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 is 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 , Russia and Belarus . 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. Global demand trends have been impacted by the ongoing COVID-19
pandemic and therefore remain uncertain at this time. Economic indicators
continue to show improvement from the severe contraction experienced one year
ago, which has led to an improvement in the recent demand environment in certain
regions. It is difficult to predict whether the improvement in some
macroeconomic indicators will be sustained or if it could change, if there are
additional restrictions imposed as a result of a resurgence in COVID-19
infections. This uncertainty continues to make forecasting our business
challenging in the near to medium term.
Currently, our four major production facilities in the United States , Germany ,
Russia and Belarus remain open and are operating with enhanced employee safety
and sanitization protocols that have not significantly impacted productivity and
efficiency. We have vertically integrated manufacturing and many of the
components that one facility supplies to another facility are single sourced
internally and not available from third-party suppliers. For example, our
semiconductor diodes are only manufactured in Oxford, Massachusetts . While we
have attempted to build safety stock of critical components at our various
locations, if government restrictions to address COVID-19 become more severe or
if absenteeism becomes significant as a result of a COVID-19 resurgence in the
places where we operate, it could impact our internal supply chain.
We and our customers are experiencing increased lead times for certain
components purchased from third-party suppliers, particularly electronic
components. We, our customers and our suppliers continue to face constraints
related to supply chain and logistics, including availability of capacity,
materials, air cargo space, sea containers and higher freight rates. Supply
chain and logistics constraints are expected to continue for the foreseeable
future and could impact our ability to supply products and our customers' demand
for our product or readiness to accept deliveries. We believe we have the
ability to meet the near-term demand for our products, but the situation is
fluid and subject to change if there is a resurgence in COVID-19 or if
governments implement new restrictions.
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. 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. In addition, vaccine
mandates may hinder our ability to retain or hire employees, which could impact
many different functions of our business. To date, we have been able to
accommodate these changes to our business
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operations and continue to meet customer demand. If guidelines or mandates from
relevant authorities becomes more restrictive due to a resurgence of COVID-19 in
a particular region, the effect on our operations could be more significant.
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 including electric vehicles (EV),
other transportation, aerospace, heavy industry, consumer, semiconductor and
electronics. Approximately 92% of our revenues for three quarters of 2021 and
90% of our revenues for the full 2020 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.
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 COVID-19 outbreak that affect the level of capital
expenditures or global commerce. With respect to the COVID-19 outbreak
specifically, while our financial results for the nine months ended September
30, 2021 improved as compared to quarterly results achieved during 2020, the
possible effect over the longer term continues to remain uncertain and dependent
on future developments that cannot be accurately predicted at this time, such as
the severity and transmission rate of COVID-19 or new variants, the extent and
effectiveness of containment actions taken, the approval, effectiveness, timing
and widespread vaccination of the global population, 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.
Gross margin. Our total gross margin in any period can be significantly affected
by a number of factors, some of which are not under our control, including net
sales, production volumes, competitive factors, product mix, and by other
factors such as changes in foreign exchange rates relative to the U.S. Dollar.
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. The 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;
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•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 economies of scale; and finally,
•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.
As a high proportion of our costs is fixed, they 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 $7.9 million and $11.5 million for the three months ended September 30,
2021 and 2020, respectively, and $23.5 million and $26.0 million for the nine
months ended September 30, 2021 and 2020, 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.
Research and development expenses. We plan to continue to invest in research and
development to improve our existing components and products and develop new
products, components, 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. 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.
As discussed above, we continue to monitor 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 future effects of COVID-19 remain uncertain as more
variants start to emerge on a global basis. 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
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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 of 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 would 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 , Russia and Belarus ) 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 depreciation of the Euro partially offset by the
depreciation of the Chinese Yuan created a foreign exchange gain for the quarter
ended September 30, 2021 because our European subsidiaries have certain net
assets denominated in U.S. Dollars, and our Chinese subsidiary has certain net
liabilities denominated in U.S. Dollars. 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 nine months ended September 30, 2021
and 24%, 21% and 26% for the full years 2020, 2019 and 2018, respectively. One
of our customers accounted for 23% and 21% of our net accounts receivable as of
September 30, 2021 and December 31, 2020 , 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 substantially reduced their purchases from us,
our results would be adversely affected.
