IPG PHOTONICS CORPORATION 31
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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 6, "Selected Financial Data"
and our consolidated financial statements and related notes included in this
Annual Report on Form 10-K. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including, but not limited to, those discussed under Item 1A,
"Risk Factors."
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.
Description of Our Net Sales , Costs and Expenses
Net sales. We derive net sales primarily from the sale of fiber lasers, diode
lasers, laser and non-laser based systems, amplifiers and complementary
products. We sell our products to OEMs that supply materials processing laser
systems, communications systems, medical laser systems and other laser systems
to end users. We also sell our laser products and laser and non-laser based
systems to end users. Our scientists and engineers work closely with OEMs,
systems integrators and end users to analyze their system requirements and match
appropriate fiber laser, amplifier or system specifications to those
requirements. 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 are generally recognized upon shipment, provided that no
obligations remain and collection of the receivable is reasonably assured. Sales
of customized robotic systems are recognized over time. 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.
Cost of sales. Our cost of sales consists primarily of the cost of raw materials
and components, direct labor expenses and manufacturing overhead. We are
vertically integrated and currently manufacture all critical components for our
products as well as assemble finished products. We believe our vertical
integration allows us to increase efficiencies, leverage our scale and lower our
cost of sales. Cost of sales also includes personnel costs and overhead related
to our manufacturing, engineering and service operations, related occupancy and
equipment costs, shipping costs and reserves for inventory obsolescence and for
warranty obligations. Inventories are written off and charged to cost of sales
when identified as excess or obsolete.
Due to our vertical integration strategy and ongoing investment in plant and
machinery, we maintain a relatively high fixed manufacturing overhead. We may
not be able to or choose not to adjust these fixed costs to adapt to rapidly
changing market conditions. Our gross margin is therefore significantly affected
by our sales volume and the corresponding utilization of capacity and absorption
of fixed manufacturing overhead expenses.
Sales and marketing. Our sales and marketing expense consists primarily of costs
related to compensation, trade shows, professional and technical conferences,
travel, facilities, depreciation of equipment used for demonstration purposes
and other marketing costs.
Research and development. Our research and development expense consists
primarily of compensation, development expenses related to the design of our
products and certain components, the cost of materials and components to build
prototype devices for testing and facilities costs. Costs related to product
development are recorded as research and development expenses in the period in
which they are incurred.
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General and administrative. Our general and administrative expense consists
primarily of compensation and associated costs for executive management,
finance, legal, human resources, information technology and other administrative
personnel, outside legal and professional fees, insurance premiums and fees,
allocated facilities costs and other corporate expenses such as charges and
benefits related to the change in allowance for doubtful debt.
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 grew from $1,006.2 million in 2016 to $1,314.6
million in 2019, representing a three year compound annual growth rate of
approximately 9%. Net sales growth was driven by increasing demand for our
products, partially offset by declines in average sales prices, the introduction
of new products, including laser and non-laser systems, high power and
ultra-fast pulsed lasers, optical heads and other accessories and the
development of new applications for our products some of which displace
non-laser technologies. Our annual revenue growth rates have varied. Net sales
decreased by 10% in 2019 and increased by 4% and 40%, 2018 and 2017,
respectively.
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 94% of
our revenues in 2019 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.
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. 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.
In the recent years, our net sales have been susceptible to negative impacts of
tariffs. New tariffs and other changes in U.S. trade policy could trigger
retaliatory actions by affected countries, and certain foreign governments,
including the Chinese government (which has imposed retaliatory tariffs on a
range of U.S. goods including certain optical and electronic products and
components). We have seen a drop in demand for our products, particularly in the
materials processing market as result.
We are also susceptible to global or regional disruptions such as political
instability, geopolitical conflicts, acts of terrorism, significant fluctuations
in currency values, natural disasters, macroeconomic concerns and particularly
the impact of the 2019 novel coronavirus outbreak that affect the level of
capital expenditures or global commerce. The novel coronavirus outbreak is
understood to have started in China , which is a large and important market for
IPG, with repercussions for other markets. With respect to the 2019 novel
coronavirus outbreak specifically, we currently expect that our first quarter
2020 financial results will be negatively impacted, potentially to a material
degree. In addition, as of the time of this Annual Report on Form 10-K, we
expect that the 2019 novel coronavirus could continue to negatively impact our
businesses beyond the first quarter of 2020, but the extent and duration of such
impacts over the longer term remain uncertain and dependent on future
developments that cannot be accurately predicted at this time, such as the
severity and transmission rate of the coronavirus, the extent and effectiveness
of containment actions taken, including mobility restrictions and work
restrictions, and the impact of these and other factors on our customer base and
general commercial activity.
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 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.
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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 can experience additional competition which tends to
decrease average selling prices and affects 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 receive lower
prices per device than customers that purchase fewer units. These lower selling
prices to high unit volume customers may be partially offset by the improved
absorption of fixed overhead costs associated with larger product volumes, which
drive economies of scale in manufacturing; and finally,
•Gross margin on systems and communication components can be lower than margins
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 levels of gross and operating margins by growing
our market position across the broader markets we serve.
We invested $133.5 million , $160.3 million and $126.5 million in capital
expenditures in 2019, 2018 and 2017, respectively. Most of this investment
relates to expansion of our manufacturing capacity and, to a lesser extent,
research and development and sales-related facilities.
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 are 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 $38.9 million , $13.0 million and $16.9 million in 2019, 2018 and 2017,
respectively.
