e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2006
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
Commission file number:
001-33155
IPG PHOTONICS
CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
04-3444218
|
(State or other jurisdiction
of
|
|
(IRS Employer
|
incorporation or
organization)
|
|
Identification No.)
|
|
|
|
50 Old Webster Road, Oxford,
Massachusetts
|
|
01540
|
(Address of principal executive
offices)
|
|
(Zip
Code)
|
Registrants telephone number, including area code:
(508) 373-1100
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
(Title of Class)
|
|
(Name of Exchange on Which Registered)
|
|
Common Stock, Par Value
$0.0001 per share
|
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-Accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of March 23, 2007, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $315.4 million, calculated
based upon the closing price of our common stock of $19.94 per
share as reported by the Nasdaq Global Market on March 23,
2007.
As of March 23, 2007, 42,916,532 shares of the
registrants common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2007
Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A within 120 days of the end of the
registrants fiscal year ended December 31, 2006 are
incorporated by reference into Part III of this Annual
Report on
Form 10-K.
This Annual Report on
Form 10-K
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 Annual Report on
Form 10-K
except for historical information are forward-looking
statements. Without limiting the generality of the foregoing,
words such as may, will,
expect, believe, anticipate,
intend, could, estimate, or
continue or the negative or other variations thereof
or comparable terminology are intended to identify
forward-looking statements. In addition, any statements that
refer to projections of our future financial performance, trends
in our businesses, or other characterizations of future events
or circumstances are forward-looking statements.
The forward-looking statements included herein are based on
current expectations of our management based on available
information and involve a number of risks and uncertainties, all
of which are difficult or impossible to accurately predict and
many of which are beyond our control. As such, our actual
results may differ significantly from those expressed in any
forward-looking statements. Factors that may cause or contribute
to such differences include, but are not limited to, those
discussed in more detail in Item 1 (Business) and
Item 1A (Risk Factors) of Part I and Item 7
(Managements Discussion and Analysis of Financial
Condition and Results of Operations) of Part II of this
Annual Report on
Form 10-K.
Readers should carefully review these risks, as well as the
additional risks described in other documents we file from time
to time with the Securities and Exchange Commission. In light of
the significant risks and uncertainties inherent in the
forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by
us or any other person that such results will be achieved, and
readers are cautioned not to rely on such forward-looking
information. We undertake no obligation to revise the
forward-looking statements contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
PART I
Our
Company
IPG Photonics Corporation (IPG, the
Company, the Registrant, we,
us or our) was incorporated in Delaware
in 1998. The Company is a leading developer and manufacturer of
a broad line of high-performance fiber lasers for diverse
applications in numerous markets. Fiber lasers are a new
generation of lasers that combine the advantages of
semiconductor diodes, such as long life and high efficiency,
with the high amplification and precise beam qualities of
specialty optical fibers to deliver superior performance,
reliability and usability. Our vertically integrated operations
allow us to rapidly develop and integrate advanced products,
protect our proprietary technology and ensure access to critical
components while reducing manufacturing costs.
Our diverse lines of low, mid and high-power lasers and
amplifiers are used in materials processing, communications,
medical and advanced applications. We sell our products globally
to original equipment manufacturers, or OEMs, system integrators
and end users. We market our products internationally primarily
through our direct sales force and also through agreements with
independent sales representatives and distributors. We have
sales offices in the United States, Germany, Italy, the United
Kingdom, Japan, South Korea, India and Russia.
We are vertically integrated such that we design and manufacture
all key components used in our finished products, from
semiconductor diodes to optical fiber preforms, finished fiber
lasers and amplifiers. Our vertically integrated operations
allow us to reduce manufacturing costs, ensure access to
critical components and rapidly develop and integrate advanced
products while protecting our proprietary technology.
2
Industry
Background
Traditional
Laser Technologies
Since the laser was invented over 45 years ago, laser
technology has revolutionized a broad range of applications and
products in various industries, including automotive, medical,
research, consumer products, electronics, semiconductors and
communications. Lasers provide flexible, non-contact and
high-speed ways to process and treat various materials. They are
widely used to transmit large volumes of data in optical
communications systems, in various medical applications and in
test and measurement systems. For a wide variety of
applications, lasers provide superior performance and a more
cost-effective solution than non-laser technologies.
Lasers emit an intense light beam that can be focused on a small
area, causing metals and other materials to melt, vaporize or
change their character. These properties are utilized in
applications requiring very high-power densities, such as
marking, printing, welding, cutting and other materials
processing procedures. Lasers are well-suited for imaging and
inspection applications, and the ability to confine laser light
to narrow wavelengths makes them particularly effective in
medical and sensing applications. A laser works by converting
electrical energy to optical energy. In a laser, an energy
source excites or pumps a lasing medium, which converts the
energy from the source into an emission consisting of particles
of light, called photons, at a particular wavelength. Lasers are
used as an energy or light source for various applications. They
are also incorporated into manufacturing, medical and other
systems by original equipment manufacturers (OEMs),
system integrators and end users.
Historically,
CO2
gas lasers and crystal lasers have been the two principal laser
types used in materials processing and many other applications.
They are named for the materials used to create the lasing
action. A
CO2
laser produces light by electrically stimulating a gas-filled
tube. A crystal laser uses an arc lamp, pulsed flash lamp, or
diode stack or array to optically pump a special crystal. The
most common crystal lasers use YAG crystals infused with
neodymium or ytterbium. Despite the improvements in
CO2
and YAG laser technologies over the past 40 years, these
technologies have not kept pace with evolving customer
requirements.
Introduction
of Fiber Lasers
Fiber lasers use semiconductor diodes as the light source to
pump specialty optical fibers, which are infused with rare earth
ions. These fibers are called active fibers and are comparable
in diameter to a human hair. The laser emission is created
within optical fibers and delivered through a flexible cable. As
a result of their different design and components, fiber lasers
are generally more reliable, efficient, robust and portable, and
easier to operate than traditional lasers.
Although low-power fiber lasers have existed for approximately
four decades, their increased recent adoption has been driven
primarily by our improvements in their performance, increases in
output power levels and decreased costs. Over the last several
years, technological improvements in optical components such as
active fibers have increased their power capacities and resulted
in overall performance improvements in fiber lasers. Also, the
high cost of semiconductor diodes, a critical component of fiber
lasers, meant that fiber lasers could not compete with
conventional lasers on price and limited their use to high
value-added applications. Over the last decade, however,
semiconductor diodes have become more affordable and reliable
due in part to substantial advancements in semiconductor diode
technology and increased production volumes. Because of these
improvements, fiber lasers can now effectively compete with
conventional lasers over a wide range of output powers and
applications.
3
Advantages
of Fiber Lasers over Traditional Lasers
We believe that fiber lasers provide a combination of benefits
that include:
|
|
|
|
|
Superior Performance. Fiber lasers provide
high beam quality over the entire power range. The superior beam
quality and greater intensity of a fiber lasers beam allow
tasks to be accomplished rapidly and with lower-power units than
comparable traditional lasers.
|
|
|
|
Lower Total Cost of Ownership. Fiber lasers
offer strong value to customers because of their generally lower
total operating costs due to their lower required maintenance
costs, high reliability and energy efficiency. The initial
purchase price for fiber lasers is generally below that of YAG
lasers and comparable to that of
CO2
lasers. Because fiber lasers are much more energy-efficient and
place lower levels of thermal stress on their internal
components, they have substantially lower cooling requirements
compared to conventional lasers and lower or no required
maintenance costs.
|
|
|
|
Ease of Use. Many features of fiber lasers
make them easy to operate, maintain and integrate into
laser-based systems, providing a turnkey solution.
|
|
|
|
Compact Size and Portability. Fiber lasers are
typically smaller and lighter in weight than traditional lasers,
saving valuable floor space. Fiber lasers are durable and able
to perform in variable working environments, qualities that
permit fiber laser systems to be transported easily and perform
in variable working environments.
|
|
|
|
Choice of Wavelengths and Precise Control of
Beam. The design of fiber lasers generally
provides a broad range of wavelength choices, a highly stable
output and improved control of output beam parameters, allowing
users to more effectively use lasers in their applications.
|
Fiber amplifiers are similar in design to fiber lasers, use many
of the same components, such as semiconductor diodes and
specialty optical fibers, and provide many of the same
advantages in the applications that require amplification.
Notwithstanding the benefits offered by fiber lasers, there
remain applications and processes where traditional laser
technologies and non-laser tools may provide superior
performance with respect to particular features. For example,
crystal lasers can provide higher peak power pulses and fiber
lasers do not generate the deep ultraviolet light that is used
for photolithography in many semiconductor applications.
Our
Competitive Strengths
We believe that our key strengths and competitive advantages
include the following:
Differentiated Proprietary Technology
Platform. At the core of our products is our
proprietary pumping technology platform that allows our products
to have higher output powers and superior beam quality than are
achievable through traditional techniques. It allows us to
combine a greater number of diodes, specialty optical fibers and
optoelectronic components in parallel into a single beam using
our advanced proprietary components and
state-of-the-art
combining techniques.
Leading Market Position. As a pioneer and
technology leader in fiber lasers, we have built leading
positions in our various end markets with a large and diverse
customer base. Based on our leadership position, we are driving
the proliferation of fiber lasers in existing and new
applications.
Breadth and Depth of Expertise. Since the
founding of our company in 1990, our core business has been
developing, designing, manufacturing and marketing advanced
fiber lasers and amplifiers. We have extensive know-how in
materials sciences, and optical, electrical, mechanical and
semiconductor engineering that enables us to make our specialty
optical fibers, semiconductor diodes and other critical
components.
4
Vertically Integrated Development and
Manufacturing. We develop and manufacture all of
our key specialty components, such as semiconductor diodes,
active fibers, passive fibers and specialty optical components.
Our proprietary components, which we do not resell, are capable
of handling the stress of the high optical powers from our
products and we believe they exceed the performance of
commercially available components. We believe that our vertical
integration enhances our ability to meet customer requirements,
accelerate development, manage costs and improve component
yields, while maintaining high performance and quality standards.
Diverse Customer Base, End Markets and
Applications. Our diverse customer base, end
markets and applications provide us with many growth
opportunities. We have shipped more than 24,000 units
through the end of 2006 and, in 2006, we shipped to more than
500 customers worldwide. Our products are used in a variety of
applications and end markets worldwide. Our principal end
markets and representative applications within those markets
include:
Broad Product Portfolio and Ability to Meet Customer
Requirements. We offer a broad range of standard
and custom fiber lasers and amplifiers that operate between 1
and 2 microns, ranging in power from one watt to 50 kilowatts.
Our vertically integrated manufacturing and broad technology
expertise
5
enable us to rapidly design, prototype and commence high-volume
production of our products, allowing our customers to meet their
time-to-market
requirements.
Our
Strategy
Our objective is to maintain and extend our competitive position
by pursuing the following key elements of our strategy:
Leverage Our Technology to Gain Market
Share. As the benefits of fiber lasers become
more widely recognized, we plan to leverage our brand and
position as the leader in developing and commercializing fiber
lasers to increase our market share in the broader market.
Target New Applications for Lasers. We intend
to continue to enable and penetrate additional applications
where lasers have not traditionally been used. We believe that
fiber laser technology can overcome many of the limitations that
have slowed the adoption of traditional lasers. We intend to
target applications where higher power, portability, efficiency,
size and flexible fiber cable delivery can lead customers to
adopt fiber lasers instead of non-laser solutions.
Expand Our Product Portfolio. We plan to
continue to invest in research and development to add additional
wavelengths, power levels and other parameters while also
improving beam quality. We intend to use our core technologies
to develop new products and complementary products and systems
that incorporate fiber lasers and amplifiers to expand our
product portfolio.
Optimize Our Manufacturing Capabilities. We
plan to seek further increases in the automation of our
component manufacturing processes and device assembly to improve
component yields and increase the power outputs and capacities
of the various components that we make. We intend to leverage
our technology and operations expertise to manufacture
additional components in order to reduce costs, ensure component
quality and ensure supply.
Expand Global Reach to Attract Customers
Worldwide. In 2006, more than 67% of our sales
came from international customers. We intend to capitalize on
and grow our global customer base by opening new application
development centers as well as sales and service offices in
Asia, Europe and the United States.
Products
We design and manufacture a broad range of high-performance
optical fiber-based lasers and amplifiers. We also make direct
diode laser systems and communications systems that utilize our
optical fiber-based products. Many of our products are designed
to be used as general purpose energy or light sources, making
them useful in diverse applications and markets.
Our products are based on a common proprietary technology
platform using many of the same core components which we
configure to our customers specifications. Our engineers
and scientists work closely with OEMs and end users to develop
and customize our products for their needs. Because of our
flexible and modular product architecture, we offer products in
different configurations according to the desired applications.
The Companys engineers and other technical experts work
directly with the customer in the Companys applications
centers to develop and configure the optimal solution for each
customers manufacturing requirements.
Lasers
Our laser products include low (1 to 99 watts), medium (100 to
999 watts) and high (1,000 watts and above) output power lasers
from 1 to 2 microns in wavelength. These lasers may be either
continuous wave or modulated at different rates. We offer
several different types of lasers, which are defined by the type
of gain medium they use. These are ytterbium, erbium, thulium
and raman. We also sell fiber coupled direct diode
6
laser systems that use semiconductor diodes rather than optical
fibers as their gain medium. In addition, we offer high energy
pulsed lasers, multi-wavelength lasers, tunable lasers,
single-polarization and single-frequency lasers, as well as
other versions of our products.
We believe that we produce some of the highest power solid-state
lasers available. Our ytterbium fiber lasers are capable of
reaching power levels over 50,000 watts. We also make
single-mode output ytterbium fiber lasers with powers of up to
2,000 watts and single-mode output erbium and thulium fiber
lasers with powers of up to 200 watts. Our compact, durable
design and integrated fiber optic beam delivery allows us to
offer versatile laser energy sources and simple laser
integration for complex production processes, without
compromising quality, speed or power.
Amplifiers
Our amplifier products range from milliwatts to up to 500 watts
of output power from 1 to 2 microns in wavelength. We offer
erbium-doped fiber amplifiers, commonly called EDFAs, raman
amplifiers and integrated communications systems that
incorporate our amplifiers. These products are predominantly
deployed in broadband networks and dense wavelength division
multiplexing, or DWDM, networks. We also offer ytterbium and
thulium specialty fiber amplifiers and broadband light sources
that are used in advanced applications. In addition, we sell
single-frequency, linearly polarized and
polarization-maintaining versions of our amplifier products. As
with our fiber lasers, our fiber amplifiers offer some of the
highest output power levels and highest number of optical
outputs. We believe our line of fiber amplifiers offers the best
commercially available output power and performance.
7
The following summarizes some of our product offerings by
product family, primary markets and representative applications
for each product family:
8
Materials
Processing
The most significant materials processing applications for fiber
lasers are marking, printing, welding and cutting. Other
applications include micromachining, surface treatment,
drilling, soldering, annealing, rapid prototyping and
laser-assisted machining.
Marking, Engraving and Printing
Applications. With the increasing need for source
traceability, component identification and product tracking as a
means of reducing product liability and preventing
falsification, as well as the demand for modern robotic
production systems, industrial manufacturers are increasingly
demanding marking systems capable of applying serialized
alphanumeric, graphic or bar code identifications directly onto
their manufactured components. Laser engraving is similar to
marking but forms deeper grooves in the material. In contrast to
conventional acid etching and ink-based technologies, lasers can
mark a wide variety of metal and non-metal materials, such as
ceramic, glass and plastic surfaces, at high speeds and without
contact by changing the surface structure of the material or by
engraving. Laser marking systems can be easily integrated into a
customers production process and do not subject the item
being marked to mechanical stress.
In the semiconductor industry, lasers are typically used to mark
wafers and integrated circuits. In the electronics industry,
lasers are typically used to mark electrical components such as
contactors and relays, printed circuit boards and keyboards.
With the increase in marking speed in the past few years, the
cost of laser marking has decreased, improving the price and
performance characteristics of this technology. The high beam
quality, flexible fiber delivery and competitive price of fiber
lasers have accelerated the adoption of fiber lasers in this
low-power application.
Historically, the printing industry has depended upon
silver-halide films and chemicals to engrave printing plates.
This chemical engraving process requires several time-consuming
steps. In recent years, we have worked closely with OEMs in the
printing industry to employ fiber lasers for alternative
computer-to-plate,
or CTP, processes. As a result, our ytterbium fiber lasers are
now widely used for CTP printing, an environmentally friendly
process that saves production time by writing directly to plates
and greatly reduces chemical waste.
Welding Applications. Laser welding offers
several important advantages over conventional welding
technology as it is non-contact, easy to automate, provides high
process speed and results in narrow-seamed, high quality welds
that generally require little or no post- processing machining.
Parts can be accurately machined before welding because laser
welding does not overly heat or otherwise damage or distort the
material being processed. The high beam quality of our fiber
lasers coupled with high CW power offers deep penetration
welding as well as shallow conduction mode welding. High
modulation frequencies offer very high throughput in pulsed
applications. Also, fiber lasers can be focused to a small spot
with extremely long focal lengths, enabling remote welding
on the fly, a flexible method of three-dimensional
welding in which the laser beam is positioned by a robot-guided
scanner. Such remote welding stations equipped with fiber lasers
are used for welding door panels and the multiple welding of
spot and lap welds over the entire auto body frame. Typically,
mid to high-power ytterbium fiber lasers are used in welding
applications.
Cutting Applications. Laser-based cutting
technology has several advantages compared to alternative
technologies. Laser cutting is fast, flexible, highly precise
and can be used to cut complex contours on flat, tubular or
three-dimensional materials. The laser source can be easily
programmed to process many different kinds of materials such as
steel, aluminum, brass, copper, glass, ceramic and plastic at
various thicknesses. Laser cutting technology is a non-contact
process that is easy to integrate into an automated production
line and is not subject to wear of the cutting medium. We sell
low, mid and high-power ytterbium fiber lasers for laser
cutting. The operating wavelength, multi-kilowatt power, high
beam quality, wide operating power range, power stability and
small spot size are some of the qualities offered by fiber
lasers for most cutting applications.
Emerging Technologies and
Applications. Robotic production methods are
increasing in use, driven by their lower production costs,
flexibility and consistency. Fiber lasers complement the
capabilities of robots with their flexible fiber delivery,
high-power beam and low beam divergence. Another potential
application of
9
fiber lasers is in cutting new lightweight and high-strength
metal alloys used in automobile manufacturing, which requires
the high output power densities that fiber lasers provide.
Communications
We design and manufacture a full range of fiber amplifiers and
raman pump lasers with varying output power and wavelengths that
enhance data transmission in broadband access and DWDM optical
networks.
Broadband Access. The delivery to subscribers
of television programming and Internet-based information and
communication services is converging, driven by advances in IP
technology and by changes in the regulatory and competitive
environment. Fiber optic lines offer connection speeds of up to
50 megabits per second, or 50 times faster than digital
subscriber lines (DSL) or cable links. We offer a series of
specialty multi-port EDFAs and cable TV nodes and transmitters
that support different types of passive optical network
architectures, enabling high speed data, voice, video on demand
and high definition TV. We provide an EDFA that supports up to
32 ports, which allows service providers to support a high
number of customers in a small space, reducing overall power
consumption and network cost. End users for our products include
communications network operators for video wavelength division
multiplexing overlay, as well as cable and multiple service
operators for video signal and hybrid fiber coaxial cable.