Results of Operations for the Three Months Ended September 30, 2021 Compared to
the Three Months Ended September 30, 2020
Net sales. Net sales increased by $60.7 million , or 19.1%, to $379.1 million for
the three months ended September 30, 2021 from $318.4 million for the three
months ended September 30, 2020 .
The table below sets forth sales by application:
Three Months Ended September 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Application % of Total % of Total
Materials processing $ 346,045 91.3 % $ 290,028 91.1 % $ 56,017 19.3 %
Other applications 33,105 8.7 % 28,413 8.9 % 4,692 16.5 %
Total $ 379,150 100.0 % $ 318,441 100.0 % $ 60,709 19.1 %
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The table below sets forth sales by type of product and other revenue:
Three Months Ended September 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power Continuous Wave ("CW")
Lasers $ 177,787 46.9 % $ 184,387 57.9 % $ (6,600) (3.6) %
Medium Power CW Lasers 24,520 6.4 % 11,756 3.7 % 12,764 108.6 %
Pulsed Lasers 59,051 15.6 % 34,975 11.0 % 24,076 68.8 %
Quasi-Continuous Wave ("QCW") Lasers 16,312 4.3 % 15,079 4.7 % 1,233 8.2 %
Laser and Non-Laser Systems 32,523 8.6 % 20,841 6.5 % 11,682 56.1 %
Other Revenue including Amplifiers,
Service, Parts, Accessories and Change
in Deferred Revenue 68,957 18.2 % 51,403 16.2 % 17,554 34.1 %
Total $ 379,150 100.0 % $ 318,441 100.0 % $ 60,709 19.1 %
Materials processing
Sales for materials processing applications increased due to higher sales from
pulsed lasers, laser and non-laser systems, medium power lasers, other laser
products and service, and QCW lasers, partially offset by a decrease in sales of
high power lasers. Sales for materials processing applications improved as
markets recover from being negatively affected by the COVID-19 pandemic in 2020.
•The decrease in high power laser sales related to metal cutting applications
was partially offset by an increase in sales for metal welding applications.
Within cutting applications, decreased sales were attributable to lower demand
and increased competition in China . The increase in sales of high power lasers
used in welding applications was driven by higher sales into electric vehicle
battery (EV) and general manufacturing industries.
•Medium power sales increased due to increased demand for additive
manufacturing, welding and cutting applications.
•Pulsed laser sales, including high power pulsed lasers, increased due to growth
in sales for foil cutting and cleaning for EV battery processing applications,
other cleaning and stripping application, marking and engraving applications and
green pulsed lasers used for solar cell manufacturing applications.
•QCW laser sales increased due to increased demand for fine processing in
consumer electronics applications.
•The increase of revenue in laser systems was attributable to increased demand
for laser and non-laser systems, and the launch of LightWELD, a handheld laser
welding system.
•Other revenue for materials processing increased due to increased sales of
options and accessories.
Other applications
Sales from other applications increased due to higher demand in lasers used for
medical procedures, partially offset by decreased demand in lasers used for
advanced applications and telecom products.
Cost of sales and gross margin. Cost of sales increased by $27.7 million , or
16.7%, to $193.3 million for the three months ended September 30, 2021 from
$165.6 million for the three months ended September 30, 2020 . Our gross margin
increased to 49.0% for the three months ended September 30, 2021 from 48.0% for
the three months ended September 30, 2020 . The increase in gross margin was
driven by a reduction of manufacturing costs and provision for inventory as a
percentage of sales, partially offset by a decrease in absorption of
manufacturing expenses as a percentage of sales. In addition, there was a
moderate increase in cost of product sold from inventory as a percentage of
sales due to changes in product mix as average selling prices were approximately
the same as the year ago period.
Sales and marketing expense. Sales and marketing expense increased by $3.4
million , or 19.7%, to $20.7 million for the three months ended September 30,
2021 compared with $17.3 million for the three months ended September 30, 2020 .
This change was primarily a result of increases in personnel costs and trade
fairs and exhibits. As a percentage of sales, sales and marketing expense
increased to 5.5% for the three months ended September 30, 2021 from 5.4% for
the three months ended September 30, 2020 , mainly due to increased expense for
trade fairs and exhibits as a percentage of sales.