Selling and general and administrative expenses. In the past, the Company has
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.
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.
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Cost reduction program. During the fourth quarter of 2019, IPG implemented a
cost reduction program in response to continued global macroeconomic,
competitive and geopolitical headwinds. The Company expects to reduce annualized
manufacturing and operating expenses by approximately $30 million . As part of
this program the Company will reduce global headcount by more than 300 positions
and decrease other direct labor costs and expenses. IPG has implemented a hiring
freeze and expects limited replacement of workforce attrition to result in
further headcount reductions. Refer to Note 6, "Restructuring," for discussion
of the 2019 charges associated with this program.
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. If our analysis indicates potential impairment to goodwill 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. Further discussion of impairment charges recorded during 2019 can be
found in Note 6, "Restructuring," and Note 7, "Goodwill and Intangible Assets."
Foreign exchange. Because we are a U.S. based company doing business globally,
we have both translational and transactional exposure to fluctuations in foreign
currency exchange rates. Changes in the relative exchange rate between the U.S.
dollar and the foreign currencies in which our subsidiaries operate directly
affects our sales, costs and earnings. Differences in the relative exchange
rates between where we sell our products and where we incur manufacturing and
other operating costs (primarily in the U.S. , Germany and Russia ) also affects
our costs and earnings. Certain currencies experiencing significant exchange
rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen and Chinese
Yuan have had and could have an additional significant impact on our sales,
costs and earnings. Our ability to adjust the foreign currency selling prices of
products in response to changes in exchange rates is limited and may not offset
the impact of the changes in exchange rates on the translated value of sales or
costs. In addition, if we increase the selling price of our products in local
currencies, this could have a negative impact on the demand for our products.
Major customers. While we have historically depended on a few customers for a
large percentage of our annual net sales, the composition of this group can
change from year to year. Net sales derived from our five largest customers as a
percentage of our annual net sales were 21%, 26% and 28% in 2019, 2018 and 2017,
respectively. Our largest customer accounted for 9%, 12% and 13% of our net
sales in 2019, 2018 and 2017, 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. We generally
do not enter into agreements with our customers obligating them to purchase a
fixed number or large volume of our fiber lasers or amplifiers. If any of our
significant customers were to substantially reduce their purchases from us, our
results would be adversely affected.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net sales and expenses. By
their nature, these estimates and judgments are subject to an inherent degree of
uncertainty. We base our estimates and judgments on our historical experience
and on other assumptions that we believe are reasonable under the circumstances,
the results of which form the basis for making the judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates, which may materially
affect our operating results and financial position. We have identified the
following items that require the most significant judgment and often involve
complex estimation: revenue recognition, inventory valuation, warranty, and
accounting for income taxes.
Revenue Recognition - Revenue is recognized when transfer of control to the
customer occurs in an amount reflecting the consideration that we expect to be
entitled. In order to achieve this core principle, we apply the following five
step approach: (1) identify the contract with a customer, (2) identify the
performance obligations in the contract, (3) determine the transaction price,
(4) allocate the transaction price to the performance obligations in the
contract, and (5) recognize revenue when a performance obligation is satisfied.
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We allocate the transaction price to each distinct product based on its relative
standalone selling price, as more fully described in Note 1, "Nature of Business
and Summary of Significant Accounting Policies - Revenue Recognition," in our
consolidated financial statements. Revenue is generally recognized when control
of the product is transferred to the customer (i.e., when our performance
obligation is satisfied), which typically occurs at shipment but which can occur
over time for certain of our systems contracts. When goods or services have been
delivered to the customer, but all conditions for revenue recognition have not
been met, deferred revenue and deferred costs are recorded on our consolidated
balance sheet. With the acquisition of Genesis Systems in December 2018 , we
enter into contracts to sell customized robotic systems, for which revenue is
generally recognized over time, depending on the terms of the contract.
Recognizing revenue over time for these contracts is based on our judgment that
the customized robotic system does not have an alternative use and we have an
enforceable right to payment for performance completed to date. Recognizing
revenue over time also requires estimation of the progress towards completion
based on the projected costs for the contract.
Inventory - Inventory is stated at the lower of cost (first-in, first-out
method) or market value. Inventory includes parts and components that may be
specialized in nature and subject to rapid obsolescence. We maintain a reserve
for excess or obsolete inventory items. The reserve is based upon a review of
inventory materials on hand, which we compare with historic usage, estimated
future usage and age. In addition, we review the inventory and compare recorded
costs with estimates of current market value. Write-downs are recorded to reduce
the carrying value to the net realizable value with respect to any part with
costs in excess of current market value. Estimating demand and current market
values is inherently difficult, particularly given that we make highly
specialized components and products. We determine the valuation of excess and
obsolete inventory by making our best estimate considering the current
quantities of inventory on hand and our forecast of the need for this inventory
to support future sales of our products. We often have limited information on
which to base our forecasts. If future sales differ from these forecasts, the
valuation of excess and obsolete inventory may change and additional inventory
provisions may be required. Because of our vertical integration, a significant
or sudden decrease in sales could result in a significant change in the
estimates of excess or obsolete inventory valuation.
Warranty - We maintain an accrual for warranty claims for units sold that are
subject to warranty. We estimate this accrual considering past claims
experience, the number of units still carrying warranty coverage and the average
life of the remaining warranty period. A change in the rate of warranty repairs
or when warranty is generally incurred during the warranty period could change
our estimated warranty accrual and associated warranty expense.