DWDM. DWDM is a technology that expands the
capacity of optical networks allowing service providers to
extend the life of existing fiber networks and reduce operating
and capital costs by maximizing bandwidth capacity. We provide a
broad range of high-power products for DWDM applications
including EDFAs and raman lasers. We provide a DWDM transport
system that offers service providers and private network
operators a simple, flexible, optical layer solution optimized
for up to eight channels.
Medical
We sell our commercial fiber and diode lasers to OEMs that
incorporate our products into their medical laser systems.
Continuous wave and pulsed lasers from 1 to 150 watts and diode
laser systems can be used in medical and biomedical
applications. Aesthetic applications addressed by lasers include
skin rejuvenation, skin resurfacing and stretch mark removal.
Purchasers use our diode lasers in urological applications and
dental procedures. Fiber lasers have the ability to fine-tune
optical penetration depth and absorption characteristics and can
be used for ear, nose and throat, urology, gynecology and other
surgical procedures.
Advanced
Applications
Our fiber lasers and amplifiers are utilized by commercial firms
and by academic and government institutions worldwide for
manufacturing of commercial systems and for research in advanced
technologies and products. These markets may use specialty
products developed by us or commercial versions of our products.
Obstacle Warning. Our products are used aboard
aircraft for obstacle warning and
3-dimensional
mapping of earth surfaces.
Special Projects. Due to the high power,
compactness, performance, portability, ruggedness and electrical
efficiency of our fiber lasers and amplifiers, we sell our
commercial products for government research and projects. These
include materials testing, ordnance destruction, coherent beam
combining, advanced communications and research.
Research and Development. Our products are
used in a variety of applications for research and development
by scientists and industrial researchers. In addition, our
lasers and amplifiers are used to design, test and characterize
components and systems in a variety of markets and applications.
Optical Pumping and Harmonic
Generation. Several types of our lasers are used
to optically pump other solid-state lasers and for harmonic
generation and parametric converters to support research in
sensing, medical and other scientific research in the infrared
and visible wavelength domains. Our lasers are used as a power
source for these other lasers.
10
Optical Communication. We provide high-power
EDFAs and ytterbium fiber amplifiers for deployment in both
point-to-point
and
point-to-multipoint
free space optical networks. These networks permit
communications between two or more points on land or in the sky
without the use of fiber optic lines or radio or microwaves.
Remote Sensing. Our products are used in light
detection and ranging, also called LIDAR, a laser technique for
remote sensing. Optical fiber can be used as a sensor for
measuring changes in temperature, pressure and gas concentration
in oil wells, atmospheric and pollution measurements and seismic
exploration.
Technology
Our products are based on our proprietary technology platform.
The following technologies are key elements in our products.
Specialty
Optical Fibers
We have expertise in the disciplines and techniques that form
the basis for the multi-clad active and passive optical fibers
used in our products. Active optical fibers form the laser
cavity or gain medium in which lasing or amplification of light
occurs in our products. Passive optical fibers deliver the
optical energy created in our products. Our active fibers
consist of an inner core that is infused with the appropriate
rare earth ion, such as ytterbium, erbium or thulium, and outer
cores of un-doped glass having different indices of refraction.
Our ability to quickly optimize our proprietary active and
passive optical fibers allow us to provide a variety of
innovative fiber devices in customizable configurations.
Semiconductor
Diode Laser Processing and Packaging Technologies
Another key element of our technology platform is that we use
multiple multi-mode, or broad area, single-emitter diodes rather
than diode bars or stacks as a pump source. We believe that
multi-mode single-emitter diodes are the most efficient and
reliable pumping source presently available, surpassing diode
bars and stacks in efficiency, brightness and reliability.
We developed molecular beam epitaxy techniques to grow wafers
for our diodes. This method yields high-quality optoelectronic
material for low-defect density and high uniformity of
optoelectronic parameters. In addition, we have developed
proprietary wafer processes and testing and qualification
procedures in order to create a high energy output in a reliable
and high-power diode. We package our diodes in hermetically
sealed pump modules in which the diodes are combined with an
optical fiber output.
Specialty
Components and Combining Techniques
We have developed optical components that are capable of
handling high optical power levels and contribute to the
superior performance, efficiency, reliability and uniqueness of
our products. In addition to fibers and diodes, our optical
component portfolio includes fiber gratings, isolators and
combiners. We also developed methods and expertise in splicing
fibers together with low optical energy loss and on-line loss
testing.
Side
Pumping of Fibers and Fiber Block Technologies
Our technology platform allows us to efficiently combine a
greater number of multi-mode single-emitter semiconductor diodes
with our active optical fibers that are used in all of our
products. A key element of this technology is that we pump our
fiber lasers through the cladding surrounding the active core.
Our design is scalable and modular, permitting us to make
products with high output power by coupling a large number of
diodes with fiber blocks, which can be combined in parallel and
serially.
11
High-Stress
Testing
We employ high-stress techniques in testing components and final
products that help increase reliability and accelerate product
development. We also have built a large database of diode test
results that allows us to predict the estimated lifetime of our
diodes and thus increase reliability.
Customers
We sell our products globally to OEMs, system integrators and
end users in a wide range of diverse markets who have the
in-house engineering capability to integrate our products into
their own systems. In 2006, we shipped products to over 500
customers worldwide. Our end markets include materials
processing (comprised of general manufacturing, automotive,
aerospace, heavy industry, semiconductor, electronics and
consumer products customers), communications (comprised of
system integrators, utilities and municipalities), medical
(medical laser systems manufacturers) and advanced applications
(comprised of commercial companies, universities, research
entities and government entities). We believe that our customer
and end market diversification minimizes dependence on any
single industry or group of customers.
The following table shows the allocation of our net sales (in
thousands) among our principal markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Materials Processing
|
|
$
|
102,317
|
|
|
|
71.4
|
%
|
|
$
|
59,659
|
|
|
|
61.9
|
%
|
|
$
|
41,990
|
|
|
|
69.2
|
%
|
Communications
|
|
|
15,187
|
|
|
|
10.6
|
|
|
|
15,751
|
|
|
|
16.3
|
|
|
|
9,697
|
|
|
|
16.0
|
|
Medical
|
|
|
11,163
|
|
|
|
7.8
|
|
|
|
7,319
|
|
|
|
7.6
|
|
|
|
1,544
|
|
|
|
2.5
|
|
Advanced Applications
|
|
|
14,558
|
|
|
|
10.2
|
|
|
|
13,656
|
|
|
|
14.2
|
|
|
|
7,476
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,225
|
|
|
|
100.0
|
%
|
|
$
|
96,385
|
|
|
|
100.0
|
%
|
|
$
|
60,707
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUNX Limited, a provider of laser marking systems, accounted for
10%, 13% and 20% of our net sales for the years ended
December 31, 2006, 2005 and 2004, respectively.
Our net sales (in thousands) were derived from customers in the
following geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
North and South America(1)
|
|
$
|
45,965
|
|
|
|
32.1
|
%
|
|
$
|
38,512
|
|
|
|
40.0
|
%
|
|
$
|
20,911
|
|
|
|
34.4
|
%
|
Europe
|
|
|
48,491
|
|
|
|
33.9
|
|
|
|
23,882
|
|
|
|
24.8
|
|
|
|
19,339
|
|
|
|
31.9
|
|
Asia and Australia
|
|
|
48,769
|
|
|
|
34.1
|
|
|
|
33,569
|
|
|
|
34.8
|
|
|
|
20,232
|
|
|
|
33.3
|
|
Rest of World
|
|
|
|
|
|
|
|
|
|
|
422
|
|
|
|
0.4
|
|
|
|
225
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,225
|
|
|
|
100.0
|
%
|
|
$
|
96,385
|
|
|
|
100.0
|
%
|
|
$
|
60,707
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The substantial majority of sales in North and South America are
to customers in the United States. |
Backlog
At December 31, 2006, our backlog of orders scheduled for
shipment (generally within one year) was approximately
$51.8 million compared to $39.0 million at
December 31, 2005. Orders used to compute backlog are
generally cancelable without substantial penalties.
Historically, the rate of cancellation experienced by us has not
been significant. We manage the risk of cancellation by
establishing the right to charge a cancellation fee that
generally covers a portion of the purchase price, any materials
and development costs incurred prior to the order being
cancelled. Our ability to enforce this right depends on many
factors including, but not limited to, the customers
requested length of delay, the number of other outstanding
orders with the customer and our ability to quickly convert the
canceled order to another sale.
The Company anticipates shipping the present backlog during
fiscal year 2007. However, the Companys backlog at any
given date is not necessarily indicative of actual sales for any
future period.
12
Sales,
Marketing and Support
We market our products internationally primarily through our
direct sales force and also through agreements with independent
sales representatives and distributors. We have sales offices in
the United States, Germany, Russia, Italy, Japan, South Korea,
India and the United Kingdom. Our independent sales
representatives and distributors are located in the United
States, Japan, China, Brazil and other parts of the world. Only
one of these arrangements is on an exclusive basis. Foreign
sales to customers are generally priced in local currencies and
are therefore subject to currency exchange fluctuations.
We maintain a customer support and field service staff in our
major markets within the United States, Europe, Russia, Japan
and South Korea. We work closely with customers, customer groups
and independent representatives to service equipment, train
customers to use our products and explore additional
applications for our technologies. We typically repair products
at our facilities or at customer sites. We plan to expand our
support and field service, particularly in locations where
customer concentration or volume requires local service
capabilities.
We typically provide one to three-year warranties on our lasers
and amplifiers. Warranty reserves have generally been sufficient
to cover product warranty repair and replacement costs.
Manufacturing
Our vertically integrated manufacturing operations include
optical preform making, specialty fiber drawing, semiconductor
wafer growth, diode processing and packaging, specialty optical
component manufacturing, fiber block and fiber module assembly
for different power units, software and electronics development,
final assembly, as well as testing, tool manufacturing and
automated production systems. We have recently added additional
production capabilities, including building redundant diode and
optical fiber manufacturing in separate facilities, in order to
increase our capacity as well as reduce the risks associated
with our production process.
We operate our own semiconductor foundry for the production of
the multi-mode single-emitter diodes. Diodes are the pumps that
are used as the light source in each device we make. We also
process, package and extensively test all of our diodes. We also
design, manufacture and optimize many of our own test
instruments, diode test racks, robotic and automated assembly
tools and machines.
We developed these proprietary components, manufacturing tools,
equipment and techniques over many years in an effort to address
the major issues that had been inhibiting the development of
fiber laser technology and to provide products that
differentiate us from our competitors. Generally, we do not sell
our proprietary components to third parties. Using our
technology platform, we configure standard products based upon
each customers specifications.
Our in-house manufacturing generally includes only those
operations and components that are critical to the protection of
our intellectual property, reducing our costs or to the
achievement of performance and quality standards. We purchase
from vendors common as well as specialized mechanical,
electrical and optical parts and raw materials, such as printed
circuit boards, wafer substrates and various optical components.
Research
and Development
We have extensive research and development experience in laser
materials, fiber and optoelectronic components. We focus our
research and development efforts on designing and introducing
new and improved standard and customized products and the mass
production of components that go into our products. In addition
to our cladding-pumped specialty fiber platform, we have core
competencies in high-power multi-mode semiconductor laser
diodes, diode packaging, specialty active and passive optical
fibers, high-performance optical components, fiber gain blocks
and fiber modules, as well as splicing and combining techniques
and high-stress test methods. We concentrate our research and
development efforts on advancements in performance as well as
capacity to hold and produce higher optical power levels.
13
Our research and development efforts are also directed at
expanding our product line by increasing power levels, improving
beam quality and electrical efficiency, decreasing size and
lowering the cost per watt. Our team of scientists and engineers
work closely with many of our customers to develop and introduce
custom products that address specific applications and
performance requirements.
We incurred research and development costs of approximately
$6.5 million in 2006, $5.8 million in 2005 and
$4.8 million in 2004.
Intellectual
Property
We seek to protect our proprietary technology primarily through
U.S. and foreign laws affording protection for trade secrets,
and to seek U.S. and foreign patent, copyright and trademark
protection of our products and processes where appropriate. We
do not believe that any of our patents are material to the
conduct of our business. We rely primarily on trade secrets,
technical know-how and other unpatented proprietary information
relating to our product development and manufacturing
activities. We seek to protect our trade secrets and proprietary
information, in part, by requiring our employees to enter into
agreements providing for the maintenance of confidentiality and
the assignment to us of rights to inventions that they make
while we employ them. We also enter into non-disclosure
agreements with our consultants and suppliers to protect
confidential information delivered to them. We believe that our
vertical integration, including our long experience in making a
wide range of specialty and high-power capacity components, as
well as our technology platform make it difficult for others to
reverse engineer our products. Intellectual property rights,
including those that we own and those of others, involve
significant risks. See Item 1A, Risk
Factors Risks Related to Our Business
Our Inability to Protect Our Intellectual Property and
Proprietary Technologies Could Result in the Unauthorized Use of
Our Technologies by Third Parties, Hurt Our Competitive Position
and Adversely Affect Our Operating Results.
Competition
Our markets are competitive and characterized by rapidly
changing technology and continuously evolving customer
requirements. We believe that the primary competitive factors in
our markets are: product performance and reliability; quality
and service support; price and value to the customer; ability to
manufacture and deliver products on a timely basis; ability to
achieve qualification for and integration into OEM systems;
ability to meet customer specifications; and ability to respond
quickly to market demand and technological developments.
In the materials processing market, the competition is
fragmented and includes a large number of competitors. We
compete with makers of high-power conventional
CO2
and solid-state lasers, including Fanuc, Lasag Ltd., Rofin-Sinar
Technologies, Inc., and Trumpf Inc., and makers of mid and
low-power conventional
CO2
and solid-state lasers such as Coherent, Inc., the Synrad, Inc.
subsidiary of Excel Technology, Inc., GSI Group Inc., Newport
Corporation and Rofin-Sinar Technologies, Inc. We also compete
with fiber laser makers including Keopsys SA, Mitsubishi Cable
Industries, Ltd., Miyachi Unitek Corporation, MPB Communications
Inc., SPI Lasers plc and JDS Uniphase Corporation for low
and/or
mid-power lasers. We expect competition from established laser
makers that may have started or may start programs to develop
and sell fiber lasers or alternative new solid state laser
technologies. Because many of the components required to develop
and produce low-power fiber lasers are becoming increasingly
available, barriers to entry are decreasing, and we expect new
competitive products to enter the market. Several
well-established conventional laser manufacturers are known to
be interested in developing and licensing technology for fiber
lasers. We also compete in the materials processing, medical and
advanced applications markets with end users who produce their
own solid-state and gas lasers as well as with manufacturers of
non-laser methods and tools, such as resistance welding in the
materials processing market and scalpels in the medical market.
In the communications market, our principal competitors are
manufacturers of high-power fiber amplifiers and DWDM systems,
such as Avanex Corporation, Bookham, Inc., the
Scientific-Atlanta division of Cisco Systems, Inc.
(Scientific-Atlanta), Emcore Corporation, JDS Uniphase
Corporation and MPB Communications
14
Inc. The fiber amplifier market is more established than the
fiber laser market and technological change has not occurred as
rapidly as it has in the case of fiber lasers.
Many of our competitors are larger than we are and have
substantially greater financial, managerial and technical
resources, more extensive distribution and service networks,
greater sales and marketing capacity, and larger installed
customer bases than we do.
Employees
As of December 31, 2006, we had approximately
1,040 full-time employees, including approximately 60 in
research and development, 840 in manufacturing operations, 50 in
sales, service and marketing, and 90 in general and
administrative functions. Of our total full-time employees at
our principal facilities, approximately 300 were in the United
States, 380 were in Germany, 300 were in Russia and 10 were in
Italy. We have never experienced a work stoppage and none of our
employees is subject to a collective bargaining agreement. We
believe that our current relations with our employees are good.
Government
Regulation
Regulatory
Compliance
The majority of our laser and amplifier products sold in the
United States are classified as Class IV Laser Products
under the applicable rules and regulations of the Center for
Devices and Radiological Health (CDRH) of the
U.S. Food and Drug Administration. The same classification
system is applied in the European markets. Safety rules are
formulated with Deutsche Industrie Norm (i.e.,
German Industrial Standards) or ISO standards, which are
internationally harmonized. CDRH regulations generally require a
self-certification procedure pursuant to which a manufacturer
must submit a filing to the CDRH with respect to each product
incorporating a laser device, make periodic reports of sales and
purchases and comply with product labeling standards, product
safety and design features and informational requirements. The
Companys products applications can result in injury to
human tissue if directed at an individual or otherwise misused.
The CDRH is empowered to seek fines and other remedies for
violations of their requirements. We believe that our products
are in material compliance with applicable laws and regulations
relating to the manufacture of laser devices.
Environmental
Regulation
Our operations are subject to various federal, state and local
environmental protection regulations governing the use, storage,
handling and disposal of hazardous materials, chemicals, various
radioactive materials and certain waste products. In the United
States, we are subject to the federal regulation and control of
the Environmental Protection Agency. Comparable authorities are
involved in other countries. We believe that our operations are
in material compliance with applicable environmental protection
laws and regulations.
Although we believe that our safety procedures for using,
handling, storing and disposing of such materials comply with
the standards required by federal and state laws and
regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the
event of such an accident involving such materials, we could be
liable for damages and such liability could exceed the amount of
our liability insurance coverage and the resources of our
business.
Availability
of Reports
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to such reports are available free of charge
on our web site at www.ipgphotonics.com as soon as
reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange
Commission (www.sec.gov). We will also provide electronic or
paper copies of such reports free of charge, upon request made
to our Corporate Secretary.
15
The factors described below are the principal risks that
could materially adversely affect our operating results and
financial condition. Other factors may exist that we do not
consider significant based on information that is currently
available. In addition, new risks may emerge at any time, and we
cannot predict those risks or estimate the extent to which they
may affect us.
Our
future growth depends upon our ability to penetrate new
applications for fiber lasers and increase our market share in
existing applications.
Our future growth will depend on our ability to generate sales
of fiber lasers in applications where traditional lasers, such
as
CO2
and yttrium aluminum garnet (YAG) lasers, have been used or in
new and developing markets and applications for lasers where
they have not been used previously. To date, a significant
portion of our revenue growth has been derived from sales of
fiber lasers primarily for applications where
CO2
and YAG lasers historically have been used. In order to increase
market demand for our fiber laser products, we will need to
devote substantial resources to:
|
|
|
|
|
demonstrate the effectiveness of fiber lasers in new
applications;
|
|
|
|
increase our direct and indirect sales efforts;
|
|
|
|
extend our product line to address new applications for our
products;
|
|
|
|
continue to reduce our manufacturing costs and enhance our
competitive position; and
|
|
|
|
effectively service and support our installed product base.
|
If we are unable to implement our strategy to develop new
applications for our products, our revenues, operating results
and financial condition could be adversely affected. We cannot
assure you that we will be able to successfully implement our
business strategy. In addition, our newly developed or enhanced
products may not achieve market acceptance or may be rendered
obsolete or less competitive by the introduction of new products
by other companies.
If
fiber lasers do not achieve broader market acceptance or if
market penetration occurs more slowly than we expect, prospects
for our growth and profitability may be negatively
impacted.
The fiber laser market is relatively new when compared to the
conventional laser market and our future success depends on the
development and broader market acceptance of fiber lasers.