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Research and development expense. Research and development expense increased by
$2.6 million , or 8.2%, to $34.3 million for the three months ended September 30,
2021 , compared to $31.7 million for the three months ended September 30, 2020 .
This change was primarily a result of increases in personnel costs partially
offset by decreases in expense for materials used for research and development
projects. As a percentage of sales, research and development expense decreased
to 9.0% for the three months ended September 30, 2021 from 10.0% for the three
months ended September 30, 2020 , mainly due to the increase in sales.
General and administrative expense. General and administrative expense increased
by $3.6 million , or 12.4%, to $32.6 million for the three months ended September
30, 2021 from $29.0 million for the three months ended September 30, 2020 . This
change was primarily a result of increases in personnel costs partially offset
by a reduction in losses on disposal of fixed assets. As a percentage of sales,
general and administrative expense decreased to 8.6% for the three months ended
September 30, 2021 from 9.1% for the three months ended September 30, 2020 ,
mainly due to the reduction in losses on disposal of fixed assets.
Goodwill impairment. We did not incur impairment of goodwill for the three
months ended September 30, 2021 , compared to the non-cash goodwill impairment
loss of $44.6 million incurred for the three months ended September 30, 2020 . We
performed a goodwill impairment analysis after concluding that decreased order
flows experienced by our Genesis custom systems business reporting unit
resulting from the macroeconomic conditions largely attributed to COVID-19 was a
triggering event. The impairment loss was equal to the carrying value of
goodwill prior to its impairment.
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 0.86 , Russian Ruble 74 , Japanese Yen
106 and Chinese Yuan 6.92 , respectively, we would have expected net sales to be
$9.1 million lower, gross profit to be $5.6 million lower and total operating
expenses to be $0.5 million lower.
Gain on foreign exchange. We incurred a foreign exchange gain of $3.6 million
for the three months ended September 30, 2021 as compared to a $11.3 million
gain for the three months ended September 30, 2020 . Our Russian and European
subsidiaries have certain net assets denominated in U.S. Dollars, and our
Chinese subsidiary has certain net liabilities denominated in U.S. Dollars. The
foreign exchange gain for the three months ended September 30, 2021 was
primarily attributable to depreciation of the Euro, partially offset by the
depreciation of the Chinese Yuan as compared to the U.S. Dollar. The foreign
exchange gain for the three months ended September 30, 2020 was primarily
attributable to the depreciation of the Russian Ruble and appreciation of the
Chinese Yuan, partially offset by appreciation of the Euro as compared to the
U.S. Dollar.
Interest (expense) income, net. Interest expense, net was $0.3 million for the
three months ended September 30, 2021 as compared to interest income, net of
$1.2 million for the three months ended September 30, 2020 . The change in
interest (expense) income, net is due to a reduction in yields on cash
equivalents and short term investments.
Provision for income taxes. Provision for income taxes was $26.8 million for the
three months ended September 30, 2021 compared to $7.0 million for the three
months ended September 30, 2020 , representing an effective tax rate of 26.4% and
16.4% for the three months ended September 30, 2021 and 2020, respectively. The
increase in tax expense in 2021 is primarily due to an increase in income before
tax and to an adjustment related to a change in the regulations that impacted
the 2020 annual effective tax rate. The regulations for the Global Intangible
Low-Taxed Income ("GILTI") provisions of US tax law issued in July 2020 allowed
companies to elect out for high taxed foreign income; the reduced effective tax
rate as a result of this regulatory change when applied to the income from the
first half of 2020 reduced the tax expense in the third quarter of 2020. For the
three months ended September 30, 2021 and 2020, the net discrete tax benefits
were $1.4 million and $0.7 million , respectively, primarily related tax
deductions for equity-based compensation that exceeded compensation expense
recognized and to provision to return adjustments for the prior year.
Net income attributable to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation increased by $39.8 million to $75.4 million for the
three months ended September 30, 2021 compared to $35.6 million for the three
months ended September 30, 2020 . Net income attributable to IPG Photonics
Corporation as a percentage of our net sales increased by 8.7 percentage points
to 19.9% for the three months ended September 30, 2021 from 11.2% for the three
months ended September 30, 2020 due to the factors described above.