Income Taxes and Deferred Taxes - Our annual tax rate is based on our income,
statutory tax rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. We file federal and state income tax
returns in the United States and tax returns in numerous international
jurisdictions. We must estimate our income tax expense after considering, among
other factors, if inter-company transactions have been made on an arm's length
basis, differing tax rates between jurisdictions, allocation factors, tax
credits, nondeductible items and changes in enacted tax rates. Significant
judgment is required in determining our annual tax expense and in evaluating our
tax positions. As we continue to expand globally, there is a risk that, due to
complexity within and diversity among the various jurisdictions in which we do
business, a governmental agency may disagree with the manner in which we have
computed our taxes. Additionally, due to the lack of uniformity among all of the
foreign and domestic taxing authorities, there may be situations where the tax
treatment of an item in one jurisdiction is different from the tax treatment in
another jurisdiction or that the transaction causes a tax liability to arise in
another jurisdiction.
We provide reserves for potential payments of tax to various tax authorities
related to uncertain tax positions and other issues. Reserves recorded are based
on a determination of whether and how much of a tax benefit taken by us in our
tax filings or positions is "more likely than not" to be realized following
resolution of any potential contingencies present related to the tax benefit,
assuming that the matter in question will be raised by the tax authorities.
Potential interest and penalties associated with such uncertain tax positions is
recorded as a component of income tax expense. At December 31, 2019 , we had
unrecognized tax benefits of approximately $11.4 million that, if recognized,
would be recorded as a reduction in income tax expense.
Goodwill and Long-lived Asset Impairment - We perform our annual goodwill
impairment review as of the first day of our fourth quarter, or more frequently
if events or circumstances indicate it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. Such events and
circumstances could include significant and sustained reductions in sales
volume, margin, profitability or cash flows of the reporting unit or changes in
market dynamics, including technology or product changes. We test reporting
units for impairment by comparing the estimated fair value of each reporting
unit with its carrying amount. Intangible assets and other long-lived assets are
also subject to an impairment test if there is an indicator of impairment.
Fair value determinations require considerable judgment and are sensitive to
changes in underlying assumptions, estimates, and market factors. Estimating the
fair value of individual reporting units requires us to make assumptions and
estimates regarding our future plans, as well as industry, economic, and
regulatory conditions. These assumptions and estimates
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include estimated future annual net cash flows, income tax considerations,
discount rates, growth rates, royalty rates, contributory asset charges, and
other market factors. Assumptions used in impairment testing are made at a point
in time and require significant judgment; therefore, they are subject to change
based on the facts and circumstances present at each annual and interim
impairment test date. Additionally, these assumptions are generally
interdependent and do not change in isolation. If current expectations of future
growth rates and margins are not met, if market factors outside of our control,
such as discount rates, change, or if management's expectations or plans
otherwise change, then one or more of our reporting units might become impaired
in the future. As detailed in Note 7, "Goodwill and Intangible Assets," we
recorded goodwill impairment losses totaling $37.1 million for the year ended
December 31, 2019 , which related to our SND and telecommunications reporting
units. Further, the estimated fair value of our Genesis reporting unit, which
was acquired in December 2018 , approximates the carrying value, which is
expected for a recent acquisition. We will continue to monitor this reporting
unit during 2020. If our estimates of future performance are reduced or if other
market assumptions change such that the fair value of the reporting unit is
reduced, impairment charges may be incurred. The value of goodwill associated
with the Genesis reporting unit is $44.4 million at December 31, 2019 .
Definite-lived intangible assets are amortized on a straight-line basis over the
estimated useful life. We review definite-lived intangible assets for impairment
when conditions exist that indicate the carrying amount of the assets may not be
recoverable. Such conditions could include significant adverse changes in the
business climate, current-period operating or cash flow losses, significant
declines in forecasted operations, or a current expectation that an asset group
will be disposed of before the end of its useful life. We perform undiscounted
operating cash flow analyses to determine if an impairment exists. When testing
for impairment of definite-lived intangible assets held for use, we group assets
at the lowest level for which cash flows are separately identifiable. If an
impairment is determined to exist, the loss is calculated based on estimated
fair value.