Potential customers may be reluctant to adopt fiber lasers as an
alternative to traditional lasers, such as
CO2
and YAG, and non-laser methods, such as mechanical tools. Such
potential customers may have substantial investments and
know-how related to their existing laser and non-laser
technologies, and may perceive risks relating to the
reliability, quality, usefulness and cost-effectiveness of fiber
lasers when compared to other laser or non-laser technologies
available in the market. Many of our target markets, such as the
automotive, machine tool and other manufacturing, communications
and medical industries, have historically adopted new
technologies slowly. These markets often require long test and
qualification periods or lengthy government approval processes
before adopting new technologies. As a result, we may expend
significant resources and time to qualify our products for a new
customer application, and we cannot assure that our products
will be qualified or approved for such markets. If acceptance of
fiber laser technology, and of our fiber lasers in particular,
does not continue to grow within the markets that we serve, then
the opportunities to increase our revenues and profitability may
be severely limited.
We may
not be able to effectively manage our growth and we may need to
incur significant costs to address the operational requirements
related to our growth, either of which could harm our business
and operating results.
We have been experiencing a period of significant growth and
expansion, both in the United States and internationally, which
has required, and will continue to require, increased efforts of
our management and other resources. Our recent and anticipated
growth has placed, and is expected to continue to place,
significant
16
strain on our research and development, sales and marketing,
operational and administrative resources. To manage our growth,
we will need to continue to improve our operational and
financial systems and expand, train and manage our employees.
For example, we must implement new modules of our management
information system, hire and train new sales representatives,
service and application personnel, and expand our supply chain
management and quality control operations. This may require
substantial managerial and financial resources, and our efforts
in this regard may not be successful. If we fail to adequately
manage our expected growth, or to improve our operational,
financial and management information systems, or fail to
effectively motivate or manage our new and future employees, the
quality of our products and the management of our operations
could suffer and our operating results could be adversely
affected.
Our
vertically integrated business results in high levels of fixed
costs that may adversely impact our gross profits and our
operating results in the event of a reduction in demand for our
products.
We have a high fixed cost base due to our vertically integrated
business model, including the fact that approximately 840 of our
1,040 employees as of December 31, 2006 were employed in
our manufacturing operations. We cannot adjust these fixed costs
quickly to adapt to rapidly changing market conditions. Our
gross profit, in absolute dollars and as a percentage of net
sales, is greatly impacted by our sales volume and the
corresponding absorption of fixed manufacturing overhead
expenses. In addition, because we are a vertically integrated
manufacturer and design and manufacture our key specialty
components, insufficient demand for our products may subject us
to the risk of high inventory carrying costs and increased
inventory obsolescence. Given our vertical integration, the rate
at which we turn inventory has historically been low when
compared to our cost of sales. We do not expect this to change
significantly in the future and believe that we will have to
maintain a relatively high level of inventory compared to our
cost of sales. As a result, we continue to expect to have a
significant amount of working capital invested in inventory and
changes in our level of inventory to lead to an increase in cash
generated from our operations when it is sold or a decrease in
cash generated from our operations at times when the amount of
inventory is increasing. We may be required to write down
inventory costs in the future as we have done in the past, and
the high inventory costs may have an adverse effect on our gross
profits and our operating results.
We are
subject to lawsuits alleging that we are infringing third-party
intellectual property rights. Intellectual property claims could
result in costly litigation and harm our business.
In recent years, there has been significant litigation involving
intellectual property rights in many technology-based
industries, including our own. We face risks and uncertainties
in connection with such litigation, including the risk that
patents issued to others may harm our ability to do business;
that there could be existing patents of which we are unaware
that could be pertinent to our business; and that it is not
possible for us to know whether there are patent applications
pending that our products might infringe upon, since patent
applications often are not disclosed until a patent is issued or
published. Moreover, the frequency with which new patents are
granted and the diversity of jurisdictions in which they are
granted make it impractical and expensive for us to monitor all
patents that may be relevant to our business.
From time to time, we have been notified of allegations and
claims that we may be infringing patents or intellectual
property rights owned by third parties. We are presently
defending two patent infringement lawsuits brought by the
Scientific-Atlanta division of Cisco Systems, Inc., and IMRA
America, Inc. See Item 3, Legal Proceedings.
The Scientific-Atlanta allegations generally relate to erbium
and ytterbium co-doped optical fiber, and certain products that
incorporate such fiber. Scientific-Atlanta in its complaint
alleges willful infringement of one U.S. patent and seeks
damages in an unspecified amount, treble damages and injunctive
relief. IMRA Americas allegations generally relate to
certain unspecified fiber amplifiers that we produce and also
allege inducement of infringement and contributory infringement
without specifying any of our products. IMRA America in its
complaint alleges willful infringement of one U.S. patent
and seeks damages of at least $10 million, treble damages
and injunctive relief. These lawsuits concern products made,
used, sold, offered for sale, or imported in the United States
and therefore these lawsuits affect products that contribute a
substantial portion of our revenues. These lawsuits do not
affect revenues that are derived from products that are not
made, used, sold, offered for sale or imported in the United
States. IMRA America and other parties have notified us
17
that they believe certain of our fiber lasers and amplifiers, or
the use of these products, infringe the respective parties
patents. The subject matter of these assertions is products that
contribute a substantial portion of our revenues. There can be
no assurance that we will be able to amicably dispose of our
pending litigations with Scientific-Atlanta and IMRA America,
claims or other allegations made against us and claims that may
be asserted in the future. The outcome of any litigation,
including the pending litigations, is uncertain. Even if we
ultimately are successful on the merits of any such litigation,
legal and administrative proceedings related to intellectual
property are typically expensive and time-consuming, generate
negative publicity and divert financial and managerial
resources. Some litigants against us may have greater financial
resources and may be able to sustain the costs of complex
intellectual property litigation more easily than we can.
If we do not prevail in any intellectual property litigation
brought against us, including the lawsuits brought by
Scientific-Atlanta and IMRA America, it could affect our ability
to sell our products and materially harm our business, financial
condition and results of operations. These developments could
adversely affect our ability to compete for customers and
increase our revenues. Plaintiffs in intellectual property cases
often seek, and sometimes obtain, injunctive relief.
Intellectual property litigation commenced against us, including
the lawsuits brought by Scientific-Atlanta and IMRA America that
we are presently defending, could force us to take actions that
could be harmful to our business, competitive position, results
of operations and financial condition, including the following:
|
|
|
|
|
stop selling our products or using the technology that contains
the allegedly infringing intellectual property;
|
|
|
|
pay actual monetary damages, royalties, lost profits or
increased damages and the plaintiffs attorneys fees,
which individually or in the aggregate may be substantial;
|
|
|
|
attempt to obtain a license to use the relevant intellectual
property, which may not be available on reasonable terms or at
all; and
|
|
|
|
attempt to redesign the products that allegedly infringed upon
intellectual property of others, which may be costly or
impractical.
|
In addition, intellectual property lawsuits can be brought by
third parties against OEMs and end users that incorporate our
products into their systems or processes. In some cases, we
indemnify OEMs against third-party infringement claims relating
to our products and we often make representations affirming,
among other things, that our products do not infringe on the
intellectual property rights of others. As a result, we may
incur liabilities in connection with lawsuits against our
customers. Any such lawsuits, whether or not they have merit,
could be time-consuming to defend, damage our reputation and
result in substantial and unanticipated costs.
Our
inability to protect our intellectual property and proprietary
technologies could result in the unauthorized use of our
technologies by third parties, hurt our competitive position and
adversely affect our operating results.
We rely on trade secret laws, contractual agreements, technical
know-how and other unpatented proprietary information to protect
our products, product development and manufacturing activities
from unauthorized copying by third parties. While we own a small
number of patents, we have not historically emphasized patents
as a source of significant competitive advantage, and we do not
expect these patents alone to prevent third parties from
unauthorized copying of our technologies, products and product
components. Rather, we seek to protect our proprietary
technology under laws affording protection for trade secrets. We
also seek to protect our trade secrets and proprietary
information, in part, by requiring employees to enter into
agreements providing for the maintenance of confidentiality and
the assignment of rights to inventions made by them while
employed by us. We have significant international operations and
we are subject to foreign laws which differ in many respects
from U.S. laws. Policing unauthorized use of our trade
secret technologies throughout the world and proving
misappropriation of our technologies are particularly difficult,
especially due to the number of our employees and operations in
numerous foreign countries. The steps that we take to acquire
ownership of our employees inventions and trade secrets in
foreign countries may not have been
18
effective under all such local laws, which could expose us to
potential claims or the inability to protect intellectual
property developed by our employees. Furthermore, any changes
in, or unexpected interpretations of, the trade secret and other
intellectual property laws in any country in which we operate
may adversely affect our ability to enforce our trade secret and
intellectual property positions. Costly and time-consuming
litigation could be necessary to determine the scope of our
confidential information and trade secret protection. We also
enter into confidentiality agreements with our consultants and
other suppliers to protect our confidential information that we
deliver to them. However, there can be no assurance that our
confidentiality agreements will not be breached, that we will be
able to effectively enforce them or that we will have adequate
remedies for any breach.
Given our reliance on trade secret laws, others may
independently develop similar or alternative technologies or
duplicate our technologies and commercialize discoveries that we
have made. Therefore, our intellectual property efforts may be
insufficient to maintain our competitive advantage or to stop
other parties from commercializing similar products or
technologies. Many countries outside of the United States afford
little or no protection to trade secrets and other intellectual
property rights. Intellectual property litigation can be
time-consuming and expensive, and there is no guarantee that we
will have the resources to fully enforce our rights. If we are
unable to prevent misappropriation or infringement of our
intellectual property rights, or the independent development or
design of similar technologies, our competitive position and
operating results could suffer.
We
depend upon internal production and on outside single or
limited-source suppliers for many of our key components and raw
materials. Any interruption in the supply of these key
components and raw materials could adversely affect our results
of operations.
We rely exclusively on our own production capabilities to
manufacture certain of our key components, such as semiconductor
diodes, specialty optical fibers and optical components. We do
not have redundant production lines for some of our components,
such as our diodes and some other components, which are made at
a single manufacturing facility. These may not be readily
available from other sources at our current costs. If our
manufacturing activities were obstructed or hampered
significantly, it could take a considerable length of time, or
it could increase our costs, for us to resume manufacturing or
find alternative sources of supply. Many of the tools and
equipment we use are custom-designed, and it could take a
significant period of time to repair or replace them. In
particular, we use complex tools in the production of our
semiconductor diodes that may be taken out of production for
months to be serviced and the tools must be recertified before
they are put back into production. If we are unable to
successfully recommission these tools in a timely fashion, our
results of operations and business may be adversely affected.
Our three major manufacturing facilities are located in Oxford,
Massachusetts; Burbach, Germany; and Fryazino, Russia. If, as a
result of a flood, fire, natural disaster, political unrest, act
of terrorism, war, outbreak of disease or other similar event,
any of our three major manufacturing facilities or equipment
should become inoperable, inaccessible, damaged or destroyed,
our business could be adversely affected to the extent that we
do not have redundant production capabilities.
Also, we purchase certain raw materials used in the manufacture
of our products and other components, such as semiconductor
wafer substrates, modulators and high-power beam delivery
products, from single or limited-source suppliers. In general,
we have no long-term contractual supply arrangements with these
suppliers. Some of our suppliers are also our competitors.
Furthermore, other than our current suppliers, there are a
limited number of entities from whom we could obtain these
supplies. We do not anticipate that we would be able to purchase
these components or raw materials that we require in a short
period of time or at the same cost from other sources in
commercial quantities or that have our required performance
specifications. Any interruption or delay in the supply of any
of these components or materials, or the inability to obtain
these components and materials from alternate sources at
acceptable prices and within a reasonable amount of time, could
adversely affect our business. If our suppliers face financial
or other difficulties or if there are significant changes in
demand for the components and materials we obtain from them,
they could limit the availability of these components and
materials to us, which in turn could adversely affect our
business.
19
We
rely on the significant experience and specialized expertise of
our senior management and scientific staff and if we are unable
to retain these key employees and attract other highly skilled
personnel necessary to grow our business successfully, our
business and results of operations could suffer.
Our future success is substantially dependent on the continued
service of our executive officers, particularly our founder and
chief executive officer, Dr. Valentin P. Gapontsev, and our
managing director of IPG Laser, Dr. Eugene Shcherbakov, our
highly trained team of scientists, many of whom have several
years of experience and specialized expertise in optical fibers,
semiconductors and optical component technology, and other key
engineering, sales, marketing, manufacturing and support
personnel, any of whom may leave, which could harm our business.
The members of our scientific staff who are expected to make
significant individual contributions to our business are also
members of our executive management team. Furthermore, our
business requires scientists and engineers with experience in
several disciplines, including physics, optics, materials
sciences, chemistry and electronics. We will need to continue to
recruit and retain highly skilled scientists and engineers for
certain functions. Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate
highly skilled research and development, managerial, operations,
sales, marketing and customer service personnel. If we fail to
attract, integrate and retain the necessary personnel, our
ability to extend and maintain our scientific expertise and grow
our business could suffer significantly.
Failure
to effectively build and expand our direct field service and
support organization could have an adverse effect on our
business.
We believe that it will become increasingly important for us to
provide rapid, responsive service directly to our customers
throughout the world and to build and expand our own personnel
resources to provide these services. Accordingly, we have an
ongoing effort to develop our direct support systems in Asia,
one of our largest markets. This requires us to recruit and
train additional qualified field service and support personnel
as well as maintain effective and highly trained organizations
that can provide service to our customers in various countries.
We may not be able to attract and train additional qualified
personnel to expand our direct support operations successfully.
We may not be able to find and engage additional qualified
third-party resources to supplement and enhance our direct
support operations. Further, we may incur significant costs in
providing these direct field and support services. Failure to
implement our direct support operation effectively could
adversely affect our relationships with our customers, and our
operating results may suffer.
The
laser and amplifier industries may experience declining average
selling prices, which could cause our gross margins to decline
and harm our operating results.
Products in the laser and amplifier industries generally, and
our products specifically, have in the past and may in the
future continue to experience a decline in average selling
prices (ASPs) as a result of new product and technology
introductions, increased competition and price pressures from
significant customers. If the ASPs of our products decline and
we are unable to increase our unit volumes, introduce new or
enhanced products with higher margins or reduce manufacturing
costs to offset anticipated decreases in the prices of our
existing products, our operating results may be adversely
affected. In addition, because of our significant fixed costs,
we are limited in our ability to reduce total costs quickly in
response to any revenue shortfalls. Because of these factors, we
may experience material adverse fluctuations in our future
operating results on a quarterly or annual basis if the ASPs of
our products continue to decline.
A few
customers account for a significant portion of our sales, and if
we lose any of these customers or they significantly curtail
their purchases of our products, our results of operations could
be adversely affected.
We rely on a few customers for a significant portion of our
sales. Our top five customers accounted for 29% of our
consolidated net sales in 2006 and 37% of our consolidated net
sales in each of 2005 and 2004. Our largest customer accounted
for 10% of sales in 2006, 13% of sales in 2005 and 20% of sales
in 2004. We generally do not enter into agreements with our
customers obligating them to purchase our fiber lasers or
amplifiers. Our business is characterized by short- term
purchase orders and shipment schedules. If any of our
20
principal customers discontinues its relationship with us,
replaces us as a vendor for certain products or suffers
downturns in its business, our business and results of
operations could be adversely affected.
We
have experienced, and expect to experience in the future,
fluctuations in our quarterly operating results. These
fluctuations may increase the volatility of our stock
price.
We have experienced, and expect to continue to experience,
fluctuations in our quarterly operating results. We believe that
fluctuations in quarterly results may cause the market price of
our common stock to fluctuate, perhaps substantially. Factors
which may have an influence on our operating results in a
particular quarter include:
|
|
|
|
|
the increase, decrease, cancellation or rescheduling of
significant customer orders;
|
|
|
|
the timing of revenue recognition based on the installation or
acceptance of certain products shipped to our customers;
|
|
|
|
seasonality attributable to different purchasing patterns and
levels of activity throughout the year in the areas where we
operate;
|
|
|
|
the timing of customer qualification of our products and
commencement of volume sales of systems that include our
products;
|
|
|
|
the rate at which our present and future customers and end users
adopt our technologies;
|
|
|
|
the gain or loss of a key customer;
|
|
|
|
product or customer mix;
|
|
|
|
competitive pricing pressures;
|
|
|
|
the relative proportions of our U.S. and international sales;
|
|
|
|
our ability to design, manufacture and introduce new products on
a cost-effective and timely basis;
|
|
|
|
the incurrence of expenses to develop and improve application
and support capabilities, the benefits of which may not be
realized until future periods, if at all;
|
|
|
|
different capital expenditure and budget cycles for our
customers, which affect the timing of their spending;
|
|
|
|
foreign currency fluctuations; and
|
|
|
|
our ability to control expenses.
|
These factors make it difficult for us to accurately predict our
operating results. In addition, our ability to accurately
predict our operating results is complicated by the fact that
many of our products have long sales cycles, some lasting as
long as twelve months. Once a sale is made, our delivery
schedule typically ranges from four weeks to four months, and
therefore our sales will often reflect orders shipped in the
same quarter that they are received and will not enhance our
ability to predict our results for future quarters. In addition,
long sales cycles may cause us to incur significant expenses
without offsetting revenues since customers typically expend
significant effort in evaluating, testing and qualifying our
products before making a decision to purchase them. Moreover,
customers may cancel or reschedule shipments, and production
difficulties could delay shipments. Accordingly, our results of
operations are subject to significant fluctuations from quarter
to quarter, and we may not be able to accurately predict when
these fluctuations will occur.
Our
manufacturing capacity may not be at the appropriate size for
future levels of demand.
In response to an increase in demand for our fiber lasers over
the last three years, we started adding substantial
manufacturing capacity at our facilities in the United States,
Germany and Russia beginning in early 2005, and we are
continuing to expand our capacity further. A significant portion
of our manufacturing facilities and production equipment, such
as our semiconductor production and processing equipment, diode
21
packaging equipment and diode burn-in stations, are
special-purpose in nature and cannot be adapted easily to make
other products. If the demand for fiber lasers or amplifiers
does not increase from current levels, we may have significant
excess manufacturing capacity, which could in turn adversely
affect our business.
Conversely, if demand for fiber lasers or amplifiers increases
substantially more than we anticipate, our manufacturing
capacity may not be adequate to meet the increased customer
demand. As a result, we might not be able to fulfill customer
orders in a timely manner, which could adversely affect our
customer relationships and operating results. Moreover, our
efforts to increase our production capacity may not succeed in
enabling us to manufacture the required quantities of our
products in a timely manner or at gross profit margins that we
have achieved in the past. As a result, the profit margins we
ultimately achieve on sales of fiber lasers and amplifiers may
be lower than our historical profit margins.
Future
downturns in the economy, particularly in the materials
processing and communications markets, could have a material
adverse effect on our sales and profitability.
Our business depends substantially upon capital expenditures by
our customers, particularly by manufacturers in the materials
processing and communications markets. Approximately 82% of our
revenues during 2006 were in these two markets. Although these
industries are broad, they are cyclical and have historically
experienced sudden and severe downturns and periods of
oversupply, resulting in significantly reduced demand for
capital equipment, including the products that we manufacture
and market. For the foreseeable future, our operations will
continue to depend upon capital expenditures by customers in
these markets, which, in turn, depend upon the demand for their
products or services. Decreased demand for products and services
from customers in these industries during an economic downturn
may lead to decreased demand for our products, which would
reduce our sales or sales growth rate.
We
depend on our OEM customers and system integrators and their
ability to incorporate our products into their
systems
Our future growth will depend in part on our ability to maintain
existing and secure new OEM customers. Our revenues also depend
in part upon the ability of our current and potential OEM
customers and system integrators to develop and sell systems
that incorporate our laser and amplifier products. The
commercial success of these systems depends to a substantial
degree on the efforts of these OEM customers and system
integrators to develop and market products that incorporate our
technologies. Relationships and experience with traditional
laser makers, limited marketing resources, reluctance to invest
in research and development and other factors affecting these
OEM customers and third-party system integrators could have a
substantial impact upon our financial results. Furthermore, if
our OEM customers or third-party system integrators experience
financial or other difficulties that adversely affect their
operations, our financial condition or results of operations may
also be adversely affected.