Results of Operations for the Nine Months Ended September 30, 2021 Compared to
the Nine Months Ended September 30, 2020
Net sales. Net sales increased by $232.3 million , or 26.9%, to $1,096.4 million
for the nine months ended September 30, 2021 from $864.1 million for the nine
months ended September 30, 2020 .
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The table below sets forth sales by application:
Nine Months Ended September 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Application % of Total % of Total
Materials processing $ 1,008,939 92.0 % $ 779,810 90.2 % $ 229,129 29.4 %
Other applications 87,454 8.0 % 84,284 9.8 % 3,170 3.8 %
Total $ 1,096,393 100.0 % $ 864,094 100.0 % $ 232,299 26.9 %
The table below sets forth sales by type of product and other revenue:
Nine Months Ended September 30,
2021 2020 Change
(In thousands, except for percentages)
Sales by Product % of Total % of Total
High Power CW Lasers $ 538,013 49.1 % $ 461,181 53.4 % $ 76,832 16.7 %
Medium Power CW Lasers 58,579 5.3 % 33,701 3.9 % 24,878 73.8 %
Pulsed Lasers 176,219 16.1 % 109,391 12.7 % 66,828 61.1 %
QCW Lasers 45,503 4.2 % 38,660 4.5 % 6,843 17.7 %
Laser and Non-Laser Systems 89,236 8.1 % 64,417 7.5 % 24,819 38.5 %
Other Revenue including
Amplifiers, Service, Parts,
Accessories and Change in Deferred
Revenue 188,843 17.2 % 156,744 18.0 % 32,099 20.5 %
Total $ 1,096,393 100.0 % $ 864,094 100.0 % $ 232,299 26.9 %
Materials processing
Sales for materials processing applications increased due to higher sales of
high power lasers, pulsed lasers, laser and non-laser systems, other laser
products and service, medium power lasers, and QCW lasers.
•The increase in high power laser sales related to welding and metal cutting
applications. The increase in sales of high power lasers used in welding
applications was driven by higher sales into EV battery and general
manufacturing industries. Within cutting applications, increased sales were
attributable to a stronger global demand due to recovery from the COVID-19
pandemic, partially offset by increased competition in China .
•The increase in medium power sales related to an increase in demand for
additive manufacturing, cutting and welding applications.
•Pulsed laser sales, including high power pulsed lasers, increased due to growth
in sales for foil cutting and cleaning for EV battery processing applications,
marking and engraving applications, other cleaning and stripping application and
green pulsed lasers used for solar cell manufacturing applications.
•QCW laser sales increased due to higher demand in fine processing for consumer
electronics applications.
•The increase of revenue in laser and non-laser systems was attributable to
higher demand for laser systems used for cutting applications, non-laser systems
and the launch of LightWELD.
•Other revenue for materials processing increased due to higher sales of options
and accessories and parts and service.
Other Applications
Sales from other applications increased due to increased demand for lasers used
in medical procedures and advanced applications, partially offset by lower
demand for telecom products.
Cost of sales and gross margin. Cost of sales increased by $94.0 million , or
19.9%, to $566.0 million for the nine months ended September 30, 2021 from
$472.0 million for the nine months ended September 30, 2020 . Our gross margin
increased to
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48.4% for the nine months ended September 30, 2021 from 45.4% for the nine
months ended September 30, 2020 . Gross margin increased mainly due to a
reduction of manufacturing costs as a percentage of sales and a decrease in
inventory provisions as a percentage of sales, while cost of products sold from
inventory and absorption of manufacturing costs as a percentage of sales were
approximately the same for the nine months ended September 30, 2021 as compared
to the nine months ended September 30, 2020 .
Sales and marketing expense. Sales and marketing expense increased by $5.5
million , or 10.3%, to $58.8 million for the nine months ended September 30, 2021
from $53.3 million for the nine months ended September 30, 2020 , primarily as a
result of increases in personnel costs. As a percentage of sales, sales and
marketing expense decreased to 5.4% of sales for the nine months ended September
30, 2021 from 6.2% for the nine months ended September 30, 2020 , mainly due to
the increase in sales.
Research and development expense. Research and development expense increased by
$7.7 million , or 8.1%, to $102.8 million for the nine months ended September 30,
2021 , compared to $95.1 million for the nine months ended September 30, 2020 ,
primarily as a result of an increase in personnel costs and expenses for
depreciation and amortization, partially offset by a decrease in expenses
related to materials used for research and development projects. As a percentage
of sales, research and development expense decreased to 9.4% for the nine months
ended September 30, 2021 from 11.0% for the nine months ended September 30,
2020 , mainly due to the increase in sales.