Results of Operations
The following table sets forth selected statement of operations data for the
periods indicated in dollar amounts and expressed as a percentage of net sales:
Year Ended December 31,
2019 2018 2017
(In thousands, except percentages and per share data)
Net sales $ 1,314,581 100.0 % $ 1,459,874 100.0 % $ 1,408,889 100.0 %
Cost of sales 708,372 53.9 659,606 45.2 611,978 43.4
Gross profit 606,209 46.1 800,268 54.8 796,911 56.6
Operating expenses:
Sales and marketing 77,745 5.9 57,815 4.0 49,801 3.5
Research and development 129,997 9.9 122,769 8.4 100,870 7.2
General and administrative 107,597 8.2 102,429 7.0 80,668 5.7 Goodwill impairment 37,120 2.8 - - - - Impairment of long-lived assets and other restructuring charges 7,130 0.5 - - -
-
Loss (gain) on foreign exchange 12,827 1.0 (6,150) (0.4) 14,460
1.0
Total operating expenses 372,416 28.3 276,863 19.0 245,799 17.4 Operating income 233,793 17.8 523,405 35.9 551,112 39.1 Interest income (expense), net 14,238 1.1 9,057 0.6 737
0.1
Other income (expense), net 345 - 1,933 0.1 22
-
Income before provision for income taxes 248,376 18.9 534,395 36.6 551,871
39.2
Provision for income taxes 68,115 5.2 130,226 (8.9) 204,283 (14.5) Net income 180,261 13.7 404,169 27.7 347,588 24.7 Less: Net income (loss) attributable to non-controlling interest 27 - 142 - (26)
-
Net income attributable to IPG Photonics Corporation$ 180,234 13.7 %$ 404,027 27.7 %$ 347,614 24.7 % Net income attributable toIPG Photonics Corporation per share: Basic $ 3.40$ 7.55 $ 6.50 Diluted $ 3.35$ 7.38 $ 6.36 Weighted-average shares outstanding: Basic 53,061 53,522 53,495 Diluted 53,839 54,726 54,699 37
-------------------------------------------------------------------------------- Table of Contents Comparison of Year EndedDecember 31, 2019 to Year EndedDecember 31, 2018 Net sales. Net sales decreased by$145.3 million , or 10.0%, to$1,314.6 million in 2019 from$1,459.9 million in 2018. The table below sets forth sales by application: Year Ended December 31, 2019 2018 Change (In thousands, except for percentages) Sales by Application % of Total % of Total Materials Processing$ 1,229,211 93.5 %$ 1,374,448 94.1 %$ (145,237) (10.6) % Other Applications 85,370 6.5 % 85,426 5.9 % (56) (0.1) % Total$ 1,314,581 100.0 %$ 1,459,874 100.0 %$ (145,293) (10.0) %
The table below sets forth sales by type of product and other revenue:
Year Ended December 31,
2019 2018 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power Continuous Wave ("CW") Lasers $ 734,745 55.9 % $ 909,726 62.3 % $ (174,981) (19.2) %
Medium Power CW Lasers 56,625 4.3 % 95,764 6.6 % (39,139) (40.9) %
Pulsed Lasers 137,675 10.5 % 162,048 11.1 % (24,373) (15.0) %
Quasi-Continuous Wave ("QCW") Lasers 56,440 4.3 % 66,700 4.6 % (10,260) (15.4) %
Laser and Non-Laser Systems 141,647 10.8 % 59,330 4.1 % 82,317 138.7 %
Other Revenue including Amplifiers, Service,
Parts, Accessories and Change in Deferred
Revenue 187,449 14.2 % 166,306 11.3 % 21,143 12.7 %
Total $ 1,314,581 100.0 % $ 1,459,874 100.0 % $ (145,293) (10.0) %
Sales for materials processing applications decreased due to lower sales of high
power, medium power, pulsed, and QCW lasers, partially offset by an increase in
sales of laser and non-laser systems and other revenue.
•High power laser sales decreased primarily due to lower sales of lasers used
for cutting, welding, and laser sintering applications. Within cutting
applications, decreased sales were driven by lower average selling prices and
weaker demand in China and Europe . The decrease in sales of high power lasers
used in welding applications was driven by lower sales into automotive and EV
battery applications. Within the laser sintering business, decreased sales were
driven by weaker sales in Europe for metal based additive manufacturing.
•The decrease in medium power sales related to weakness in fine cutting
applications and laser sintering for metal-based additive manufacturing. The
reduced revenue in fine cutting applications was due in part to the ongoing
transition to kilowatt scale high power lasers for these applications.
•The decrease in pulsed laser sales was due to lower sales of lasers used for
marking and battery processing applications, partially offset by growth in green
and ultrafast pulsed lasers.
•QCW laser sales decreased due to lower demand for consumer electronics and
drilling applications.
•The increase in laser and non-laser systems sales was largely due to the
acquisition of Genesis and partially driven by growth in macro-systems for
welding applications.
•Other Revenue sales increased compared to last year due to the increased sales
of parts, service, and accessories.
Sales for other applications remained consistent in 2019 as compared to 2018.
Sales to telecom applications decreased, but was offset by increased sales in
government and medical applications.
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Our net sales were derived from customers in the following geographic regions:
Year Ended December 31,
2019 2018 Change
(In thousands, except for percentages)
Sales by Geography % of Total % of Total
North America (1) $ 280,886 21.4 % $ 202,743 13.9 % $ 78,143 38.5 %
Europe :
Germany 81,365 6.2 % 111,259 7.6 % (29,894) (26.9) %
Other including Eastern Europe/CIS 249,871 19.0 % 296,917 20.3 % (47,046) (15.8) %
Asia and Australia:
China 491,890 37.4 % 629,079 43.1 % (137,189) (21.8) %
Japan 71,757 5.5 % 87,619 6.0 % (15,862) (18.1) %
Other 121,586 9.2 % 127,251 8.7 % (5,665) (4.5) %
Rest of World 17,226 1.3 % 5,006 0.4 % 12,220 244.1 %
Total $ 1,314,581 100.0 % $ 1,459,874 100.0 % $ (145,293) (10.0) %
(1) The substantial majority of sales in North America are to customers in the
United States .
Cost of sales and gross margin. Cost of sales increased by $48.8 million , or
7.4%, to $708.4 million in 2019 from $659.6 million in 2018. Our gross margin
decreased to 46.1% in 2019 from 54.8% in 2018. Gross margin decreased mainly due
to a decrease in average selling prices and higher inventory provisions.