Because
we lack long-term purchase commitments from our customers, our
sales can be difficult to predict, which could adversely affect
our operating results.
We generally do not enter into long-term agreements with our
customers obligating them to purchase our fiber lasers or
amplifiers. Our business is characterized by short-term purchase
orders and shipment schedules and, in some cases, orders may be
cancelled or delayed without significant penalty. As a result,
it is difficult to forecast our revenues and to determine the
appropriate levels of inventory required to meet future demand.
In addition, due to the absence of long-term volume purchase
agreements, we forecast our revenues and plan our production and
inventory levels based upon the demand forecasts of our OEM
customers, end users, and distributors, which are highly
unpredictable and can fluctuate substantially. This could lead
to increased inventory levels and increased carrying costs and
risk of excess or obsolete inventory due to unanticipated
reductions in purchases by our customers. In this regard, we
recorded provisions for inventory totaling $1.0 million and
$1.9 million in 2006 and 2005, respectively. These
provisions were recorded as a result of changes in market prices
of certain components, the value of those inventories that was
realizable through finished product sales and uncertainties
related to the recoverability of the value of inventories due to
technological changes and excess quantities. If our OEM
customers, end users or distributors fail to accurately
22
forecast the demand for our products, fail to accurately
forecast the timing of such demand, or are unable to
consistently negotiate acceptable purchase order terms with
customers, our results of operations may be adversely affected.
The
markets for our products are highly competitive and increased
competition could increase our costs, reduce our sales or cause
us to lose market share.
The industries in which we operate are characterized by
significant price and technological competition. Our fiber laser
and amplifier products compete with conventional laser
technologies and amplifier products offered by several
well-established companies, some of which are larger and have
substantially greater financial, managerial and technical
resources, more extensive distribution and service networks,
greater sales and marketing capacity, and larger installed
customer bases than we do. Also, we compete with widely used
non-laser production methods, such as resistance welding. We
believe that competition will be particularly intense from
makers of
CO2
and YAG lasers, as these makers of traditional solutions may
lower prices to maintain current market share and have committed
significant research and development resources to pursue
opportunities related to these technologies.
Further, we face competition from a growing number of fiber
laser makers. We also expect competition from established laser
makers which may have started or may start programs to develop
and sell fiber lasers or alternative new solid state laser
technologies. Because many of the components required to develop
and produce low-power fiber lasers and amplifiers are
commercially available, barriers to entry into these submarkets
are relatively low, and we expect new competitive product
entries in these submarkets. We may not be able to successfully
differentiate our current and proposed products from the
products of our competitors and the market may not consider our
products to be superior to competing products. To maintain our
competitive position in these markets, we believe that we will
be required to continue a high level of investment in research
and development, application development and customer service
and support, and react to market pricing conditions. We may not
have sufficient resources to continue to make these investments
and we may not be able to make the technological advances or
price adjustments necessary to maintain our competitive
position. We also compete against our OEM customers
internal production of competitive laser technologies.
Our
inability to manage risks associated with our international
customers and operations could adversely affect our
business.
Our products are currently marketed and sold in numerous
countries. The United States, Germany, Japan and Russia are our
principal markets. A significant amount of our revenues are
derived from customers outside of the United States. We
anticipate that foreign sales will continue to account for a
significant portion of our revenues in the foreseeable future.
Our operations and sales in these markets are subject to risks
inherent in international business activities, including:
|
|
|
|
|
longer accounts receivable collection periods;
|
|
|
|
changes in the values of foreign currencies;
|
|
|
|
changes in a specific countrys or regions economic
conditions, such as recession;
|
|
|
|
compliance with a wide variety of domestic and foreign laws and
regulations and unexpected changes in those laws and regulatory
requirements, including uncertainties regarding taxes, tariffs,
quotas, export controls, export licenses and other trade
barriers;
|
|
|
|
certification requirements;
|
|
|
|
environmental regulations;
|
|
|
|
less effective protection of intellectual property rights in
some countries;
|
|
|
|
potentially adverse tax consequences;
|
23
|
|
|
|
|
different capital expenditure and budget cycles for our
customers, which affect the timing of their spending;
|
|
|
|
political, legal and economic instability, foreign conflicts,
and the impact of regional and global infectious illnesses in
the countries in which we and our customers, suppliers,
manufacturers and subcontractors are located;
|
|
|
|
preference for locally produced products;
|
|
|
|
difficulties and costs of staffing and managing international
operations across different geographic areas and cultures;
|
|
|
|
seasonal reductions in business activities; and
|
|
|
|
fluctuations in freight rates and transportation disruptions.
|
Political and economic instability and changes in governmental
regulations could adversely affect both our ability to
effectively operate our foreign sales offices and the ability of
our foreign suppliers to supply us with required materials or
services. Any interruption or delay in the supply of our
required components, products, materials or services, or our
inability to obtain these components, materials, products or
services from alternate sources at acceptable prices and within
a reasonable amount of time, could impair our ability to meet
scheduled product deliveries to our customers and could cause
customers to cancel orders.
We are also subject to risks of doing business in Russia through
our indirect subsidiary, NTO IRE-Polus, which conducts research
and development and provides components and test equipment to
us. The results of operations, business prospects and facilities
of NTO IRE-Polus are subject to the economic and political
environment in Russia. In recent years Russia has undergone
substantial political, economic and social change. As is typical
of an emerging market, Russia does not possess a well-developed
business, legal and regulatory infrastructure that would
generally exist in a more mature free market economy. In
addition, the tax, currency and customs legislation within
Russia is subject to varying interpretations and changes, which
can occur frequently. The future economic direction of Russia
remains largely dependent upon the effectiveness of economic,
financial and monetary measures undertaken by the government,
together with tax, legal, regulatory, and political
developments. Our failure to manage the risks associated with
NTO IRE-Polus and our other existing and potential future
international business operations could have a material adverse
effect upon our results of operations.
Foreign
currency transaction risk may negatively affect our net sales,
cost of sales and operating margins and could result in exchange
losses.
We conduct our business and incur costs in the local currency of
most countries in which we operate. In 2006, our net sales
outside the United States represented a significant portion of
our total sales. We incur currency transaction risk whenever one
of our operating subsidiaries enters into either a purchase or a
sales transaction using a different currency from the currency
in which it receives revenues. We currently do not hedge against
foreign currency exchange risks, and therefore the impact of
future exchange rate fluctuations on our results of operations
cannot be accurately predicted. Given the volatility of exchange
rates, we may not be able to effectively manage our currency
transaction or translation risks, and any volatility in currency
exchange rates may increase the price of our products in local
currency to our foreign customers, which may have an adverse
effect on our financial condition, cash flows and profitability.
Our
products could contain defects, which may reduce sales of those
products, harm market acceptance of our fiber laser products or
result in claims against us.
The manufacture of our fiber lasers and amplifiers involves
highly complex and precise processes. Despite testing by us and
our customers, errors have been found, and may be found in the
future, in our products. These defects may cause us to incur
significant warranty, support and repair costs, divert the
attention of our engineering personnel from our product
development efforts and harm our relationships with our
customers. These problems could result in, among other things,
loss of revenues or a delay in revenue recognition, loss of
24
market share, harm to our reputation or a delay or loss of
market acceptance of our fiber laser products. Defects,
integration issues or other performance problems in our fiber
laser and amplifier products could also result in personal
injury or financial or other damages to our customers, which in
turn could damage market acceptance of our products. Our
customers could also seek damages from us for their losses. A
product liability claim brought against us, even if
unsuccessful, could be time-consuming and costly to defend.
We may
pursue acquisitions and investments in new businesses, products
or technologies. These may involve risks which could disrupt our
business and may harm our financial condition.
We currently have no commitments or agreements to make any
acquisitions and have limited experience in making acquisitions.
In the future, we may make acquisitions of and investments in
new businesses, products, technologies and geographic areas, or
we may acquire operations that expand our current capabilities.
Acquisitions present a number of potential risks and challenges
that could, if not met, disrupt our business operations,
increase our operating costs and reduce the value of the
acquired company to us. For example, if we identify an
acquisition candidate, we may not be able to successfully
negotiate or finance the acquisition on favorable terms. Even if
we are successful, we may not be able to integrate the acquired
businesses, products or technologies into our existing business
and products. As a result of the rapid pace of technological
change in our industry, we may misjudge the long-term potential
of the acquired business or technology, or the acquisition may
not be complementary to our existing business. Furthermore,
potential acquisitions and investments, whether or not
consummated, may divert our managements attention and
require considerable cash outlays at the expense of our existing
operations. In addition, to complete future acquisitions, we may
issue equity securities, incur debt, assume contingent
liabilities or have amortization expenses and write-downs of
acquired assets, which could adversely affect our profitability
and result in dilution to our existing and future stockholders.
We are
subject to various environmental laws and regulations that could
impose substantial costs upon us and may adversely affect our
business, operating results and financial
condition.
Some of our operations use substances regulated under various
federal, state, local, and international laws governing the
environment, including those relating to the storage, use,
discharge, disposal, labeling, and human exposure to hazardous
and toxic materials. We could incur costs, fines and civil or
criminal sanctions, third-party property damage or personal
injury claims, or could be required to incur substantial
investigation or remediation costs, if we were to violate or
become liable under environmental laws. Liability under
environmental laws can be joint and several and without regard
to comparative fault. Compliance with current or future
environmental laws and regulations could restrict our ability to
expand our facilities or require us to acquire additional
expensive equipment, modify our manufacturing processes, or
incur other significant expenses in order to remain in
compliance with such laws and regulations. At this time, we do
not believe the costs to maintain compliance with current
environmental laws to be material. Although we do not currently
anticipate that such costs will become material, if such costs
were to become material in the future, whether due to
unanticipated changes in environmental laws, unanticipated
changes in our operations or other unanticipated changes, we may
be required to dedicate additional staff or financial resources
in order to maintain compliance. There can be no assurance that
violations of environmental laws or regulations will not occur
in the future as a result of the inability to obtain permits,
human error, accident, equipment failure or other causes.
We are
subject to export control regulations that could restrict our
ability to increase our international sales and may adversely
affect our business.
A significant part of our business is the export of our products
to other countries. Because our products can be used or adapted
for military, weapons or other similar uses, our products are
subject to the Export Administration Regulations, administered
by the Department of Commerce and the Bureau of Industry
Security, and their foreign counterpart laws and regulations
which require that we obtain an export license before we can
export certain products, components or technology to specified
countries. Under applicable regulations, some of our laser
products, components and technology are treated differently than
traditional
25
lasers or mechanical tools and, in some cases, the export of our
products, components and technology to certain countries
requires an export license even though an export license would
not be required for the export of a
CO2
or YAG laser or mechanical tool. Unless a license exception is
available, the stricter controls applicable to some products
could put us at a competitive disadvantage in selling our
products to customers in certain countries that require an
export license, restrict our ability to sell products to
customers in certain countries, or give rise to delays or
expenses in obtaining appropriate licenses. Export licenses can
permit the export of a unit to a single customer, or multiple
units over a period of time to one or more customers, and may
include conditions limiting the use of the product, resale,
transfer, re-export, modification, disassembly or transfer of
data. We have experienced and, in the future, may experience
delays in obtaining export licenses as we respond to questions
from licensing authorities on license requests and await their
determination to grant permission in instances where a license
is required. Failure to comply with these laws and regulations
could result in government sanctions, including substantial
monetary penalties, denial of export privileges, debarment from
government contracts and a loss of revenues. Delays in obtaining
or failure to obtain required export licenses also may require
us to defer shipments to subsequent periods or cancel orders.
Any of these could adversely affect our operations and, as a
result, our financial results could suffer.
We
could be the subject of securities class action litigation due
to future stock price volatility, which could divert
managements attention and adversely affect our operating
results.
The stock market in general, and market prices for the
securities of technology companies like ours in particular, have
experienced volatility from time to time that often has been
unrelated to the operating performance of the underlying
companies. A certain degree of stock price volatility can be
attributed to being a newly public company. These broad market
and industry fluctuations may adversely affect the market price
of our common stock, regardless of our operating performance. In
several recent situations where the market price of a stock has
been volatile, holders of that stock have instituted securities
class action litigation against the company that issued the
stock. If any of our stockholders were to bring a lawsuit
against us, the defense and disposition of such lawsuit could be
costly and divert the time and attention of management and harm
our business.
Dr. Valentin
P. Gapontsev, our chairman, chief executive officer and
principal stockholder, controls more than 46.6% of our voting
power, and has a significant influence on the outcome of
director elections and other matters requiring stockholder
approval, including a change in corporate control.
Dr. Valentin P. Gapontsev, our chairman and chief executive
officer, and IP Fibre Devices (UK) Ltd. (IPFD), of which
Dr. Gapontsev is the managing director and majority owner,
beneficially own an aggregate of 19,999,243 shares of our
common stock, or approximately 46.6% of our common stock. In
addition, Dr. Denis Gapontsev, our Vice President of
Research and Development and the son of Dr. Valentin P.
Gapontsev, beneficially owns 1,718,902 shares of our common
stock, or approximately 4.0% of our common stock, and
collectively with Dr. Valentin P. Gapontsev, approximately
50.6% of our common stock. As a result, Dr. Valentin P.
Gapontsev has significant influence on the outcome of matters
requiring stockholder approval, including:
|
|
|
|
|
election of our directors;
|
|
|
|
amendment of our certificate of incorporation or
by-laws; and
|
|
|
|
approval of mergers, consolidations or the sale of all or
substantially all of our assets.
|
Dr. Valentin P. Gapontsev may vote his shares of our common
stock in ways that are adverse to the interests of other holders
of our common stock. Dr. Valentin P. Gapontsevs
significant ownership interest could delay, prevent or cause a
change in control of our company, any of which could adversely
affect the market price of our common stock.
26
Dr. Valentin
P. Gapontsev, our chairman, chief executive officer and
principal stockholder, owns a material portion of one of our
operating subsidiaries, which creates the possibility of a
conflict of interest.
Although we own 51.0% of NTO IRE-Polus, our Russian subsidiary,
Dr. Valentin P. Gapontsev owns 26.7%, and the remaining
22.3% is owned by unaffiliated third parties and certain current
and former employees of NTO IRE-Polus. NTO IRE-Polus conducts
research and development for us and provides us with components
and test equipment. Dr. Gapontsevs significant
ownership interest in this entity creates the possibility of a
conflict of interest since, by having an ownership interest in
both our company and NTO IRE-Polus, his economic interests may
be affected by transactions between the two entities. Under
Russian law and NTO IRE-Poluss charter, supermajority or
unanimous stockholder approval is required to take certain
significant non-operational actions, such as amending NTO
IRE-Poluss charter, electing the executive body or
altering certain fundamental stockholder rights. Although we
have taken steps to address possible conflicts of interests and
potential issues concerning the requirement to obtain
supermajority approval, these steps may not prove effective.
Anti-takeover
provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company, even if a
change in control would be beneficial to our
stockholders.
Provisions of our certificate of incorporation and by-laws,
including certain provisions that will take effect when
Dr. Valentin P. Gapontsev (together with his affiliates and
associates) ceases to beneficially own an aggregate of 25% or
more of our outstanding voting securities, may discourage, delay
or prevent a merger, acquisition or change of control, even if
it would be beneficial to our stockholders. The existence of
these provisions could also limit the price that investors might
be willing to pay in the future for shares of our common stock.
These provisions include:
|
|
|
|
|
authorizing the issuance of blank check preferred
stock;
|
|
|
|
establishing a classified board;
|
|
|
|
providing that directors may only be removed for cause;
|
|
|
|
prohibiting stockholder action by written consent;
|
|
|
|
limiting the persons who may call a special meeting of
stockholders;
|
|
|
|
establishing advance notice requirements for nominations for
election to the board of directors and for proposing matters to
be submitted to a stockholder vote; and
|
|
|
|
supermajority stockholder approval to change these provisions.
|
Provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with our company or obtaining
control of our company. Specifically, Section 203 of the
Delaware General Corporation Law, which will apply to our
company following such time as Dr. Valentin P. Gapontsev
(together with his affiliates and associates) ceases to
beneficially own 25% or more of the total voting power of our
outstanding shares, may prohibit business combinations with
stockholders owning 15% or more of our outstanding voting stock.
Substantial
sales of our common stock could cause our stock price to
decline.
Sales of a substantial number of shares of common stock, or the
perception that sales could occur, could adversely affect the
market price of our common stock. As of March 23, 2007, we
had 42,916,532 shares of common stock outstanding and
4,392,206 shares subject to outstanding options and
restricted stock units. Our directors, executive officers and
other stockholders holding in the aggregate approximately 79% of
our outstanding shares as of March 23, 2007, have agreed
not to sell or otherwise dispose of any shares of common stock
for a period of at least 180 days after December 12,
2006, the date of the final prospectus relating to the IPO. The
lock up agreements may be terminated by Merrill Lynch &
Co. and Lehman Brothers Inc., or in some cases by us. When the
lock-up
agreements expire or are terminated, approximately
32,484,946 shares of our common stock will be eligible for
sale under Rule 144, Rule 144(k) or Rule 701.
27
The holders of an aggregate of approximately
5,181,184 shares of common stock have registration rights,
including the right to require us to register the sale of their
shares and the right to include their shares in public offerings
we undertake in the future. We have registered all shares of
common stock that we may issue under our stock option plans.
Consequently, they may be freely sold in the public market,
subject to the
lock-up
restrictions described above, and subject, in the case of any
awards under our stock-based compensation plans, to applicable
vesting requirements.
We
will incur increased costs and demands upon management as a
result of complying with the laws and regulations affecting
public companies, which could adversely affect our operating
results.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company,
including costs associated with public company reporting
requirements. We also have incurred and will incur costs
associated with recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley
Act of 2002, as well as new rules implemented by the SEC and the
Nasdaq Global Market. The expenses incurred by public companies
generally for reporting and corporate governance purposes have
been increasing. We expect these rules and regulations to
significantly increase our legal and financial compliance costs
and to make some activities more time-consuming and costly, and
we may be required to hire additional personnel. We also expect
these rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to
serve on our board of directors or as our executive officers.
We
will be required to evaluate our internal control over financial
reporting under Section 404 of the
Sarbanes-Oxley
Act of 2002, and any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports
and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
beginning as early as the time of the filing of our Annual
Report on
Form 10-K
for the fiscal year ending December 31, 2007, we will be
required to furnish a report by our management on our internal
control over financial reporting. Such a report will contain,
among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our
fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by
management. Such report must also contain a statement that our
independent registered public accounting firm has issued an
attestation report on managements assessment of such
internal controls.