General and administrative expense. General and administrative expense increased
by $11.1 million , or 13.4%, to $93.7 million for the nine months ended September
30, 2021 from $82.6 million for the nine months ended September 30, 2020 ,
primarily as a result of increases in personnel costs, gifts and donations,
outside processing, information systems and legal, partially offset by a
reduction in losses on disposal of fixed assets and depreciation expense. As a
percentage of sales, general and administrative expense decreased to 8.5% for
the nine months ended September 30, 2021 from 9.6% for the nine months ended
September 30, 2020 , mainly due to the increase in sales.
Goodwill impairment. We did not incur impairment of goodwill for the nine months
ended September 30, 2021 , compared to the non-cash goodwill impairment loss of
$44.6 million incurred for the nine months ended September 30, 2020 . We
performed a goodwill impairment analysis after concluding that decreased order
flows experienced by our Genesis custom systems business reporting unit
resulting from the macroeconomic conditions largely attributed to COVID-19 was a
triggering event. The impairment loss was equal to the carrying value of
goodwill prior to its impairment.
Impairment of long-lived assets and other restructuring charges. We did not
incur impairment of long-lived assets and other restructuring charges for the
nine months ended September 30, 2021 , compared to charges of $1.2 million in
total for the nine months ended September 30, 2020 , of which $0.4 million
related to severance and $0.1 million related to lease termination costs as part
of restructuring of our submarine network division. We also incurred $0.7
million of non-cash long-lived impairments related to machinery and equipment.
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 0.89 , Russian Ruble 71 , Japanese Yen
108 and Chinese Yuan 7.00 , respectively, we would have expected net sales for
the nine months ended September 30, 2021 to be $48.9 million lower, gross profit
to be $28.5 million lower and total operating expenses would have been $1.2
million lower.
Gain on foreign exchange. We reported a foreign exchange gain of $8.0 million
for the nine months ended September 30, 2021 as compared to a gain of $18.1
million for the nine months ended September 30, 2020 . Our Russian and European
subsidiaries have certain net assets denominated in U.S. Dollars, and our
Chinese subsidiary has certain net liabilities denominated in U.S. Dollars. The
gain for the nine months ended September 30, 2021 was primarily attributable to
depreciation of the Euro, partially offset by appreciation of the Russian Ruble
as compared to the U.S. Dollar. The gain for the nine months ended September 30,
2020 was primarily attributable to the depreciation of the Russian Ruble and
appreciation of the Chinese Yuan, partially offset by the appreciation of the
Euro as compared to the U.S. Dollar.
Interest (expense) income, net. Interest expense, net, was $1.2 million for the
nine months ended September 30, 2021 as compared to $6.1 million of income for
the nine months ended September 30, 2020 . The change in interest (expense)
income, net is due to a reduction in yields on cash equivalents and short term
investments that resulted in lower market interest rates as compared to prior
year rates.
Provision for income taxes. Provision for income taxes was $69.4 million for the
nine months ended September 30, 2021 compared to $29.4 million for the nine
months ended September 30, 2020 , representing an effective tax rate of 24.6% and
21.0% for the nine months ended September 30, 2021 and 2020, respectively. The
increase in expense is primarily related to an increase in income. For the nine
months ended September 30, 2021 and 2020, the net discrete tax benefits were
$5.8 million
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and $6.7 million , respectively, primarily related to the tax deductions for
equity-based compensation that exceeded compensation expense recognized and to
provision to return adjustments for the prior year.
Net income attributable to IPG Photonics Corporation . Net income attributable to
IPG Photonics Corporation increased by $103.1 million to $213.3 million for the
nine months ended September 30, 2021 compared to $110.2 million for the nine
months ended September 30, 2020 . Net income attributable to IPG Photonics
Corporation as a percentage of our net sales increased by 6.7 percentage points
to 19.5% for the nine months ended September 30, 2021 from 12.8% for the nine
months ended September 30, 2020 due to the factors described above.