Expenses related to provisions for excess or obsolete inventory and other
valuation adjustments increased by $25.9 million to $38.9 million , or 3.0% of
sales, for the year ended December 31, 2019 , as compared to $13.0 million , or
0.9% of sales, for the year ended December 31, 2018 . Inventory provisions
increased in 2019 due to review for slowing moving and excess inventory in light
of lower sales during the year and the more volatile macroeconomic,
geopolitical, and competitive environment in which we have recently been
operating. In addition, gross margin was impacted by lower absorption of
manufacturing expenses. Product mix also reduced gross margin because the
systems sold by Genesis, a business that we acquired in December 2018 , have a
lower gross margin than the core laser business. The acquisition of Genesis
reduced gross margin by 1.9% for the year ended December 31, 2019 .
Sales and marketing expense. Sales and marketing expense increased by $19.9
million , or 34.4%, to $77.7 million in 2019 from $57.8 million in 2018,
primarily as a result of sales and marketing expense for new acquisitions,
including Genesis, as well as increases in salaries and benefits, depreciation
and other selling expenses. As a percentage of sales, sales and marketing
expense increased to 5.9% in 2019 from 4.0% in 2018.
Research and development expense. Research and development expense increased by
$7.2 million , or 5.9%, to $130.0 million in 2019 from $122.8 million in 2018,
primarily as a result of an increase in materials used for research and
development, consultants, information technology, outside processing, leasing
and depreciation, partially offset by reductions in personnel and contractors.
Research and development continues to focus on developing new products,
enhancing performance of existing components, improving production processes and
developing manufacturing of new components 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 9.9% in 2019
from 8.4% in 2018. We expect to continue to invest in research and development
and that research and development expense will increase in the aggregate.
General and administrative expense. General and administrative expense increased
by $5.2 million , or 5.1%, to $107.6 million in 2019 from $102.4 million in 2018,
primarily as a result of the acquisition of Genesis and increased expenses for
information technology, depreciation and insurance, partially offset by lower
banking fees, personnel and legal expenses. As a percentage of sales, general
and administrative expense increased to 8.2% in 2019 from 7.0% in 2018.
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 2019
would have been $44.5 million higher, gross margin would have been $23.9 million
higher and operating expenses in total would have been $5.8 million higher.
These estimates assume constant exchange rates between fiscal year 2019 and
fiscal year 2018 and are calculated using the average exchange rates for the
twelve-month period ended December 31, 2018 for the respective currencies, which
were US$1 =Euro 0.85 , US$1 =Japanese Yen 110 , US$1 =Chinese Yuan 6.62 and
US$1 =Russian Ruble 63 .
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Goodwill impairment, impairment of long-lived assets and other restructuring
charges. During 2019, we incurred non-cash goodwill impairment losses of $37.1
million , non-cash impairment losses of long-lived assets of $5.3 million and
other restructuring charges of $1.8 million in total.
As a result of our 2019 annual impairment test for our transceivers reporting
unit, we recognized a non-cash impairment loss of $19.3 million , which was equal
to the carrying value of goodwill prior to its impairment. The analysis
considered lower than forecasted sales and profitability, as well as the impact
of delays in new product launches.
In addition, during the fourth quarter of 2019, we decided to cease further
development in our submarine network division ("SND") after assessing the
additional investment required to enter and obtain significant market share in
this industry. As of December 31, 2019 , we incurred cumulative pre-tax costs of
$21.2 million , which includes a non-cash goodwill impairment loss of $17.8
million and non-cash impairment loss for other assets of $2.9 million . In
addition, $0.2 million of severance and employee benefit costs were incurred and
$0.3 million related to contract cancellations.
We also implemented other restructuring programs globally, which were primarily
focused on workforce reduction and facility consolidation. These programs
resulted in expenses of $3.8 million , including $1.3 million of severance and
employee benefit costs and $2.5 million of non-cash impairment loss for long
lived assets.
Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $12.8
million in 2019 as compared to a gain of $6.2 million in 2018. The change was
primarily attributable to the appreciation of the Russian Ruble, the
depreciation of the Chinese Yuan, and depreciation of the Brazilian Real as
compared to the U.S. Dollar, which was partially offset by a gain attributed to
the depreciation of the Euro as compared to the U.S. Dollar.
Interest income (expense), net. Interest income (expense), net increased to
$14.2 million of income in 2019 compared to $9.1 million of income in 2018. In
2018, we repatriated $522.0 million of cash from Germany to the United States ,
which has been invested for the entirety of 2019, resulting in higher earnings.
Provision for income taxes. Provision for income taxes was $68.1 million in 2019
compared to $130.2 million in 2018, representing an effective tax rate of 27.4%
in 2019 and 24.4% in 2018. The increased effective tax rate was primarily due to
higher percent of earnings outside the U.S. taxed at higher rates and changes in
discrete adjustments. Discrete adjustments in 2019 include (i) a decrease to tax
expense of $5.1 million related to equity based compensation deductions for tax
in excess of the deductions reflected in book income and (ii) an increase to tax
expense of $10.0 million for goodwill impairments losses which were not
deductible for tax. Discrete adjustments in 2018 include (i) a decrease to tax
expense of $13.3 million related to equity based compensation deductions for tax
in excess of the deductions reflected in book income; (ii) an increase to tax
expense of $6.6 million related to U.S. tax on profits earned in 2017 calculated
at the prior year federal rate of 35% flowing through consolidated income in
2018; and (iii) an increase in the valuation allowance of $7.4 million primarily
for state credits.
Net income attributed to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation decreased by $223.8 million to $180.2 million in 2019
from $404.0 million in 2018. Net income attributable to IPG Photonics
Corporation as a percentage of our net sales decreased by 14.0% to 13.7% in 2019
from 27.7% in 2018 due to the factors described above.