We have begun the systems and process documentation and
evaluation needed to comply with Section 404. If our
management identifies one or more material weaknesses in our
internal control over financial reporting, we will be unable to
assert that such internal control is effective. If we are unable
to assert that our internal control over financial reporting is
effective, or if our independent registered public accounting
firm is unable to attest that our managements report is
fairly stated or is unable to express an opinion as to the
effectiveness of our internal controls, investors could lose
confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on our stock price.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
28
Our main facilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or
|
|
Lease
|
|
Approximate
|
|
|
|
Location
|
|
Leased
|
|
Expiration
|
|
Size (sq. ft.)
|
|
|
Primary Activity
|
|
Oxford, Massachusetts
|
|
Owned
|
|
|
|
|
137,000
|
|
|
Diodes, components, complete
device manufacturing, administration
|
Burbach, Germany
|
|
Owned
|
|
|
|
|
143,000
|
|
|
Optical fiber, components, final
assembly, complete device manufacturing, administration
|
Fryazino, Russia
|
|
Leased
|
|
April 2007
|
|
|
57,000
|
|
|
Components, complete device
manufacturing, administration
|
Legnano, Italy
|
|
Leased
|
|
March 2012
|
|
|
12,000
|
|
|
Complete device manufacturing,
administration
|
We are expanding our facilities in Massachusetts, Germany and
Russia by adding more than 100,000 square feet on property
owned by us. These additional facilities are expected to be used
primarily for manufacturing.
We maintain our corporate headquarters in Oxford, Massachusetts,
and conduct research and development in Oxford, Massachusetts,
Burbach, Germany and Fryazino, Russia. We operate four
manufacturing facilities for lasers, amplifiers and components
in the United States, Germany, Russia and Italy. We also
manufacture certain optical components in India. We have sales
personnel at each of our manufacturing facilities and at leased
offices in Wixom, Michigan; London, England; Tokyo, Japan;
Nagoya, Japan; Daejeon, South Korea; and Bangalore, India.
We believe that our existing facilities are adequate to meet our
current needs and that we will be able to obtain additional
commercial space as needed.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
From time to time, we are party to various legal proceedings and
other disputes incidental to our business, including those
described below. For a discussion of the risks associated with
these legal proceedings and other disputes, see Item 1A.
Risk Factors We Are Subject to Lawsuits
Alleging That We Are Infringing Third-Party Intellectual
Property Rights. Intellectual Property Claims Could Result in
Costly Litigation and Harm Our Business.
We are a defendant in an action by Scientific-Atlanta filed in
April 2005 in the United States District Court for the District
of Massachusetts. The plaintiff alleges in its complaint that
certain of our products, including but not limited to optical
fiber amplifier products, infringe one U.S. patent
allegedly owned by it and seeks damages in an unspecified
amount, treble damages for alleged willful infringement and
injunctive relief. Simultaneous with filing the complaint,
Scientific-Atlanta requested that the U.S. Patent and
Trademark Office reexamine its patent to consider certain prior
art. Scientific-Atlanta also presented narrowing amendments to
many of the issued patent claims and added several new claims.
The Patent Office granted Scientific-Atlantas request to
reexamine the patent, finding that the new prior art raised a
substantial new question of patentability. The District Court
stayed the litigation until the conclusion of the Patent Office
reexamination and we are awaiting the outcome of the
reexamination. The patent claims in the issued patent relate
generally to silicic optical fiber containing certain
concentrations of erbium and ytterbium together with phosphate.
The patent expires in January 2011. Although we intend to
vigorously contest the claims against us, we cannot predict the
outcome of either the Patent Office reexamination or the
litigation proceeding.
In January 2007, we settled a lawsuit filed in June 2006 in the
United States District Court for the Northern District of
California by Spectra-Physics, Inc., a subsidiary of Newport
Corporation. The plaintiff alleged in its complaint that certain
of our optical fiber laser and amplifier products infringe one
U.S. patent allegedly owned by it.
29
We are a defendant in an action by IMRA America, Inc. filed in
November 2006 in the United States District Court for the
Eastern District of Michigan. The plaintiff alleges in its
complaint that certain unspecified fiber amplifier products that
we produce infringe one U.S. patent allegedly owned by IMRA
America and seeks damages in excess of $10 million, treble
damages for alleged willful infringement and injunctive relief.
The plaintiff also makes a general allegation of inducement of
infringement and contributory infringement that does not specify
any of our products. The patent claims generally relate to an
optical amplification system in which a mode converter receives
an input beam with a nearly diffraction limited mode from a
laser source and converts the mode to match a fundamental mode
of a multi-mode fiber amplifier, which amplifier provides at an
output an amplified beam substantially in the fundamental mode.
The patent expires in June 2017. Although we intend to
vigorously contest the claims against us, we cannot predict the
outcome of the proceeding.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
On October 27, 2006, we held our 2006 annual meeting of
stockholders. Of the 27,411,701 shares for which votes were
cast at the meeting, the votes cast for the proposals at the
annual meeting were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
|
|
|
|
|
|
Proposal
|
|
Votes for
|
|
|
Against
|
|
|
Withheld
|
|
|
Abstentions
|
|
|
Adoption of Amended and Restated
Bylaws
|
|
|
27,411,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of Amended and Restated
Certificate of Incorporation
|
|
|
27,411,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse stock split of our common
stock
|
|
|
27,400,061
|
|
|
|
11,639
|
|
|
|
|
|
|
|
|
|
Ratification of indemnification
agreements with directors and executive officers
|
|
|
27,411,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of our 2006 Incentive
Compensation Plan
|
|
|
27,411,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of our Non-Employee
Directors Stock Plan
|
|
|
27,409,589
|
|
|
|
2,111
|
|
|
|
|
|
|
|
|
|
In addition, 2,600,000 shares of our series B
preferred stock (voting separately as a class) approved the
adoption of our Amended and Restated Certificate of
Incorporation.
Also at the annual meeting, the following directors were
nominated for election to our board of directors and each was
elected to the board for a term ending on the next annual
meeting of stockholders: Valentin P. Gapontsev, John
H. Dalton, Eugene Shcherbakov, Robert A. Blair, Michael C.
Child, William F. Krupke, Igor Samartsev, Henry E. Gauthier and
William S. Hurley. A total of 27,411,700 votes were cast for the
election of each such director, except that 27,409,591 votes
were cast in favor of, and 2,109 votes were withheld for, the
election of Henry E. Gauthier and William S. Hurley.
30
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Price
Range of Common Stock
Our common stock commenced trading on the Nasdaq Global Market
on December 13, 2006 under the symbol IPGP. As of
March 23, 2007, there were approximately
42,916,532 shares of our common stock outstanding held by
approximately 200 holders of record, which does not include
beneficial owners of common stock whose shares are held in the
names of various securities brokers, dealers and registered
clearing agencies.
The following table reflects the high and low sales prices of
our common stock for fiscal 2006 since our initial public
offering as reported by the Nasdaq Global Market:
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
December 31, 2006 (from
December 13, 2006)
|
|
$
|
26.06
|
|
|
$
|
21.61
|
|
Dividends
We have never declared or paid any cash dividends on our capital
stock. We anticipate that we will retain any future earnings to
support operations and to finance the growth and development of
our business. Therefore, we do not expect to pay cash dividends
in the foreseeable future. In addition, current agreements with
certain of our lenders contain, and future loan agreements may
contain, restrictive covenants that generally prohibit us from
paying cash dividends, making any distribution on any class of
stock or making stock repurchases.
Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered Securities
During the past three years, we have sold and issued the
following unregistered securities:
1. In connection with our initial public offering, all
outstanding shares of our series A preferred stock
converted in to 359,463 shares of our common stock, all
outstanding shares of our series B preferred stock
converted into 7,252,927 shares of our common stock and all
outstanding shares of our series D preferred stock
converted into 1,683,168 shares of our common stock.
2. On December 15, 2004, we sold 66,000 shares of
our common stock to Sujay Shetty, an individual, in exchange for
277,000 shares of IPG Photonics (India) Private Limited
3. Since January 1, 2004, we have granted options to
purchase 3,406,546 shares of our common stock at exercise
prices ranging from $1.50 to $9.60 per share to employees,
consultants and directors under our 2000 Incentive Compensation
Plan, our 2006 Incentive Compensation Plan and our Non-Employee
Directors Stock Plan. From January 1, 2004 through
March 23, 2007, we have issued 1,685,024 shares of our
common stock pursuant to the exercise of stock options for
aggregate consideration of $2.5 million.
The sales of securities described in items (1) and
(2) above were deemed to be exempt from registration
pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. Each of these sales was
to accredited investors, as such term is defined in
Rule 501 of Regulation D. Each of the recipients of
securities in the transactions deemed to be exempt from
registration pursuant to Section 4(2) of the Securities Act
received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be
made pursuant to a registration or an available exemption from
such registration. The issuances of the securities described in
item (3) above were deemed to be exempt from registration
pursuant to either Rule 701 promulgated under the
Securities Act as a transaction pursuant to compensatory benefit
plans approved by our board of directors or, where such
recipients of securities under these compensatory plans were
accredited investors because the recipients were
directors or executive officers of our company, under
Section 4(2) of the Securities Act as
31
transactions by an issuer not involving a public offering. None
of the sales of the securities described in items (1) to
(3) above involved the use of an underwriter, and no
commissions were paid in connection with the sale of any of the
securities that we issued. The sales of these securities were
made without general solicitation or advertising.
The aggregate net proceeds from the sale by us of
6,241,379 shares of our common stock, $0.0001 par
value, in our initial public offering was approximately
$93.2 million. We did not receive any proceeds from the
sale by selling shareholders of 4,108,621 shares of our
common stock sold in the initial public offering. The
representatives for the several underwriters in the offering
were Merrill Lynch & Co. and Lehman Brothers. All of
the shares of common stock sold in the offering were registered
under the Securities Act of 1933 pursuant to a Registration
Statement on
Form S-1
(Reg.
No. 333-136521),
effective December 12, 2006. The offering commenced
December 12 and closed on December 18, 2006. To date,
$44.9 million of our net proceeds from the initial public
offering has been applied. In December 2006, we used
$22.1 million to purchase the series B preferred stock
warrants and repaid $4.5 million of long-term debt in
December 2006. In January 2007, we repaid long-term debt in
Germany and the United States amounting to $18.3 million.
In connection with the offering, we incurred underwriting
discounts of $7.2 million and offering expenses of
$2.6 million. We expect that remaining cash after repayment
of debt will be sufficient to meet our liquidity and capital
needs for the foreseeable future. Pending application of the
remaining net proceeds, we have invested the remaining net
proceeds of the offering in cash, cash equivalents and auction
rate securities with maturities ranging from 30 to 90 days
in accordance with our investment policy. None of our net
proceeds were paid directly or indirectly to directors,
officers, persons owning ten percent or more of our equity
securities, or our affiliates.
Issuer
Purchases of Equity Securities
During the quarter ended December 31, 2006, there were no
repurchases made by us or on our behalf, or by any
affiliated purchasers, of shares of our common stock.
Information
Regarding Equity Compensation Plans
The following table sets forth information with respect to
securities authorized for issuance under our equity compensation
plans as of December 31, 2006:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Compensation Plans
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation Plans Approved
by Security Holders
|
|
|
4,358,827
|
|
|
$
|
2.69
|
|
|
|
3,129,461
|
|
Equity Compensation Plans Not
Approved by Security Holders
|
|
|
33,334
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,392,161
|
|
|
|
|
|
|
|
3,129,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The equity compensation plan not approved by security holders
includes a non-plan grant of stock options by the Board of
Directors in March 2000 to a non-employee advisor. The stock
options were non-qualified stock options to purchase common
stock at an exercise price of $1.50 per share. These
options vested immediately and expire in March 2010.
32
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data should be
read in conjunction with, and is qualified by reference to, our
consolidated financial statements and related notes and
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this Annual Report on
Form 10-K.
The data as of December 31, 2006 and 2005, and for the
years ended December 31, 2006, 2005 and 2004, is derived
from our audited consolidated financial statements and related
notes included elsewhere in this Annual Report on
Form 10-K.
The data as of December 31, 2004, 2003 and 2002, and for
the years ended December 31, 2003 and 2002, is derived from
our audited consolidated financial statements and related notes
not included in this Annual Report on
Form 10-K.
Effective January 1, 2006, we were required to begin
accounting for stock-based payments at fair value, as discussed
in note 2 to the consolidated financial statements. Our
historical results are not necessarily indicative of the results
for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of
Operations Data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
143,225
|
|
|
$
|
96,385
|
|
|
$
|
60,707
|
|
|
$
|
33,740
|
|
|
$
|
22,180
|
|
Cost of sales
|
|
|
79,931
|
|
|
|
62,481
|
|
|
|
42,274
|
|
|
|
38,583
|
|
|
|
23,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
63,294
|
|
|
|
33,904
|
|
|
|
18,433
|
|
|
|
(4,843
|
)
|
|
|
(1,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
6,222
|
|
|
|
3,236
|
|
|
|
2,363
|
|
|
|
2,110
|
|
|
|
19,910
|
|
Research and development
|
|
|
6,544
|
|
|
|
5,788
|
|
|
|
4,831
|
|
|
|
10,063
|
|
|
|
8,383
|
|
General and administrative
|
|
|
14,522
|
|
|
|
10,598
|
|
|
|
8,179
|
|
|
|
9,998
|
|
|
|
13,354
|
|
Other operating expenses(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,288
|
|
|
|
19,622
|
|
|
|
15,373
|
|
|
|
22,171
|
|
|
|
51,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
36,006
|
|
|
|
14,282
|
|
|
|
3,060
|
|
|
|
(27,014
|
)
|
|
|
(52,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,493
|
)
|
|
|
(1,840
|
)
|
|
|
(2,150
|
)
|
|
|
(1,505
|
)
|
|
|
(1,089
|
)
|
Fair value adjustment to
series B warrants(2)
|
|
|
(7,444
|
)
|
|
|
(745
|
)
|
|
|
(615
|
)
|
|
|
(3,664
|
)
|
|
|
2,518
|
|
Other income, net
|
|
|
1,050
|
|
|
|
236
|
|
|
|
196
|
|
|
|
1,647
|
|
|
|
2,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before benefit from
(provision for) income taxes and minority interests in
consolidated subsidiaries
|
|
|
28,119
|
|
|
|
11,933
|
|
|
|
491
|
|
|
|
(30,536
|
)
|
|
|
(48,375
|
)
|
Benefit from (provision for)
income taxes
|
|
|
2,995
|
|
|
|
(4,080
|
)
|
|
|
1,601
|
|
|
|
2,205
|
|
|
|
(1,175
|
)
|
Minority interests in consolidated
subsidiaries
|
|
|
(1,881
|
)
|
|
|
(426
|
)
|
|
|
(80
|
)
|
|
|
121
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
29,233
|
|
|
$
|
7,427
|
|
|
$
|
2,012
|
|
|
$
|
(28,210
|
)
|
|
$
|
(49,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(2.13
|
)
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(2.13
|
)
|
|
|
|
(1) |
|
Due primarily to certain stock-based compensation awarded
primarily in 2000 and 2001, we have recorded significant
stock-based compensation during the years ended
December 31, 2002 and 2003. Those awards became fully
vested during the year ended December 31, 2004. See
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Stock-Based Compensation. |
|
(2) |
|
The change in value of the series B warrants is a non-cash
charge related to recording the increase or decrease in the fair
value of the warrants. The change in fair value for this
derivative instrument is directly related to the probability
that the warrants would have been exercised prior to their
expiration in April 2008. We repurchased these warrants on
December 18, 2006. See Item 7, Managements
Discussion and |
33
|
|
|
|
|
Analysis of Financial Condition and Results of
Operations Factors and Trends That Affect our
Operations and Financial Results Effect of Preferred
Stock On Net Income and Net Income Per Share. |
|
(3) |
|
Amount in 2002 reflects provision for settlement of a contract
with a supplier. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75,667
|
|
|
$
|
8,361
|
|
|
$
|
2,548
|
|
|
$
|
536
|
|
|
$
|
1,379
|
|
Working capital
|
|
|
115,668
|
|
|
|
21,487
|
|
|
|
20,934
|
|
|
|
16,303
|
|
|
|
35,669
|
|
Total assets
|
|
|
232,492
|
|
|
|
115,481
|
|
|
|
110,545
|
|
|
|
105,481
|
|
|
|
117,166
|
|
Long-term debt, including current
portion and a provision for contract settlement
|
|
|
38,367
|
|
|
|
26,081
|
|
|
|
31,454
|
|
|
|
34,268
|
|
|
|
38,143
|
|
Series B warrants
|
|
|
|
|
|
|
14,644
|
|
|
|
13,899
|
|
|
|
13,284
|
|
|
|
9,620
|
|
Convertible redeemable preferred
stock
|
|
|
|
|
|
|
96,348
|
|
|
|
93,997
|
|
|
|
91,646
|
|
|
|
84,194
|
|
Preferred stock
|
|
|
|
|
|
|
4,880
|
|
|
|
4,880
|
|
|
|
5,000
|
|
|
|
5,000
|
|
Stockholders equity (deficit)
|
|
|
158,594
|
|
|
|
(46,504
|
)
|
|
|
(49,038
|
)
|
|
|
(51,947
|
)
|
|
|
(19,516
|
)
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Item 6, Selected Consolidated
Financial Data and our consolidated financial statements
and related notes included in this Annual Report of
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 and manufacture a broad line of high-performance
fiber lasers for diverse applications in numerous markets. Fiber
lasers are a new generation of lasers that combine the
advantages of semiconductor diodes, such as long life and high
efficiency, with the high amplification and precise beam
qualities of specialty optical fibers to deliver superior
performance, reliability and usability at a generally lower
total cost of ownership compared to
CO2
and crystal lasers. Our products are displacing traditional
lasers in many current applications and enabling new
applications for lasers.
Our diverse lines of low, mid and high-power lasers and
amplifiers are used in materials processing, communications,
medical and advanced applications. We sell our products globally
to original equipment manufacturers, or OEMs, system integrators
and end users. We market our products internationally primarily
through our direct sales force and also through agreements with
independent sales representatives and distributors. We have
sales offices in the United States, Germany, Italy, United
Kingdom, Japan, South Korea, India and Russia.
We are vertically integrated such that we design and manufacture
all key components used in our finished products, from
semiconductor diodes to optical fiber preforms, finished fiber
lasers and amplifiers. Our vertically integrated operations
allow us to reduce manufacturing costs, ensure access to
critical components and rapidly develop and integrate advanced
products while protecting our proprietary technology.
Since our formation in 1990 in Russia, we have been focused on
developing and manufacturing high-power fiber lasers and
amplifiers. We established manufacturing and research operations
in Germany in 1994 and in the United States in 1998. In the
following years, we developed numerous OEM customer
relationships for our advanced, active fiber-based products and
generated a substantial majority of our sales from
34
communications companies. Despite the significant economic
downturn in the communications industry during 2001 and 2002, we
invested in developing and manufacturing our own semiconductor
diodes, one of our highest-cost components, rather than
purchasing them from third-party vendors. Also, we developed new
products with higher output levels, targeting new applications
and markets outside of the communications industry, particularly
materials processing.
In December 2006, we completed our IPO of 10,350,000 shares
of common stock at $16.50 per share, comprised of 6,241,379
primary shares and 4,108,621 shares offered by selling
stockholders. In connection with the IPO, all of the outstanding
shares of our preferred stock were converted into an aggregate
of 9,295,558 shares of common stock.
Description
of Our Net Sales, Costs and Expenses
Net sales. We derive net sales primarily from
the sale of fiber lasers and amplifiers. We also sell diode
lasers, communications systems and complementary products. We
develop our products to standard specifications and use a common
set of components within our product architectures. We sell our
products through our direct sales organization and our network
of distributors and sales representatives, as well as system
integrators. We sell our products to OEMs that supply materials
processing laser systems, communications systems and medical
laser systems to end users. We also sell our products to end
users that build their own systems which incorporate our
products or use our products as an energy or light source. Sales
of our products generally are recognized upon shipment, provided
that no obligations remain and collection of the receivable is
reasonably assured.