Liquidity and Capital Resources
The following table presents our principal sources of liquidity:
September 30, December 31,
2021 2020
(In thousands)
Cash and cash equivalents $ 794,904 $ 876,231
Short-term investments 724,103 514,835
Unused credit lines and overdraft facilities 129,578 132,048
Working capital (excluding cash, cash equivalents and short-term investments)
513,328 542,433
Short-term investments at September 30, 2021 consist of liquid investments
including commercial paper, corporate bonds, municipal bonds and certificates of
deposit with original maturities of greater than three months but less than one
year. See Note 5, "Fair Value Measurements" in the notes to the condensed
consolidated financial statements for further information about our short-term
investments.
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. We expect to
continue investments in capital expenditures, to assess acquisition
opportunities and to repurchase shares of our stock in accordance with our
repurchase program. The extent and timing of such expenditures may vary from
period to period. 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 including any ongoing impact of the COVID-19 pandemic on certain
global or regional economies, global or regional recessions, the timing and
extent of spending to support development efforts, expansion of 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 September 30, 2021 :
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 2023 Unsecured,
(Germany) (2) ($57.9 million ) EONIA plus 1.00% guaranteed by parent
company and German
subsidiary
Other Euro Facility (3) Euro 1.5 million Euribor plus 2.02% December 2021 Common pool of
($1.7 million ) assets of Italian
subsidiary
Long-term Secured Note (4) $17.6 million Fixed at 2.74% July 2022 Secured by the
corporate aircraft
Long-term Unsecured Note (5) $17.5 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 September 30, 2021 , there were no amounts drawn
on this line; however, there were $2.7 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 September 30, 2021 , there were no drawings on
this facility; however, there were $2.4 million of guarantees issued against the
line which reduces total availability.
(3) At September 30, 2021 , 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 $57.9 million (or 50.0 million Euro
as described above), respectively, and neither of them is syndicated. 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 reference 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
September 30, 2021 .
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:
Nine Months Ended September 30,
2021 2020
(In thousands)
Cash provided by operating activities $ 305,156 $ 200,017
Cash used in investing activities (304,824) (96,078)
Cash used in financing activities (72,119)
(25,565)
Operating activities. Net cash provided by operating activities increased by$105.2 million to$305.2 million for the nine months endedSeptember 30, 2021 from$200.0 million for the nine months endedSeptember 30, 2020 , primarily due to an increase in net income and a decrease in cash used for 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 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 provided by operating activities in 2021 primarily resulted from an increase in cash provided by net income after adding back non-cash charges, an increase in cash provided by income and other taxes payable, an increase in cash provided by accrued expenses and an increase in cash provided by accounts payable; partially offset by an increase in cash used by inventory, an increase in cash used by accounts receivable and an increase in cash used by prepaid expenses and other assets. Investing activities. Net cash used in investing activities was$304.8 million for the nine months endedSeptember 30, 2021 as compared to cash used in investing activities of$96.1 million in 2020. The cash used in investing activities in 2021 related to$210.7 million of net purchases of short-term investments and$93.9 million of capital expenditures. The cash used in investing activities in 2020 related to$61.9 million of capital expenditures and$34.9 million of net purchases of short-term investments. In 2021, we expect to incur between$130 million to$150 million in capital expenditures, excluding acquisitions. Capital expenditures include investments in property, facilities and equipment to add capacity worldwide to support anticipated revenue growth, increase vertical integration, increase redundant manufacturing capacity for critical components and enhance research and development capabilities. 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$72.1 million for the nine months endedSeptember 30, 2021 as compared to net cash used of$25.6 million in 2020. The cash used in financing activities in 2021 related to the purchase of treasury stock of$78.1 million ,$2.9 million of principal payments on our long-term borrowings and$2.6 million of payments of purchase price holdbacks from business combinations; partially offset by, proceeds of$11.4 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. The cash used in financing activities in 2020 was related to the purchase of treasury stock of$37.9 million ,$2.8 million of principal payments on our long-term borrowings and$1.7 million of payment of a purchase price holdback from a business combination, partially offset by proceeds of$16.8 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. 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. 28
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Table of Contents The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, "Business" and Item 1A, "Risk Factors" of Part I of the Form 10-K filed with theSEC for the year endedDecember 31, 2020 (the "Annual Report") and in Item 1A, "Risk Factors" of Part II on Form 10-Q filed with theSEC for the quarter endedSeptember 30, 2021 . 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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