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Comparison of Year Ended December 31, 2018 to Year Ended December 31, 2017
Net sales. Net sales increased by $51.0 million , or 3.6%, to $1,459.9 million in
2018 from $1,408.9 million in 2017. The table below sets forth sales by
application:
Year Ended December 31,
2018 2017 Change
(In thousands, except for percentages)
Sales by Application % of Total % of Total
Materials Processing $ 1,374,448 94.1 % $ 1,332,607 94.6 % $ 41,841 3.1 %
Other Applications 85,426 5.9 % 76,282 5.4 % 9,144 12.0 %
Total $ 1,459,874 100.0 % $ 1,408,889 100.0 % $ 50,985 3.6 %
The table below sets forth sales by type of product and other revenue:
Year Ended December 31,
2018 2017 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power Continuous Wave ("CW") Lasers $ 909,726 62.3 % $ 867,464 61.6 % $ 42,262 4.9 %
Medium and Low Power CW Lasers 95,764 6.6 % 118,705 8.4 % (22,941) (19.3) %
Pulsed Lasers 162,048 11.1 % 148,701 10.6 % 13,347 9.0 %
Quasi-Continuous Wave ("QCW") Lasers 66,700 4.6 % 88,329 6.3 % (21,629) (24.5) %
Laser and Non-Laser Systems 59,330 4.1 % 40,410 2.9 % 18,920 46.8 %
Other Revenue including Amplifiers, Service,
Parts, Accessories and Change in Deferred
Revenue 166,306 11.3 % 145,280 10.2 % 21,026 14.5 %
Total $ 1,459,874 100.0 % $ 1,408,889 100.0 % $ 50,985 3.6 %
Sales for materials processing applications increased due to higher sales of
high power and pulsed lasers and laser systems, partially offset by a decrease
in sales of medium and low power lasers and QCW lasers.
•High power laser sales increased primarily due to growth in sales for cutting
applications offset by declines in sales in welding applications. Within cutting
applications, we continue to see a migration to lasers with higher output powers
which improve processing speeds and enable processing of thicker materials. The
shift towards lasers with higher output powers has also benefited sales due to
their higher average selling prices.
•Medium and low power sales decreased due to lower sales for cutting and laser
sintering applications partially offset by higher sales for welding
applications. The decline in sales for cutting applications is largely due to
the use of high power lasers instead of medium power lasers for these
applications as the low cost cutting systems market has gravitated to higher
power lasers as their selling price per watt has decreased.
•Pulsed laser sales increased due to growth in sales of high power pulsed lasers
used for cutting, marking and engraving and cleaning applications partially
offset by decreases in pulsed lasers used for ablation.
•QCW laser sales decreased due to lower sales for welding applications. Welding
applications for QCW lasers are largely related to consumer electronics
manufacturing and the investment cycle for this application was weaker in 2018
and 2017.
•Laser systems sales increased due to increases in sales for cutting systems, as
well as incremental sales from the acquisition of ILT in July 2017 and the
acquisition of Genesis in December 2018 .
Sales for other applications increased due to higher sales of high power lasers
and high power amplifiers used for advanced applications as well as increased
sales of telecommunication components, including pluggable transceivers used in
data transmission.
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Our net sales were derived from customers in the following geographic regions:
Year Ended December 31,
2018 2017 Change
(In thousands, except for percentages)
Sales by Geography % of Total % of Total
North America (1) $ 202,743 13.9 % $ 165,363 11.8 % $ 37,380 22.6 %
Europe :
Germany 111,259 7.6 % 114,608 8.1 % (3,349) (2.9) %
Other including Eastern Europe/CIS 296,917 20.3 % 290,067 20.6 % 6,850 2.4 %
Asia and Australia:
China 629,079 43.1 % 621,283 44.1 % 7,796 1.3 %
Japan 87,619 6.0 % 80,612 5.7 % 7,007 8.7 %
Other 127,251 8.7 % 131,511 9.3 % (4,260) (3.2) %
Rest of World 5,006 0.4 % 5,445 0.4 % (439) (8.1) %
Total $ 1,459,874 100.0 % $ 1,408,889 100.0 % $ 50,985 3.6 %
(1) The substantial majority of sales in North America are to customers in the
United States .
Cost of sales and gross margin. Cost of sales increased by $47.6 million , or
7.8%, to $659.6 million in 2018 from $612.0 million in 2017. Our gross margin
decreased to 54.8% in 2018 from 56.6% in 2017. Gross margin decreased due to
lower absorption of manufacturing costs, decreases in average selling prices and
changes in product sales mix. The impact to gross margin primarily occurred in
the second half of the year in conjunction with the slowdown in sales and
increased competition for certain products in China . Expenses related to
provisions for excess or obsolete inventory and other valuation adjustments
decreased by $3.9 million to $13.0 million , or 0.9% of sales, for the year ended
December 31, 2018 , as compared to $16.9 million , or 1.2% of sales, for the year
ended December 31, 2017 .
Sales and marketing expense. Sales and marketing expense increased by $8.0
million , or 16.1%, to $57.8 million in 2018 from $49.8 million in 2017,
primarily as a result of an increase in personnel, depreciation, trade show and
exhibitions, and travel expense. As a percentage of sales, sales and marketing
expense increased to 4.0% in 2018 from 3.5% in 2017.
