from operations and available credit facilities will be sufficient to
meet our working capital and operating resource expenditure requirements for the
next twelve months. We also expect to continue investments in capital
expenditures, to assess acquisition opportunities and to repurchase shares of
our stock in accordance with our repurchase program, although the extent and
timing of such expenditures may be adjusted in response to the impact of
COVID-19 on our operations, cash flow and other factors. Our future long-term
capital requirements will depend on many factors including our level of sales,
the impact of the economic environment on our growth, global or regional
recessions, the timing and extent of spending to support development efforts,
expansion of the global sales and marketing activities, government regulation
including trade sanctions, the timing and introductions of new products, the
need to ensure access to adequate manufacturing capacity and the continuing
market acceptance of our products.
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The following table details our line-of-credit facilities and long-term notes as
of March 31, 2020 :
Description Total Facility/ Note Interest Rate Maturity Security
U.S. Revolving Line of Credit $75.0 million LIBOR plus 0.80% to April 2025 Unsecured
(1) 1.20%, depending on
our performance
Euro Credit Facility Euro 50.0 million Euribor plus 0.75% or July 2020 Unsecured,
(Germany) (2) ($55.0 million ) EONIA plus 1.00% guaranteed by parent
company and German
subsidiary
Other Euro Facility (3) Euro 2.0 million Euribor plus 0.89% to May 2020 Common pool of
($2.2 million ) 1.78% assets of Italian
subsidiary
Long-term Secured Note (4) $21.5 million Fixed at 2.74% July 2022 Secured by the
corporate aircraft
Long-term Unsecured Note (5) $19.3 million 1.20% above LIBOR, May 2023 Unsecured
fixed using an
interest rate swap at
2.85% per annum
(1) This facility is available to certain foreign subsidiaries in their
respective local currencies. At March 31, 2020 , there were no amounts drawn on
this line; however, there were $1.1 million of guarantees issued against the
line which reduces total availability.
(2) This facility is also available to certain foreign subsidiaries in their
respective local currencies. At March 31, 2020 , there were no drawings on this
facility; however, there were $1.9 million of guarantees issued against the line
which reduces total availability.
(3) At March 31, 2020 , there were no drawings. This facility renews annually.
(4) At maturity, the outstanding note balance will be $15.4 million .
(5) At maturity, the outstanding note balance will be $15.4 million .
Our largest committed credit lines are with Bank of America N.A . and Deutsche
Bank AG in the amounts of $75.0 million and $55.0 million (or 50.0 million Euro
as described above), respectively, and neither of them is syndicated. On March
25, 2020 , we amended the U.S. revolving line of credit, with an increase of $25
million for a total facility of $75.0 million and extended its maturity through
April 30, 2025 . On April 22, 2020 , we amended the Euro credit facility with
Deutsche Bank AG, extending its maturity through July 31 , 2023.We plan to seek
amendments of our credit agreements and notes to modify LIBOR and Euribor
reference rates as these rates are phased out as borrowing rates.
We are required to meet certain financial covenants associated with our
U.S. revolving line of credit and long-term debt facility. These covenants,
tested quarterly, include an interest coverage ratio and a funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
The interest coverage covenant requires that we maintain a trailing twelve-month
ratio of EBITDA to interest on all obligations that is at least 3.0:1.0. The
funded debt to EBITDA covenant requires that the sum of all indebtedness for
borrowed money on a consolidated basis be less than three times our trailing
twelve months EBITDA. Funded debt is decreased by our cash and available
marketable securities not classified as long-term investments in the U.S.A. in
excess of $50 million up to a maximum of $500 million . We were in compliance
with all such financial covenants as of and for the three months ended March 31,
2020 .
The financial covenants in our loan documents may cause us to not make 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.
See Note 10, "Financing Arrangements" in the notes to the condensed consolidated
financial statements for further information about our facilities and term debt.
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The following table presents cash flow activities:
Three Months Ended
March 31, March 31,
2020 2019
(In thousands)
Cash provided by operating activities
(139,754) (23,152)
Cash used by financing activities (20,792) (7,060)
Operating activities. Net cash provided by operating activities increased by
$13.1 million to $56.8 million for the three months ended March 31, 2020 from
$43.7 million for the three months ended March 31, 2019 . In 2020, net sales and
net income decreased by 21% and 34%, respectively. As there were decreases in
net sales and net income, cash provided by net income after adding back non-cash
charges decreased. This decrease has been offset by a decrease in the amount
invested in working capital. Our largest working capital items typically are
inventory and accounts receivable. Items such as accounts payable to third
parties, prepaid expenses and other current assets and accrued expenses and
other liabilities are not as significant as our working capital investment in
accounts receivable and inventory because of the amount of value added within
IPG due to our vertically integrated structure. Accruals and payables for
personnel costs including bonuses and income and other taxes payable are largely
dependent on the timing of payments for those items. The increase in cash flow
from operating activities in 2020 primarily resulted from a decrease in cash
used by income and taxes payable, an increase in cash provided by accounts
receivable, and a decrease in cash used by inventory; partially offset by a
decrease in cash provided by net income after adding back non-cash charges.
Investing activities. Net cash used in investing activities was $139.8 million
for the three months ended March 31, 2020 as compared to cash used in investing
activities of $23.2 million in 2019. The cash used in investing activities in
2020 related to $122.2 million of net purchases of short-term investments and
$17.8 million of capital expenditures. The cash used in investing activities in
2019 related to $33.0 million of capital expenditures and $15.1 million for
acquisition of business, partially offset by $24.8 million of net proceeds of
short-term investments.
We expect to incur approximately $115 million to $125 million in capital
expenditures, excluding acquisitions, in 2020. Capital expenditures include
investments in facilities and equipment to add capacity in selected countries,
add redundancy in specialized manufacturing and support our research and
development efforts. The timing and extent of any capital expenditures in and
between periods can have a significant effect on our cash flow. If we obtain
financing for certain projects, our cash expenditures would be reduced in the
year of expenditure. Many of the capital expenditure projects that we undertake
have long lead times and are difficult to cancel or defer to a later period.
Financing activities. Net cash used in financing activities was $20.8 million
for the three months ended March 31, 2020 as compared to net cash used of $7.1
million in 2019. The cash used in financing activities in 2020 was primarily
related to the purchase of treasury stock of $12.7 million , $5.5 million from
the exercise of stock options net of amounts disbursed in relation to shares
withheld to cover employee income taxes due upon the vesting and release of
restricted stock units and $0.9 million of principal payments on our long-term
borrowings. The cash used in financing activities in 2019 was primarily related
to $6.1 million from the exercise of stock options net of amounts disbursed in
relation to shares withheld to cover employee income taxes due upon the vesting
and release of restricted stock units and $0.9 million of principal payments on
our long-term borrowings.
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
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Table of Contents more detail in Item 1, "Business" of Part I of the Form 10-K for the year endedDecember 31, 2019 (the "Annual Report") and in the Current Report on Form 8-K, filed onMay 5, 2020 , with theSEC (the "May 5 Current Report"). Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with theSecurities 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 See Note 2 in the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.
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