Our sales cycle varies substantially, ranging from a period of a
few weeks to as long as one year or more. Our scientists and
engineers work closely with OEMs and end users to analyze their
system requirements and select and meet appropriate
specifications. Our major products are based upon a common
technology platform. We continually enhance these and other
products by improving their components as well as by developing
new components. Although it is difficult to predict the life
cycles of our products and what stage of the life cycle our
products are in, we estimate that our major products are in the
early stages of their life cycles. Our sales typically are made
on a purchase order basis rather than through long-term purchase
commitments.
The average selling prices of our products generally decrease as
the products mature. These decreases arise from factors such as
increased competition, the introduction of new products,
increases in unit volumes and market share considerations. In
the past, we have lowered our selling prices in order to
penetrate new markets and applications in which previously it
was not economically feasible for customers to deploy our
products. Furthermore, we offer volume discounts to customers
who buy multiple units. We cannot predict the timing and degree
of these price declines.
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. For example, we
believe that our internally manufactured diodes offer
performance superior to that of commercially available diodes.
Cost of sales also includes personnel costs and overhead related
to our manufacturing and engineering 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, we maintain a
relatively high fixed manufacturing overhead. We cannot adjust
these fixed costs quickly to adapt to rapidly changing market
conditions. Our gross profit, in absolute dollars and as a
percentage of net sales, is greatly impacted by our sales volume
and the corresponding absorption of fixed manufacturing overhead
expenses. Additionally, because many of our products are
customized, we are frequently required to devote significant
engineering resources to the sales process, which we also
include in cost of product sales as incurred.
35
Sales and marketing. Our sales and marketing
expense consists primarily of compensation, costs of
advertising, trade shows, professional and technical
conferences, promotions, travel related to our sales and
marketing operations, related occupancy and equipment costs and
other marketing costs.
Research and development. Our research and
development expense consists primarily of compensation, test and
development expenses related to the design of our products and
certain components, and facilities costs. We use a common
research and development platform for our products. Costs
related to product development are recorded as research and
development expenses in the period in which they are incurred.
General and administrative. Our general and
administrative expense consists primarily of compensation and
associated costs for executive management, finance and other
administrative personnel, outside professional fees, allocated
facilities costs and other corporate expenses.
Fair value adjustment to series B
warrants. In connection with the issuance of our
series B preferred stock in 2000, we issued warrants to
purchase shares of our common stock. In December 2006, we
repurchased the series B warrants with a portion of the
proceeds from our IPO. The fair value adjustment to our
series B warrants was a non-cash benefit or expense
relating to a change in the fair value of the warrants. These
warrants were accounted for as a derivative and were exercisable
only after an initial public offering, a merger or liquidation
or the sale of a majority of our common stock. A change in the
fair value of the warrants was based on a change in the
probability of any of such events occurring prior to the
expiration of the warrants. We incurred a non-cash benefit or
expense each quarter based upon the increase or decrease,
respectively, in the fair value of the warrants until such
warrants were repurchased. Following the IPO we will record no
further adjustments to the fair value of these warrants in our
financial statements because they have been repurchased.
Minority interests in consolidated
subsidiaries. Our financial statements
consolidate the financial results of our subsidiaries, including
the subsidiaries that are not wholly owned by us. We own all of
the stock of our subsidiaries, except for 20% of our Italian
subsidiary, IPG Fibertech S.r.l., 49% of our Russian subsidiary,
NTO IRE-Polus, 20% of our Japanese subsidiary, IPG Photonics
(Japan) Ltd. (IPG Japan), and 10% of our Korean subsidiary, IPG
Photonics (Korea) Ltd. We reduce or increase our net income by
the net income or loss, respectively, attributable to the
minority ownership interest in such subsidiaries. In the event
that any losses attributable to the minority stockholders of
these subsidiaries exceed the minority interest in the equity
capital of the subsidiaries, we recognize the amount of such
excess and any further losses attributable to the minority
stockholders in full in our consolidated statements of
operations because either the minority stockholders do not have
the ability to absorb such losses or they are not obligated to
do so. Such excess losses historically have not been significant
and we do not expect them to be significant in future periods.
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. From 2002 to 2006, our net sales
grew from $22.2 million to $143.2 million,
representing a compound annual growth rate of approximately 59%.
The principal drivers of our net sales growth have been
(i) introduction of new products, including our high-power
lasers, and increasing demand for our products, fueled by the
decreasing average cost per watt of output power, (ii) the
expansion of our product line into higher output power levels,
(iii) the growing market acceptance of fiber lasers,
(iv) the development of new applications for our products
and new OEM customer relationships, and, to a lesser extent,
(v) the level of investment by communications system
providers for broadband applications. While we believe we have
multiple opportunities for additional net sales growth, we do
not expect our net sales percentage growth rates to continue at
rates as high as those we have historically experienced. Our
annual revenue growth rates have decreased from 80% in 2004 to
59% in 2005 and 49% in 2006. We experienced periods of rapid
growth from 1998 to 2000 and from 2002 to the present, as well
as a period when net sales decreased in 2001 and 2002 following
the decline in the communications market. Since 2002, we have
diversified our end markets and reduced our reliance on any
particular industry.
36
In planning our business, we take into account the cyclical
nature of some of the end markets that we serve, as well as the
longer-term historical patterns in the development of our
business. For example, our net sales growth from materials
processing applications could slow if there is a decline in
investment in machinery and equipment used in manufacturing. Net
sales derived from communications sales were adversely affected
following the increase in inventory levels of communications
devices in 2000 and 2001. Furthermore, net sales can be affected
by the time taken to qualify our products for use in new
applications in the end markets that we serve. The adoption of
our products by a new customer or qualification in a new
application can lead to an increase in net sales for a period,
which may then slow until we further penetrate new markets or
customers.
Our net sales have historically fluctuated from quarter to
quarter. The increase and decrease in sales from a prior quarter
can be affected by the timing of orders received from customers,
the shipment, installation and acceptance of products at our
customers facilities, the mix of OEM orders and one-time
orders for products with large purchase prices, and seasonal
factors such as the purchasing patterns and levels of activity
throughout the year in the regions where we operate.
Historically, our net sales have been higher in the second half
of the year than in the first half of the year.
Gross margin. In the last three years our
gross margins have increased from 30.4% in 2004 to 35.2% in 2005
and 44.2% in 2006. Our total gross margin in any period can be
affected by total net sales in any period, product mix, that is,
the percentage of our revenue in that period that is
attributable to higher or lower-power products, and by other
factors, some of which are not under our control. Due to the
fact that we have high fixed costs, our costs are difficult to
adjust in response to changes in demand. Therefore, our
manufacturing costs as a percentage of net sales are volatile
and can increase or decrease depending on total net sales
reported in a period. Our product mix affects our margins
because the selling price per watt is higher for low and
mid-power devices than for high-power devices. The overall cost
of high-power lasers may be partially offset by improved
absorption of fixed overhead costs associated with sales of
larger volumes of higher-power products. We regularly review our
inventory for items that have been rendered obsolete or
determined to be excess, and any write-off of such obsolete or
excess inventory affects our gross margins.
The factors that can influence the gross margins derived from
sales of any individual product include the following:
|
|
|
|
|
factors that affect the prices we can charge, including the
features and performance of our products, their output power,
the nature of the end user and application, and competitive
pressures;
|
|
|
|
factors that affect the cost of our net sales, including the
cost of raw materials and components, manufacturing costs and
shipping costs;
|
|
|
|
production volumes of specific product lines; and
|
|
|
|
in the case of our OEM customers, the type of market that they
serve and the competitive pricing pressures faced by our OEM
customers.
|
Cost of diodes. Prior to 2004, we used
semiconductor diodes purchased from a third-party supplier. In
2004, we began production at our semiconductor diode
manufacturing facility, which enabled us to significantly reduce
the cost of our semiconductor diodes and eliminate reliance upon
suppliers for this component. For many of our products,
particularly at higher power levels, the cost of diodes is the
most important factor in determining the price of the product.
In addition, we have increased the output power of an individual
semiconductor diode, further reducing our cost per watt. We do
not anticipate that any further reductions in the cost of diodes
will be as significant as we have experienced in the past.
Sales and marketing expense. We expect to
continue to expand our worldwide direct sales organization,
build and expand applications centers, hire additional personnel
involved in marketing in our existing and new geographic
locations and otherwise increase expenditures on sales and
marketing activities in order to support the growth in our net
sales. As such, we expect that our sales and marketing expenses
will increase in the aggregate.
Research and development expense. We plan to
continue to invest in research and development to improve our
existing components and products and develop new components and
products. We plan to
37
increase the personnel involved in research and development and
expect to increase other research and development expenses. As
such, we expect our research and development expenses will
increase in the aggregate.
General and administrative expense. We expect
our general and administrative expenses to continue to increase
as we expand headcount to support the growth of the Company,
public company reporting obligations and regulatory compliance,
incur higher insurance expenses related to directors and
officers insurance and continue to invest in our financial
reporting systems. Further, legal expenses may increase in
response to pending and any future litigation or intellectual
property matters, the timing and amount of which may vary
substantially from quarter to quarter.
Major customers. 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 29% in 2006, 37% in 2005
and 37% in 2004. Sales to our largest customer accounted for
10%, 13% and 20% of our net sales in 2006, 2005 and 2004,
respectively. We seek to add new customers and to expand our
relationships with existing customers. We anticipate that the
composition of our net sales to our significant customers will
continue to change. If any of our significant customers were to
substantially reduce their purchases from us, our results would
be adversely affected.
Effect of preferred stock on net income and net income per
share. Our net income per share computations
historically have been impacted by our convertible preferred
stock, convertible debt and the series B warrants which
were outstanding prior to our IPO in December 2006. We no longer
have any such convertible debt or equity instruments
outstanding. As such, our net income per share computations will
no longer be adjusted for the effects of these convertible
instruments for the periods following the completion of the IPO.
In connection with the issuance of our series B preferred
stock, we issued warrants (the series B warrants) to
purchase, in the aggregate, shares of our common stock valued at
$47.5 million at an equivalent per-share price of 50% of
the fair value on the date of an initial public offering of
common stock or the sale, merger or liquidation of our company.
The series B warrants constituted freestanding derivatives
that were accounted for as liabilities at fair value and the
changes in fair value of the series B warrants were
recorded as non-cash expenses or benefits. Any increase in the
fair value of the series B warrants had the effect of
reducing our reported net income and net income per share. For
the years ended December 31, 2006, 2005, and 2004, the fair
value of the series B warrants increased by
$7.4 million, $0.7 million and $0.6 million,
respectively. We repurchased the series B warrants in
December 2006 and we recorded incremental expense associated
with the series B warrants totaling approximately
$3.1 million, representing the increase in fair value from
the carrying value on the most recent measurement date to the
$22.1 million repurchase value. In subsequent quarters, we
will not recognize any further income or expense with respect to
the series B warrants.
The terms of our series A preferred stock and series B
preferred stock included price protection or anti-dilution
features that constituted a contingent beneficial conversion
feature (or deemed dividend) that were recorded upon the
resolution of the contingency, the completion of our IPO. The
deemed dividend did not reduce net income but did reduce net
income applicable to common stockholders in the computation of
net income (loss) per share. We recorded a deemed dividend
totaling approximately $18.3 million in the quarter ended
December 31, 2006, the quarter in which our IPO occurred.
No further deemed dividends associated with the beneficial
conversion features related to our series A preferred stock
or series B preferred stock will be required in subsequent
quarters as all outstanding shares of our series A
preferred stock and series B preferred stock converted into
shares of our common stock upon completion of our IPO.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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
38
to an inherent degree of uncertainty. On an ongoing basis we
re-evaluate our judgments and estimates including those related
to inventories, income taxes and the fair value of certain debt
and equity instruments including stock-based compensation. 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
result in material effects on our operating results and
financial position. The accounting policies described below are
those which, in our opinion, involve the most significant
application of judgment, or involve complex estimation, and
which could, if different judgments or estimates were made,
materially affect our reported results of operations and
financial position.
Revenue recognition. Our net sales are
generated from sales of fiber lasers, fiber amplifiers, diode
lasers and complementary products. Our products are used in a
wide range of applications by different types of end users or
used as components or integrated into systems by OEMs or system
integrators, and are often used as
sub-assemblies
required for end products manufactured by or for the customer.
We also sell communications systems that include our fiber
lasers and amplifiers as components.
We recognize revenue in accordance with SEC Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition.
SAB No. 104 requires that four basic criteria be met
before revenue can be recognized: (i) persuasive evidence
of an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the fee is fixed or
determinable; and (iv) collectibility is reasonably
assured. Revenue from the sale of our products is generally
recognized upon shipment, provided that the other revenue
recognition criteria have been met. We have no obligation to
provide upgrades, enhancements or customer support subsequent to
the sale. Revenue from orders with multiple deliverables is
divided into separate units of accounting when certain criteria
are met. The consideration for the arrangement is then allocated
to the separate units of accounting based on their relative fair
values. We defer the revenue on multiple element arrangements if
the fair values of all deliverables are not known or if customer
acceptance is contingent on delivery of specified items or
performance conditions. Applicable revenue recognition criteria
are then applied separately for each separate unit of accounting.
Returns and customer credits are infrequent and are recorded as
a reduction to revenue. Rights of return are generally not
included in sales arrangements. Generally, we receive a customer
purchase order as evidence of an arrangement and product
shipment terms are free on board (F.O.B.) shipping point.
Periodically, our revenue arrangements include customer
acceptance clauses. Revenue is deferred until customer
acceptance has been obtained.
Inventory. Inventory is stated at the lower of
cost
(first-in,
first-out method) or market. Inventory includes parts and
components that may be specialized in nature and subject to
rapid obsolescence. We maintain a reserve for inventory items to
provide for an estimated amount of excess or obsolete inventory.
The reserve is based upon a review of inventory materials on
hand, which we compare with estimated future usage. 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 unique 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. In addition, during
2005 we recorded a charge against the remaining diodes that had
been procured from third parties, other components and finished
goods that totaled $1.9 million.
Stock-based compensation. Prior to
January 1, 2006, we accounted for stock-based employee
compensation arrangements in accordance with the intrinsic value
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Therefore,
we did not record any compensation expense for stock options we
granted to our employees where the exercise price was at least
equal to the fair value of
39
the stock on the date of grant. Stock-based compensation is
included in the following financial statement captions as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of sales
|
|
$
|
127
|
|
|
$
|
4
|
|
|
$
|
218
|
|
Sales and marketing
|
|
|
62
|
|
|
|
1
|
|
|
|
6
|
|
Research and development
|
|
|
43
|
|
|
|
1
|
|
|
|
669
|
|
General and administrative
|
|
|
301
|
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
533
|
|
|
$
|
7
|
|
|
$
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the adoption of SFAS No. 123(R), we complied
with the disclosure requirements of SFAS No. 123 and
SFAS No. 148, which required that we disclose our pro
forma net income or loss and net income or loss per common share
as if we had expensed the options at fair value. As a private
company, we applied the provisions of SFAS No. 123
using the minimum value computations, which assume no volatility
in the fair value of our common stock underlying employee stock
options. In December 2004, SFAS No. 123 was amended
(now referred to as SFAS No. 123(R)), and we account
for any newly issued, modified or settled stock awards on or
after January 1, 2006 at fair value.
We adopted SFAS No. 123(R) using the prospective
transition method. Under this method, compensation costs
recorded during 2006 include: (i) compensation costs for
all share-based payment awards granted prior to, but not yet
vested as of, January 1, 2006, based on the intrinsic value
in accordance with the original provisions of APB 25; and
(ii) compensation costs for all share-based payment awards
granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). We allocate and record
stock-based compensation expense on a straight-line basis over
the requisite service period.
Under SFAS No. 123(R), we calculate the fair value of
stock option grants using the Black-Scholes option pricing
model. Determining the appropriate fair value model and
calculating the fair value of stock-based payment awards require
the use of highly subjective assumptions, including the expected
life of the stock-based payment awards and stock price
volatility. The assumptions used in calculating the fair value
of stock-based payment awards represent managements best
estimates, but the estimates involve inherent uncertainties and
the application of management judgment. As a result, if factors
change and we use different assumptions, our stock-based
compensation expense could be materially different in the
future. The weighted average assumptions used in the
Black-Scholes model were 6.25 years for the expected term,
65% for the expected volatility, 4.75% for the risk-free rate
and 0% for dividend yield for 2006. Because there is currently
no public market for our common stock, we are unable to use
actual price volatility or option life as input assumptions
within our Black-Scholes valuation model.
The weighted average expected option term for 2006 reflects the
application of the simplified method set forth in Securities and
Exchange Commission Staff Accounting Bulletin, or SAB,
No. 107, Shared-Based Payment, which was issued in
March 2005. The simplified method defines the life as the
average of the contractual term of the options and the weighted
average vesting period for all option tranches.
Because there was no public market for our common stock prior to
December 12, 2006, the fair value of our common stock was
determined by our board of directors based on consideration of
relevant factors. Factors considered by our board of directors
included:
|
|
|
|
|
independent valuation reports that we received;
|
|
|
|
the
agreed-upon
consideration paid in arms-length transactions in the form of
convertible preferred stock and common stock;
|
|
|
|
the superior rights and preferences of securities senior to our
common stock at the time of each grant;
|
40
|
|
|
|
|
historical and anticipated fluctuations in our net sales and
results of operations, which reflect our dependence on certain
key customers, the cyclical nature of certain of our end markets
and market acceptance of our products; and
|
|
|
|
the risk of owning our common stock and its non-liquid nature.
|
For the calculation of expected volatility, because there was no
public market for our common stock prior to December 12,
2006, and therefore we lack company-specific historical and
implied volatility information, we based our estimate of
expected volatility on the expected volatility of similar
entities whose share prices are publicly available. We used the
following factors to identify similar public entities: industry,
stage of life cycle, size and profitability. We intend to
continue to consistently apply this process using the same or
similar entities until a sufficient amount of historical
information regarding the volatility of our own share price
becomes available, or unless circumstances change such that the
identified entities are no longer similar to us. In this latter
case, more suitable, similar entities whose share prices are
publicly available would be utilized in the calculation.
As stock-based compensation expense recorded in our statement of
operations for 2006 is based on options ultimately expected to
vest, it has been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
stock-based compensation recorded for 2006 reflects an estimated
forfeiture rate of 5%. For purposes of preparing the pro forma
information required under SFAS No. 123 for the
periods prior to 2006, we accounted for forfeitures as they
occurred.
Income taxes. We account for income taxes
under the provisions of SFAS No. 109, Accounting
for Income Taxes. Under this method, we determine the
deferred tax assets and liabilities based upon the difference
between the financial statements and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to affect taxable income. The
tax consequences of most events recognized in the current
years financial statements are included in determining
income taxes currently payable. However, because tax laws and
financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, net sales, expenses,
gains and losses, differences arise between the amount of
taxable income and pretax financial income for a year and the
tax basis of assets or liabilities and their reported amounts in
the financial statements. Because we assume that the reported
amounts of assets and liabilities will be recovered and settled,
respectively, a difference between the tax basis of an asset or
a liability and its reported amount in the balance sheet will
result in a taxable or a deductible amount in some future years
when the related assets or liabilities are settled or the
reported amount of the assets are recovered, giving rise to a
deferred tax asset or liability. We must then periodically
assess the likelihood that our deferred tax assets will be
recovered from our future taxable income, and, to the extent we
believe that it is more likely than not our deferred tax assets
will not be recovered, we must establish a valuation allowance
against our deferred tax assets.