Research and development expense. Research and development expense increased by
$21.9 million , or 21.7%, to $122.8 million in 2018 from $100.9 million in 2017,
primarily as a result of an increase in personnel, materials, contractors,
consultants, depreciation and other research and development 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 and components such as ASICs used in pluggable
transceivers in the telecom industry. 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 8.4% in 2018
from 7.2% in 2017.
General and administrative expense. General and administrative expense increased
by $21.7 million , or 26.9%, to $102.4 million in 2018 from $80.7 million in
2017, primarily as a result of increased expenses for personnel, stock-based
compensation, professional services expenses related to acquisitions, accounting
legal and information technology expenses, and depreciation expense. As a
percentage of sales, general and administrative expense increased to 7.0% in
2018 from 5.7% in 2017.
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 2018
would have been $35.8 million lower, gross margin would have been $23.3 million
lower and operating expenses in total would have been $1.3 million higher. These
estimates assume constant exchange rates between fiscal year 2018 and fiscal
year 2017 and are calculated using the average exchange rates for the
twelve-month period ended December 31, 2017 for the respective currencies, which
were US$1 =Euro 0.89 , US$1 =Japanese Yen 112 , US$1 =Chinese Yuan 6.76 and
US$1 =Russian Ruble 58 .
Loss (gain) on foreign exchange. We incurred a foreign exchange gain of $6.2
million in 2018 as compared to a loss of $14.5 million in 2017. The change was
primarily attributable to the depreciation of the Euro as compared to the U.S.
Dollar, which was partially offset by depreciation of the Chinese Yuan as
compared to the U.S. Dollar.
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Interest income (expense), net. Interest income (expense), net increased to $9.1
million of income in 2018 compared to $0.7 million of income in 2017. The
increase of interest income was the result of the repatriation of $522 million
of cash during the year from Germany to the United States and improved rate of
return on U.S. Dollar denominated investments as compared to Euro denominated
investments.
Provision for income taxes. Provision for income taxes was $130.2 million in
2018 compared to $204.3 million in 2017, representing an effective tax rate of
24.4% in 2018 and 37.0% in 2017. The decreased effective tax rate was primarily
due to changes in the statutory tax rate in the United States from 35% to 21%
resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Discrete adjustments
in 2018 include (i) a decrease to tax expense of $13.3 million related to equity
based compensation deductions for tax in excess of the deductions reflected in
book income; (ii) an increase to tax expense of $6.6 million related to U.S. tax
on profits earned in 2017 calculated at the prior year federal rate of 35%
flowing through consolidated income in 2018; and, (iii) an increase in the
valuation allowance of $7.4 million primarily for state credits. Discrete
adjustments in 2017 include (i) a decrease to tax expense of $14.0 million
related to equity based compensation deductions for tax in excess of the
deductions reflected in book income and (ii) an increase to tax expense of $48.1
million for a U.S. tax on cumulative foreign earnings as a result of the Tax
Act.
On December 22, 2017 , the U.S. government enacted the Tax Act. The Tax Act makes
broad and complex changes to the U.S. tax code including, but not limited to:
(i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) requiring
companies to pay a one-time transition tax on certain un -repatriated earnings of
foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on
dividends from foreign subsidiaries; (iv) providing an incentive benefit for
U.S. income from intangibles (Foreign Derived Intangible Income); (v) increasing
U.S. taxable income to include all income earned by foreign subsidiaries in
excess of ten percent of the fixed assets in those entities (Global Intangible
Low-taxed Income) and (vi) providing for bonus depreciation that will allow for
full expensing of qualified property.
Our final calculation of the Deemed Repatriation Transition Tax ("Transition
Tax") element of the Tax Act is a $43.4 million increase to the tax expense. At
December 31, 2017 , we calculated a provisional amount of tax for this at $48.1
million and have included a benefit of $4.7 million in 2018 income tax expense
to reflect the impact of the decrease in liability. The federal Transition Tax
is payable over eight years and $30.3 million of the liability is included in
other long-term liabilities at December 31, 2018 .
Net income. Net income attributable to IPG Photonics Corporation increased by
$56.4 million to $404.0 million in 2018 from $347.6 million in 2017. Net income
attributable to IPG Photonics Corporation as a percentage of our net sales
increased by 3.0% to 27.7% in 2018 from 24.7% in 2017 due to the factors
described above.
Liquidity and Capital Resources
The following table presents our principal sources of liquidity:
As of December 31,
2019 2018
(In thousands)
Cash and cash equivalents $ 680,070 $ 544,358
Short-term investments 502,546 500,432
Unused credit lines and overdraft facilities 105,469 107,412
Working capital (excluding cash and cash equivalents and short-term investments)
522,114 514,860
Short-term investments at December 31, 2019 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 consolidated balance
sheets, which consist of auction rate securities totaling $0.6 million . See Note
3, "Fair Value Measurements" in the notes to the consolidated financial
statements for further information about our short and long-term investments.
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The following table details our line-of-credit facilities and long-term notes as
of December 31, 2019 :
Description Total Facility/ Note Interest Rate Maturity Security
U.S. Revolving Line of $50.0 million LIBOR plus 0.80% to April 2020 Unsecured
Credit (1) 1.20%, depending on our
performance
Euro Credit Facility Euro 50.0 million Euribor plus 0.75% or July 2020 Unsecured, guaranteed
(Germany) (2) ($56.1 million ) EONIA plus 1.00% by parent company and
German subsidiary
Other Euro Facilities
May 2020 Common pool of assets
million) 1.78% of Italian subsidiary
Long-term Secured Note (4) $22.1 million Fixed at 2.74% July 2022 Secured by the
corporate aircraft
Long-term Unsecured Note (5) $19.6 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 December 31, 2019 , there were no amounts drawn
on this line, however, there were $1.4 million of guarantees issued against the
line which reduces total availability.
(2) This facility is available to certain foreign subsidiaries in their
respective local currencies. At December 31, 2019 , there were no drawings,
however, there were $1.4 million of guarantees issued against the line which
reduces total availability.
(3) At December 31, 2019 , 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 $50.0 million and $56.1 million (or 50 million Euro as
described above), respectively, and neither of them is syndicated. We have
initiated negotiations to renew the U.S. revolving line of credit and Euro
credit facility, which both mature in 2020. 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 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. Debt service in the calculation is decreased by our cash held in the
U.S.A. in excess of $50 million up to a maximum of $250 million . Cash flow is
defined as EBITDA less unfunded capital expenditures. The funded debt to EBITDA
covenant requires that the sum of all indebtedness for borrowed money on a
consolidated basis be less than three times our trailing twelve-months EBITDA.
We were in compliance with all such financial covenants as of and for the three
months ended December 31, 2019 .
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.
See Note 11, "Financing Arrangements" in the notes to the consolidated financial
statements for further information about our facilities and term debt.
The following table presents cash flow activities:
As of December 31,
2019 2018
(In thousands)
Cash provided by operating activities
(139,975) (562,999)
Cash used by financing activities (37,067) (166,647)
Operating activities. Net cash provided by operating activities decreased by
$69.8 million to $323.5 million in 2019 from $393.3 million in 2018. In 2019,
net sales and net income decreased by 10% and 55%, respectively. As there were
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decreases in net sales and net income, cash provided by net income after adding
back non-cash charges decreased. This decrease has been partially 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
decrease in cash flow from operating activities in 2019 primarily resulted from
a decrease in cash provided by net income after adding back non-cash charges, an
increase in cash used by income and taxes payable; partially offset by, a
decrease in cash used for inventory, and an increase in cash provided by
accounts receivable.
Investing activities. Net cash used in investing activities was $140.0 million
and $563.0 million in 2019 and 2018, respectively. The cash used in investing
activities in 2019 related to $133.5 million for property, plant and equipment
and $15.1 million for the acquisition of a business during 2019, net of cash
acquired; partially offset by $7.8 million of net proceeds of investments. The
cash used in investing activities in 2018 related to $295.0 million of net
purchases of investments after the repatriation of cash from our German
subsidiary, $160.3 million for property, plant and equipment, and $109.1 million
for the acquisition of two businesses during 2018, net of cash acquired.
In 2020, we expect to incur approximately $115 million to $125 million in
capital expenditures, excluding acquisitions. Capital expenditures include
investments in property, facilities and equipment to add capacity worldwide to
support anticipated revenue growth. The timing and extent of any capital
expenditures in and between periods can have a significant effect on our cash
flow. 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 $37.1 million
and $166.6 million in 2019 and 2018, respectively. The cash used in financing
activities in 2019 was primarily related to the purchase of treasury stock of
$40.7 million and payments on our long-term borrowings of $3.7 million . These
uses of cash were partially offset by net proceeds 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 shares issued under our employee stock purchase plan of $7.3 million . The
cash used in financing activities in 2018 was primarily related to the purchase
of treasury stock of $176.1 million and payments on our long-term borrowings of
$3.6 million . These cash uses were partially offset by net proceeds of $12.2
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 shares issued under our employee stock
purchase plan.
We believe that our existing cash and cash equivalents, short-term investments,
our cash flows from operations and our existing lines of credit provide us with
the financial flexibility to meet our liquidity and capital needs, as well as to
complete certain acquisitions of businesses and technologies. We intend to
continue to pursue acquisition opportunities based upon market conditions and
the strategic importance and valuation of the target company. We may consider
issuing debt to finance acquisitions depending on the timing and size of the
acquisition among other reasons. Our future long-term capital requirements will
depend on many factors including our level of sales, the impact of economic
environment on our sales levels, the timing and extent of spending to support
development efforts, the expansion of the global sales and marketing activities,
government regulation including trade sanctions, the timing and introduction of
new products, the need to ensure access to adequate manufacturing capacity and
the continuing market acceptance of our products.
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2019 , we had no off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources. The following summarizes our contractual
obligations at December 31, 2019 and the effect such obligations are expected to
have on our liquidity and cash flow in future periods:
Payments Due in
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
(In thousands)
Operating lease obligations $ 29,797 $ 6,004 $ 8,366 $ 5,100 $ 10,327
Purchase obligations 53,922 52,711 1,211 - -
Long-term debt obligations (including
interest)(1) 43,561 4,857 23,675 15,029 -
Contingent consideration 273 273 - - -
Total(2) $ 127,553 $ 63,845 $ 33,252 $ 20,129 $ 10,327
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Table of Contents (1) Interest for long-term debt obligations was calculated including the effect of our fixed rate amounts. The weighted average fixed rate amount was 2.79%. (2) Excludes obligations related to ASC 740, reserves for uncertain tax positions, because we are unable to provide a reasonable estimate of the timing of future payments relating to the remainder of these obligations. See Note 17, "Income Taxes" to the consolidated financial statements. Recent Accounting Pronouncements See Note 1, "Nature of Business and Summary of Significant Accounting Policies" in the notes to the consolidated financial statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our consolidated financial statements contained in Part IV of this Annual Report.
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