We have used our net operating losses in Germany that we have
previously generated and we are now paying income taxes in
Germany. In 2006, our valuation allowances related to deferred
tax assets were reduced by $17.7 million. The reduction
included $4.6 million related to operating losses used and
timing differences that were reversed during the year and
$13.1 million of valuation allowances released in the
fourth quarter of 2006 after we determined that the underlying
deferred tax assets primarily consisting of U.S. Federal
operating loss carryforwards were more likely than not to be
realized. As of December 31, 2006, the remaining valuation
allowances were $1.7 million, primarily provided against
U.S. state net operating loss carryforwards. The release of
the remaining valuation allowance will depend upon the continued
improvement in results of our U.S. operations.
Fair value adjustment of warrants. In
connection with the issuance of our series B preferred
stock, we issued warrants to purchase, in the aggregate, shares
of our common stock valued at $47.5 million at an
equivalent per-share price of 50% of the fair value on the date
of an initial public offering of our common stock or the sale,
merger or liquidation of our company. The warrants were treated
as a free-standing derivative under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Under SFAS No. 133, the Company was
required to record a non-cash expense or benefit each quarter,
based upon the increase or
41
decrease in the fair value of the warrants, until such warrants
were repurchased. The warrants were repurchased in 2006 and no
further charges will be incurred relative to changes in their
fair market 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except percentages)
|
|
|
Net sales
|
|
$
|
143,225
|
|
|
|
100.0
|
%
|
|
$
|
96,385
|
|
|
|
100.0
|
%
|
|
$
|
60,707
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
79,931
|
|
|
|
55.8
|
|
|
|
62,481
|
|
|
|
64.8
|
|
|
|
42,274
|
|
|
|
69.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
63,294
|
|
|
|
44.2
|
|
|
|
33,904
|
|
|
|
35.2
|
|
|
|
18,433
|
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
6,222
|
|
|
|
4.4
|
|
|
|
3,236
|
|
|
|
3.4
|
|
|
|
2,363
|
|
|
|
3.9
|
|
Research and development
|
|
|
6,544
|
|
|
|
4.6
|
|
|
|
5,788
|
|
|
|
6.0
|
|
|
|
4,831
|
|
|
|
8.0
|
|
General and administrative
|
|
|
14,522
|
|
|
|
10.1
|
|
|
|
10,598
|
|
|
|
11.0
|
|
|
|
8,179
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,288
|
|
|
|
19.1
|
|
|
|
19,622
|
|
|
|
20.4
|
|
|
|
15,373
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
36,006
|
|
|
|
25.1
|
|
|
|
14,282
|
|
|
|
14.8
|
|
|
|
3,060
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,493
|
)
|
|
|
(1.0
|
)
|
|
|
(1,840
|
)
|
|
|
(1.9
|
)
|
|
|
(2,150
|
)
|
|
|
(3.5
|
)
|
Fair value adjustment to
series B warrants
|
|
|
(7,444
|
)
|
|
|
(5.2
|
)
|
|
|
(745
|
)
|
|
|
(0.8
|
)
|
|
|
(615
|
)
|
|
|
(1.0
|
)
|
Other income, net
|
|
|
1,050
|
|
|
|
0.7
|
|
|
|
236
|
|
|
|
0.2
|
|
|
|
196
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before benefit from
(provision for) income taxes and minority interests in
consolidated subsidiaries
|
|
|
28,119
|
|
|
|
19.6
|
|
|
|
11,933
|
|
|
|
12.3
|
|
|
|
491
|
|
|
|
0.8
|
|
Benefit from (provision for)
income taxes
|
|
|
2,995
|
|
|
|
2.1
|
|
|
|
(4,080
|
)
|
|
|
(4.2
|
)
|
|
|
1,601
|
|
|
|
2.6
|
|
Minority interests in consolidated
subsidiaries
|
|
|
(1,881
|
)
|
|
|
(1.3
|
)
|
|
|
(426
|
)
|
|
|
(0.4
|
)
|
|
|
(80
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,233
|
|
|
|
20.4
|
|
|
$
|
7,427
|
|
|
|
7.7
|
|
|
$
|
2,012
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2006 to Year Ended
December 31, 2005
Net sales. Our net sales increased by
$46.8 million, or 48.6%, to $143.2 million in 2006
from $96.4 million in 2005. This increase was primarily
attributable to a higher volume of sales of fiber lasers in
materials processing applications, where net sales increased by
$42.7 million or, by 91.0% of the total increase in net
sales. Medical applications accounted for 8.1% of the total
increase in net sales. These increases were partially offset by
a slight decrease in sales in communications applications. The
growth in net sales resulted primarily from increased market
acceptance of high-power fiber lasers and the continued growth
in sales of low and medium-power fiber lasers for materials
processing. Net sales growth in medical applications resulted
from an increase in net sales for aesthetic skin procedures.
Cost of sales and gross margin. Our costs of
sales increased by $17.4 million, or 27.8%, to
$79.9 million in 2006 from $62.5 million in 2005, as a
result of the increased sales volume. Our gross margin increased
to 44.2% in 2006 from 35.2% in 2005 primarily because of a
reduction in the cost of our internally manufactured optical
components, including semiconductor diodes, more favorable
absorption of fixed manufacturing costs as a result of higher
production volumes.
42
Sales and marketing expense. Sales and
marketing expense increased by $3.0 million, or 93.8%, to
$6.2 million in 2006 from $3.2 million in 2005,
primarily as a result of a $1.5 million increase in
personnel costs due to the expansion of our worldwide direct
sales organization and increases in related sales commissions,
compensation, travel and selling expenses related to the cost of
products used for demonstration purposes. As we continue to
expand our sales presence and organization worldwide we expect
expenditures on sales and marketing to continue to increase.
Research and development expense. Research and
development expense increased by $0.7 million, or 12.1%, to
$6.5 million in 2006 from $5.8 million in 2005. This
increase is primarily due to a $0.7 million increase in
personnel costs related to higher headcount and increased
research and development activity. Research and development
activity continues to focus on enhancing the performance of our
internally manufactured diodes, optical fibers and components,
refining production processes to improve manufacturing yields of
optical components, testing new applications for our existing
products and developing new products.
General and administrative expense. General
and administrative expenses increased by $3.9 million, or
36.8%, to $14.5 million in 2006 from $10.6 million in
2005, primarily due to a $0.8 million increase in legal,
consulting and accounting costs attributable to new litigation,
internal control compliance and financial reporting, a
$0.7 million increase in personnel-related expenses, a
$0.6 million increase in foreign exchange losses
attributable to the depreciation of the U.S. Dollar
relative to the Euro and Japanese Yen and a $0.5 million
increase in depreciation.
Interest expense, net. Interest expense, net
decreased by $0.3 million, or 16.7%, to $1.5 million
in 2006 from $1.8 million in 2005, resulting from the
repayment of term debt as well as lower utilization of our
German
line-of-credit
facilities during 2006. We expect to generate net interest
income in 2007 as a result of interest income generated from
investing the net proceeds from our recent IPO, and reduction of
interest expense related to repayment of our U.S. and German
term debt and a reductions in the amounts drawn under our
line-of-credit
facilities, which will be partially offset by interest on the
subordinated notes that we issued to our series B preferred
stockholders in connection with the IPO.
Fair value adjustment to series B
warrants. The fair value adjustment of the
series B warrants increased by $6.7 million to
$7.4 million in 2006 as a result of our IPO in December
2006. We will not incur any further charges related to the fair
value adjustment of the series B warrants after 2006 as we
repurchased the warrants using part of the proceeds from the IPO.
Benefit from (provision for) income taxes. Our
benefit from income taxes in 2006 was $3.0 million, which
resulted from a reduction in our valuation allowance primarily
related to the use of operating losses during the year and also
the release of valuation allowances of $13.1 million
related to deferred tax assets that we have determined are more
likely than not to be realized. This compared to a provision for
income taxes of $4.1 million in 2005. Our effective tax
rate in 2006 was a benefit of 10.7% as compared to a provision
of 34.2% in 2005. Excluding the impact of the release of the
valuation allowance and the $7.4 million fair value
adjustment to the series B warrants, which is not tax
deductible, our effective tax rate was 28.3% in 2006 compared to
32.2% in 2005. The decrease in effective tax rates is primarily
due to changes in the relative amounts of our taxable income
generated throughout various tax jurisdictions and benefits
arising from an effective rate on income arising in the United
States of zero percent because the income was offset by the use
of operating losses against which we had previously established
a valuation allowance. As a result of releasing the valuation
allowance, we expect an effective tax rate of approximately 39%
in 2007.
Net income. Net income increased by
$21.8 million, or over 100%, to $29.2 million for the
year ended December 31, 2006 from $7.4 million for the
same period in 2005. Our net income as a percentage of our net
sales increased by 12.7 percentage points to 20.4% for the
year ended December 31, 2006 from 7.7% for the same period
in 2005.
Comparison
of Year Ended December 31, 2005 to Year Ended
December 31, 2004
Net sales. Our net sales increased by
$35.7 million, or 58.8%, to $96.4 million in 2005 from
$60.7 million in 2004. This increase was primarily
attributable to higher sales of fiber lasers in the materials
43
processing market, where net sales increased by
$18.4 million or 51.5% of the total increase in net sales.
Communications, medical and advanced applications each accounted
for an approximately equal portion of the remaining increase in
net sales. The growth in net sales resulted primarily from
increased market acceptance of fiber lasers in materials
processing applications, particularly high-power fiber lasers,
and to a lesser extent, broadband systems rollouts that
increased fiber amplifier sales. In addition, sales for medical
applications grew by almost $5.9 million to
$7.4 million in 2005 due principally to qualification of
our products by a customer in 2004.
Cost of sales and gross margin. Our cost of
sales increased by $20.2 million, or 47.8%, to
$62.5 million in 2005 from $42.3 million in 2004, as a
result of increased sales volumes. Our gross margin increased to
35.2% in 2005 from 30.4% in 2004 because of a reduction in the
cost of our internally manufactured components, including
semiconductor diodes, and more favorable absorption of fixed
manufacturing costs as a result of higher production volumes.
The increase in gross margin was partially offset by higher
manufacturing and labor costs and a shift in product mix to
sales of lower-margin high-power fiber lasers and lower-margin
fiber amplifiers as well as slightly reduced sales of
higher-margin low-power fiber lasers.
Sales and marketing expense. Sales and
marketing expense increased by $0.8 million, or 33.3%, to
$3.2 million in 2005 from $2.4 million in 2004 as a
result of a $0.4 million increase in personnel costs
associated with the increase in sales commissions and the
expansion of our worldwide direct sales organization.
Research and development expense. Research and
development expense increased by $1.0 million, or 20.8%, to
$5.8 million in 2005 from $4.8 million in 2004. The
increase in our research and development expense was primarily
attributable to a $1.9 million increase in personnel costs
due to increased headcount, which was partially offset by a
decrease in other development expenses.
General and administrative expense. General
and administrative expense increased by $2.4 million, or
29.3%, to $10.6 million in 2005 from $8.2 million in
2004, primarily due to a $2.7 million increase in personnel
costs, partially offset by a $0.5 million decrease in
certain other expenses such as travel and lease expenses.
Interest expense, net. Interest expense, net
decreased by $0.4 million, or 18.2%, to $1.8 million
in 2005 from $2.2 million in 2004. The decrease resulted
from the repayment of debt.
Fair value adjustment to series B
warrants. The fair value adjustment of the
series B warrants increased by $0.1 million to
$0.7 million in 2005 from $0.6 million in 2004 due to
an increase in the probability of their exercise as well as a
lower total discount related to the time value of money.
Benefit from (provision for) income taxes. Our
provision for income tax expense increased by $5.7 million,
to $4.1 million in 2005 from a benefit of $1.6 million
in 2004, representing an effective tax rate of 32.2% in 2005 and
more than negative 100% in 2004. The $1.6 million benefit
in 2004 largely reflects the reversal of $1.6 million in
reserves for prior year taxes as a result of the completion of a
tax audit in the United States. The relative amounts of our
taxable income generated between Germany and the United States
have a significant impact on our effective rate. In each of 2005
and 2004, we did not provide any benefits on our operating
losses in the United States, whereas in Germany we have
historically been profitable and recorded a tax provision
without a valuation allowance. Absent the effects of the
valuation allowance, our blended worldwide effective tax rate is
estimated to have been approximately 40% in each of 2005 and
2004.
Net income. Our net income increased by
$5.4 million to $7.4 million in 2005 from
$2.0 million in 2004 and our net income as a percentage of
our net sales increased by 4.4 percentage points to 7.7% in
2005 from 3.3% in 2004.
Liquidity
and Capital Resources
Our principal sources of liquidity as of December 31, 2006
consisted of cash and cash equivalents of $75.7 million and
unused credit lines and overdraft facilities of
$13.8 million. This compares to cash and cash equivalents
of $8.5 million and unused credit lines and overdraft
facilities of $5.0 million as of December 31,
44
2005. Our total working capital as of December 31, 2006 was
$115.7 million, compared to $21.5 million as of
December 31, 2005.
In December 2006, we completed and received $93.2 million
in proceeds from our IPO (net of $9.8 million of expenses
related to the offering). In December 2006, we used
$22.1 million of the net proceeds to purchase the
series B warrants and $4.5 million to repay long-term
debt. In the first quarter of 2007, we used an additional
$18.3 million of proceeds to repay substantially all of our
bank term debt except for the $20.0 million subordinated,
unsecured, variable-rate notes, which mature in 2009. We expect
that the remaining cash after repayment of debt and cash
generated from operations will be sufficient to meet our
liquidity and capital needs for the foreseeable future. Our
future long-term capital requirements will depend on many
factors including our rate of net sales growth, the timing and
extent of spending to support development efforts, the expansion
of our sales and marketing activities, the timing and
introductions of new products, the need to ensure access to
adequate manufacturing capacity and the continuing market
acceptance of our products. We have made no arrangements to
obtain additional financing, and there is no assurance that such
additional financing, if required or desired, will be available
in amounts or on terms acceptable to us, if at all.
Although we repaid substantially all our fixed-term debt with a
portion of the proceeds of the IPO in the first quarter of 2007,
we intend to maintain availability under our lines of credit to
finance our short term working capital requirements that may
arise from time to time.
The following table details our
line-of-credit
facilities as of December 31, 2006:
|
|
|
|
|
|
|
|
|
Description
|
|
Available Principal
|
|
Interest Rate
|
|
Maturity
|
|
Security
|
|
Euro Overdraft Facility
|
|
Euro 4.9 million
($6.5 million)
|
|
7.5% - 8.6% depending upon
principal outstanding
|
|
May 2007 to
December 2010
|
|
Common pool of assets of German
subsidiary
|
U.S. Demand Line(1)
|
|
80% of eligible receivables, up to
$7 million
|
|
LIBOR plus 3.0%
|
|
June 2008
|
|
All assets held by our
U.S. parent company (IPG Photonics Corporation)
|
Japanese Overdraft Facility
|
|
JPY 600 million
($5 million)
|
|
2.0% - 2.13%
|
|
September 2007
|
|
Pool of assets of Japanese
subsidiary
|
|
|
|
(1) |
|
This loan has a minimum debt service coverage covenant, which
requires that we maintain a ratio of not less than 1.20:1.00 of
(i) earnings before interest, taxes, depreciation and
amortization, plus stock-based compensation and fair value
adjustments to the series B warrants, less unfunded capital
expenditures and cash taxes paid, divided by (ii)(a) current
maturities of long-term debt and capital leases, plus
(b) interest expense, measured as of each fiscal quarter.
We are also required to maintain a ratio of not less than
2.50:1.00 of current assets to current liabilities and a ratio
of not less than 2.01:1.00 of total liabilities to tangible net
worth, measured each fiscal quarter. |
Operating activities. Cash provided by
operating activities was $19.2 million and
$13.6 million in the years ended December 31, 2006 and
2005, respectively. The increase in cash provided by operating
activities of $5.6 million in 2006 as compared to 2005 was
primarily due to an increase in net income of $21.8 million
and an increase in cash resulting from higher income taxes and
accounts payable. This increase in cash generated from our
operations was partially offset by cash used to purchase
inventory and the repayment of $5.1 million of convertible
notes payable, originally issued to a vendor in settlement of a
contract dispute. Cash flows generated by operating activities
were $13.6 million in the year ended December 31, 2005
as compared to cash generated by operating activities of
$6.2 million in the year ended December 31, 2004.
Given our vertical integration, rigorous and time-consuming
testing procedures for both internally manufactured and
externally purchased components and the lead time required to
manufacture components used in our finished product, the rate at
which we turn inventory has historically been low when compared
to our cost of sales. We do not expect this to change
significantly in the future and believe that we will have to
maintain a relatively high level of inventory compared to our
cost of sales. As a result we continue to expect to have a
significant amount of working capital invested in inventory and
for changes in our level of inventory to lead to an increase in
cash generated from our operations when it is sold or a decrease
in cash generated
45
from our operations at times when the amount of inventory is
increasing. A reduction in our level of net sales or the rate of
growth of our net sales from their current levels would mean
that the rate which we are able to convert our inventory into
accounts receivable would decrease.
Investing activities. Cash used in investing
activities was $19.1 million in 2006 as compared to cash
used in investing activities of $8.6 million in 2005. The
cash used in investing activities in 2006 was related to capital
expenditures on plant and machinery and equipment of
$20.4 million, primarily in the United States and Germany,
which was partially offset by loan repayments from certain of
our stockholders. In 2005, capital expenditures of
$16.0 million were offset by a one-time cash inflow from
investing activities of $6.6 million related to the release
of restricted cash. We expect to continue to invest in plant and
machinery and to use a significant amount of our cash generated
from operations to finance capital expenditures. The timing and
extent of any capital expenditures in and between periods can
have a significant effect on the cash flow. Many of the capital
expenditure projects that we undertake have long lead times and
are difficult to cancel or defer in the event that our net sales
are reduced or if our rate of growth slows, with the result that
it would be difficult to defer committed capital expenditures to
a later period. Cash used in investing activities was
$8.6 million in the year ended December 31, 2005 as
compared to cash used in investing activities of
$3.9 million in the year ended December 31, 2004.
Financing activities. Cash provided by
financing activities was $66.9 million in 2006 as compared
to $1.1 million in 2005. The increase in cash from
financing activities was primarily attributable to net proceeds
of $93.2 million from our IPO in December 2006, partially
offset by the purchase of the series B warrants for
$22.1 million and $4.3 million that we used to repay
long-term debt. The primary source of cash in financing
activities in 2005 was $1.0 million proceeds from the
exercise of stock options. Cash provided by financing activities
was $1.1 million in the year ended December 31, 2005
as compared to cash used in financing activities of
$0.4 million in the year ended December 31, 2004.
Contractual
Obligations
The following table describes our contractual obligations as of
December 31, 2006 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating lease obligations
|
|
$
|
3,870
|
|
|
$
|
1,574
|
|
|
$
|
1,880
|
|
|
$
|
416
|
|
|
$
|
|
|
Long-term debt obligations
(including interest)
|
|
|
44,848
|
|
|
|
9,913
|
|
|
|
31,708
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,718
|
|
|
$
|
11,487
|
|
|
$
|
33,588
|
|
|
$
|
3,643
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total long-term debt obligations included in the table
above, $18.3 million were repaid in January 2007. Excluded
from the table above are purchase commitments for property,
plant and equipment entered into in the first quarter of 2007.
Our annual minimum purchases under these commitments are
$6.4 million, $1.5 million and $1.0 million in
2007, 2008 and 2009, respectively.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes a
recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transitions. FIN 48 will be effective for us beginning
January 1, 2007. We are currently analyzing the effects, if
any, of the adoption of FIN 48. We do not anticipate that
adoption of FIN 48 to have a material impact on our results
of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which addresses how
companies should measure fair value when they are required to
use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles. The provisions
of SFAS No. 157 are
46
effective for us beginning after January 1, 2008. We have
not yet adopted this pronouncement and we are currently
evaluating the expected impact that the adoption of
SFAS No. 157 will have on our consolidated financial
position and results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, which provides companies with an option to
report selected financial assets and liabilities at fair value.
SFAS No. 159 also establishes presentation and
disclosure requirements relating to the use of fair values
within the financial statements. The provisions of
SFAS No. 159 are effective for us beginning after
January 1, 2008. We have not yet adopted this pronouncement
and are currently evaluating the expected impact that the
adoption of SFAS No. 159 will have on our consolidated
financial position and results of operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk
associated with our cash and cash equivalents and our debt and
foreign exchange rate risk.
Interest rate risk. Our investments have
limited exposure to market risk. To minimize this risk, we
maintain a portfolio of cash, cash equivalents and short-term
investments, consisting primarily of bank deposits, money market
funds and short-term government funds. The interest rates are
variable and fluctuate with current market conditions. Because
of the short-term nature of these instruments, a sudden change
in market interest rates would not be expected to have a
material impact on our financial condition or results of
operations.
Our exposure to market risk also relates to the increase or
decrease in the amount of interest expense we must pay on our
bank debt and borrowings on our bank credit facilities. The
interest rate on our existing bank debt is currently fixed
except for our U.S. demand line of credit. The rates on our
Euro overdraft facilities in Germany and Italy and our Japanese
Yen overdraft facility are fixed for twelve-month periods.
Approximately 82% of our outstanding debt had a fixed rate of
interest as of December 31, 2006. All of our U.S. and
German term debt was repaid in the first quarter of 2007 except
for the $20 million of subordinated notes issued to our
series B stockholders upon completion of our IPO. We do not
believe that a 10% change in market interest rates would have a
material impact on our financial position or results of
operations.
Exchange rates. Due to our international
operations, a significant portion of our net sales, cost of
sales and operating expenses are denominated in currencies other
than the U.S. dollar, principally the Euro and the Japanese
Yen. As a result, our international operations give rise to
transactional market risk associated with exchange rate
movements of the U.S. dollar, the Euro and the Japanese
Yen. Charges related to losses on foreign exchange transactions
are reported as a component of general and administrative
expense and totaled $0.8 million, $0.1 million and
$0.3 million in 2006, 2005 and 2004, respectively.
Historically, we have not utilized any derivative instruments or
other measures to protect us against foreign currency exchange
rate fluctuations. We will continue to analyze our exposure to
currency exchange rate fluctuations and may engage in financial
hedging techniques in the future to attempt to minimize the
effect of these potential fluctuations. However, exchange rate
fluctuations may adversely affect our financial results in the
future.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
This information is incorporated by reference from pages F-1
through F-27 of this report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
47
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Under the supervision of our chief executive officer and our
chief financial officer, our management has evaluated the
effectiveness of the design and operation of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)), as of the end of the
period covered by this Annual Report on
Form 10-K
(the Evaluation Date). Based upon that evaluation,
our chief executive officer and our chief financial officer have
concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms.
Changes
in Internal Controls
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that occurred during the last fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required hereunder is incorporated herein by
reference to our definitive Proxy Statement to be filed pursuant
to Regulation 14A, which Proxy Statement is anticipated to
be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required hereunder is incorporated herein by
reference to our definitive Proxy Statement to be filed pursuant
to Regulation 14A, which Proxy Statement is anticipated to
be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required hereunder is incorporated herein by
reference to our definitive Proxy Statement to be filed pursuant
to Regulation 14A, which Proxy Statement is anticipated to
be filed with the Securities and Exchange Commission within
120 days after December 31, 2006, with the exception
of the information regarding securities authorized for issuance
under our equity compensation plans, which is set forth in
Item 5, Information Regarding Equity Compensation
Plans and is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required hereunder is incorporated herein by
reference to our definitive Proxy Statement to be filed pursuant
to Regulation 14A, which Proxy Statement is anticipated to
be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
48
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required hereunder is incorporated herein by
reference to our definitive Proxy Statement to be filed pursuant
to Regulation 14A, which Proxy Statement is anticipated to
be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
(1) Financial Statements.
See Index to Financial Statements and Schedule on
page F-1.
(2) Financial Statement Schedules.
See Index to Financial Statements and Schedule on
page F-1.
All schedules are omitted because they are not applicable or the
required information is shown on the financial statements or
notes thereto.
(3) The exhibits listed on the Index to
Exhibits preceding the Exhibits attached hereto are filed
with this
Form 10-K
or incorporated by reference as set forth therein.
(b) Exhibits.
See (a)(3) above.
(c) Additional Financial Statement Schedules.
All schedules are omitted because they are not applicable or the
required information is shown on the financial statements or
notes thereto.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 29, 2007.
IPG Photonics Corporation
|
|
|
|
By:
|
/s/ Valentin
P. Gapontsev
|
Valentin P. Gapontsev
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
/s/ Valentin
P.
Gapontsev
Valentin P. Gapontsev
|
|
Chief Executive Officer, Chairman
of the Board and Director (Principal Executive Officer)
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Timothy
P.V.
Mammen
Timothy P.V. Mammen
|
|
Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Robert
A.
Blair
Robert A. Blair
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Michael
C.
Child
Michael C. Child
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ John
H.
Dalton
John H. Dalton
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Henry
E.
Gauthier
Henry E. Gauthier
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ William
S.
Hurley
William S. Hurley
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ William
F.
Krupke
William F. Krupke
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Eugene
Shcherbakov
Eugene Shcherbakov
|
|
Director
|
|
March 29, 2007
|
|
|
|
|
|
/s/ Igor
Samartsev
Igor Samartsev
|
|
Director
|
|
March 29, 2007
|
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
IPG Photonics Corporation
Oxford, Massachusetts
We have audited the accompanying consolidated balance sheets of
IPG Photonics Corporation and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations, convertible
redeemable preferred stock and stockholders equity, and
cash flows for each of the three years in the period ended
December 31, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of IPG
Photonics Corporation and subsidiaries as of December 31,
2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.
/s/ Deloitte &
Touche LLP
Boston, Massachusetts
March 28, 2007
F-2
IPG
PHOTONICS CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75,667
|
|
|
$
|
8,361
|
|
Accounts receivable, net
|
|
|
22,353
|
|
|
|
15,434
|
|
Inventories net
|
|
|
42,162
|
|
|
|
26,525
|
|
Prepaid expenses and other current
assets
|
|
|
6,666
|
|
|
|
2,482
|
|
Deferred income taxes
|
|
|
9,591
|
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
156,439
|
|
|
|
55,807
|
|
DEFERRED INCOME TAXES
|
|
|
3,801
|
|
|
|
|
|
PROPERTY, PLANT, AND
EQUIPMENT Net
|
|
|
67,153
|
|
|
|
50,995
|
|
EMPLOYEE AND STOCKHOLDER LOANS
|
|
|
86
|
|
|
|
6,339
|
|
OTHER ASSETS
|
|
|
5,013
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
232,492
|
|
|
$
|
115,481
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Revolving
line-of-credit
facilities
|
|
$
|
2,603
|
|
|
$
|
8,746
|
|
Current portion of long-term debt
|
|
|
8,299
|
|
|
|
10,438
|
|
Accounts payable
|
|
|
7,640
|
|
|
|
5,164
|
|
Accrued expenses and other
liabilities
|
|
|
13,940
|
|
|
|
9,907
|
|
Income taxes payable
|
|
|
8,289
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,771
|
|
|
|
34,320
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES
|
|
|
232
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
30,068
|
|
|
|
15,643
|
|
|
|
|
|
|
|
|
|
|
SERIES B WARRANTS
|
|
|
|
|
|
|
14,644
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Notes 6, 10 and 11)
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS
|
|
|
2,827
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE REDEEMABLE PREFERRED
STOCK, $0.0001 par value:
|
|
|
|
|
|
|
|
|
Series B no
shares designated, issued and outstanding at December 31,
2006; 3,800,000 shares designated, issued and outstanding
at December 31, 2005
|
|
|
|
|
|
|
91,248
|
|
Series D no
shares designated, issued and outstanding at December 31,
2006; 5,400,000 shares designated, 2,684,211 shares
issued and outstanding at December 31, 2005
|
|
|
|
|
|
|
5,100
|
|
STOCKHOLDERS EQUITY
(DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par
value 5,000,000 and 15,000,000 shares
authorized at December 31, 2006 and 2005, respectively;
Series A 500,000 shares designated,
488,000 shares issued and outstanding at December 31,
2005
|
|
|
|
|
|
|
4,880
|
|
Common stock, $0.0001 par
value 175,000,000 shares authorized,
42,901,612 shares issued and outstanding at
December 31, 2006; 70,000,000 shares authorized,
26,659,212 shares issued and outstanding at
December 31, 2005
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
271,122
|
|
|
|
95,029
|
|
Notes receivable from stockholders
|
|
|
(23
|
)
|
|
|
(463
|
)
|
Deferred compensation
|
|
|
|
|
|
|
(111
|
)
|
Accumulated deficit
|
|
|
(120,392
|
)
|
|
|
(149,625
|
)
|
Accumulated other comprehensive
income
|
|
|
7,883
|
|
|
|
3,782
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
158,594
|
|
|
|
(46,504
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
232,492
|
|
|
$
|
115,481
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
IPG
PHOTONICS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
NET SALES
|
|
$
|
143,225
|
|
|
$
|
96,385
|
|
|
$
|
60,707
|
|
COST OF SALES
|
|
|
79,931
|
|
|
|
62,481
|
|
|
|
42,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
63,294
|
|
|
|
33,904
|
|
|
|
18,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
6,222
|
|
|
|
3,236
|
|
|
|
2,363
|
|
Research and development
|
|
|
6,544
|
|
|
|
5,788
|
|
|
|
4,831
|
|
General and administrative
|
|
|
14,522
|
|
|
|
10,598
|
|
|
|
8,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,288
|
|
|
|
19,622
|
|
|
|
15,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
36,006
|
|
|
|
14,282
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense net
|
|
|
(1,493
|
)
|
|
|
(1,840
|
)
|
|
|
(2,150
|
)
|
Fair value adjustment to
Series B Warrants
|
|
|
(7,444
|
)
|
|
|
(745
|
)
|
|
|
(615
|
)
|
Other income net
|
|
|
1,050
|
|
|
|
236
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(7,887
|
)
|
|
|
(2,349
|
)
|
|
|
(2,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE BENEFIT FROM
(PROVISION FOR) INCOME TAXES AND MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES
|
|
|
28,119
|
|
|
|
11,933
|
|
|
|
491
|
|
BENEFIT FROM (PROVISION FOR)
INCOME TAXES
|
|
|
2,995
|
|
|
|
(4,080
|
)
|
|
|
1,601
|
|
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES
|
|
|
(1,881
|
)
|
|
|
(426
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
29,233
|
|
|
$
|
7,427
|
|
|
$
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCRETION OF SERIES B
PREFERRED STOCK
|
|
|
(1,944
|
)
|
|
|
(2,351
|
)
|
|
|
(2,351
|
)
|
BENEFICIAL CONVERSION FEATURE
|
|
|
(18,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS
|
|
$
|
8,972
|
|
|
$
|
5,076
|
|
|
$
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
WEIGHTED-AVERAGE
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,896
|
|
|
|
26,232
|
|
|
|
25,698
|
|
Diluted
|
|
|
33,005
|
|
|
|
30,167
|
|
|
|
25,698
|
|
See notes to consolidated financial statements.
F-4
IPG
PHOTONICS CORPORATION
CONSOLIDATED
STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Redeemable Preferred Stock
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Series B
|
|
|
Series D
|
|
|
|
Series A
|
|
|
|
|
|
Par
|
|
|
Paid-In
|
|
|
from
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
Income
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
BALANCE
December 31, 2003
|
|
|
3,800,000
|
|
|
$
|
86,546
|
|
|
|
2,684,211
|
|
|
$
|
5,100
|
|
|
|
|
500,000
|
|
|
$
|
5,000
|
|
|
|
25,628,609
|
|
|
$
|
3
|
|
|
$
|
98,228
|
|
|
$
|
(463
|
)
|
|
$
|
(906
|
)
|
|
$
|
(159,064
|
)
|
|
$
|
5,255
|
|
|
$
|
(51,947
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
2,012
|
|
|
$
|
2,012
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077
|
|
|
|
2,077
|
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series B
Preferred Stock
|
|
|
|
|
|
|
2,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
Common stock issued to acquire
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based awards forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,000
|
)
|
|
|
(120
|
)
|
|
|
296,967
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
December 31, 2004
|
|
|
3,800,000
|
|
|
|
88,897
|
|
|
|
2,684,211
|
|
|
|
5,100
|
|
|
|
|
488,000
|
|
|
|
4,880
|
|
|
|
25,991,576
|
|
|
|
3
|
|
|
|
96,262
|
|
|
|
(463
|
)
|
|
|
|
|
|
|
(157,052
|
)
|
|
|
7,332
|
|
|
|
(49,038
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,427
|
|
|
|
|
|
|
|
7,427
|
|
|
$
|
7,427
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,550
|
)
|
|
|
(3,550
|
)
|
|
|
(3,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series B
Preferred Stock
|
|
|
|
|
|
|
2,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
Stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667,636
|
|
|
|
1
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
December 31, 2005
|
|
|
3,800,000
|
|
|
|
91,248
|
|
|
|
2,684,211
|
|
|
|
5,100
|
|
|
|
|
488,000
|
|
|
|
4,880
|
|
|
|
26,659,212
|
|
|
|
4
|
|
|
|
95,029
|
|
|
|
(463
|
)
|
|
|
(111
|
)
|
|
|
(149,625
|
)
|
|
|
3,782
|
|
|
|
(46,504
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,233
|
|
|
|
|
|
|
|
29,233
|
|
|
$
|
29,233
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,101
|
|
|
|
4,101
|
|
|
|
4,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of note receivable from
stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
Accretion of Series B
Preferred Stock
|
|
|
|
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,994
|
)
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,241,379
|
|
|
|
|
|
|
|
93,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,169
|
|
|
|
|
|
|
|
|
|
Beneficial conversion charge
|
|
|
|
|
|
|
(18,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
18,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,204
|
|
|
|
|
|
|
|
|
|
Conversion of Series A
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(488,000
|
)
|
|
|
(4,817
|
)
|
|
|
359,463
|
|
|
|
|
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B
Preferred Stock
|
|
|
(3,800,000
|
)
|
|
|
(55,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,252,927
|
|
|
|
|
|
|
|
55,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,038
|
|
|
|
|
|
|
|
|
|
Conversion of Series D
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(2,684,211
|
)
|
|
|
(5,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,683,168
|
|
|
|
|
|
|
|
5,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,100
|
|
|
|
|
|
|
|
|
|
Issuance of subordinated notes to
Series B Stockholders
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
705,501
|
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
Excess foreign tax benefit on
exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
Adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
BALANCE
December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
42,901,612
|
|
|
$
|
4
|
|
|
$
|
271,122
|
|
|
$
|
(23
|
)
|
|
$
|
|
|
|
$
|
(120,392
|
)
|
|
$
|
7,883
|
|
|
$
|
158,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
IPG
PHOTONICS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,233
|
|
|
$
|
7,427
|
|
|
$
|
2,012
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,105
|
|
|
|
8,092
|
|
|
|
7,154
|
|
Deferred income taxes
|
|
|
(10,159
|
)
|
|
|
2,732
|
|
|
|
(462
|
)
|
Stock-based compensation
|
|
|
533
|
|
|
|
7
|
|
|
|
903
|
|
Interest accretion of convertible
note
|
|
|
158
|
|
|
|
247
|
|
|
|
235
|
|
Loss (gain) on sale of investment
and fixed assets
|
|
|
56
|
|
|
|
(238
|
)
|
|
|
(14
|
)
|
Inventory provisions
|
|
|
1,037
|
|
|
|
1,861
|
|
|
|
|
|
Fair value adjustment to
Series B Warrants
|
|
|
7,443
|
|
|
|
745
|
|
|
|
615
|
|
Minority interests in consolidated
subsidiaries
|
|
|
1,881
|
|
|
|
426
|
|
|
|
80
|
|
Changes in assets and liabilities
that provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,127
|
)
|
|
|
(5,599
|
)
|
|
|
(2,791
|
)
|
Due from affiliates net
|
|
|
473
|
|
|
|
236
|
|
|
|
(40
|
)
|
Inventories
|
|
|
(19,884
|
)
|
|
|
(4,011
|
)
|
|
|
1,176
|
|
Prepaid expenses and other current
assets
|
|
|
(1,148
|
)
|
|
|
(312
|
)
|
|
|
(55
|
)
|
Accounts payable
|
|
|
1,089
|
|
|
|
(1,030
|
)
|
|
|
(1,460
|
)
|
Repayment of convertible supplier
note
|
|
|
(5,100
|
)
|
|
|
|
|
|
|
|
|
Accrued expenses and other
liabilities
|
|
|
3,447
|
|
|
|
4,088
|
|
|
|
207
|
|
Income and other taxes payable
|
|
|
7,165
|
|
|
|
(1,086
|
)
|
|
|
(1,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
19,202
|
|
|
|
13,585
|
|
|
|
6,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and
equipment
|
|
|
(20,442
|
)
|
|
|
(15,989
|
)
|
|
|
(4,037
|
)
|
Proceeds from sale of property,
plant, and equipment
|
|
|
90
|
|
|
|
782
|
|
|
|
80
|
|
Employee and stockholder loans
repaid
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
Restricted cash released to support
construction loan
|
|
|
|
|
|
|
6,566
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(19,127
|
)
|
|
|
(8,641
|
)
|
|
|
(3,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
line-of-credit
facilities
|
|
|
16,695
|
|
|
|
9,561
|
|
|
|
3,456
|
|
Payments on
line-of-credit
facilities
|
|
|
(18,282
|
)
|
|
|
(9,384
|
)
|
|
|
(2,638
|
)
|
Principal payments on long-term
borrowings
|
|
|
(10,684
|
)
|
|
|
(2,263
|
)
|
|
|
(1,654
|
)
|
Proceeds from long-term borrowings
|
|
|
6,384
|
|
|
|
2,209
|
|
|
|
|
|
Exercise of employee stock options
and related tax benefit from exercise
|
|
|
1,274
|
|
|
|
1,001
|
|
|
|
268
|
|
Repayment of Series B Warrants
|
|
|
(22,087
|
)
|
|
|
|
|
|
|
|
|
Proceeds from initial public
offering, net of offering expenses
|
|
|
93,169
|
|
|
|
|
|
|
|
|
|
Repayment of note due from
stockholder
|
|
|
440
|
|
|
|
|
|
|
|
|
|
Minority interest capital
contribution
|
|
|
|
|
|
|
11
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
66,909
|
|
|
|
1,135
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF CHANGES IN EXCHANGE RATES
ON CASH AND CASH EQUIVALENTS
|
|
|
322
|
|
|
|
(266
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
|
67,306
|
|
|
|
5,813
|
|
|
|
2,012
|
|
CASH AND CASH
EQUIVALENTS Beginning of period
|
|
|
8,361
|
|
|
|
2,548
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of period
|
|
$
|
75,667
|
|
|
$
|
8,361
|
|
|
$
|
2,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,449
|
|
|
$
|
2,046
|
|
|
$
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
2,010
|
|
|
$
|
1,989
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-for-stock
swap on options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
120
|
|
Beneficial conversion feature
embedded in Series B Preferred Stock
|
|
$
|
18,267
|
|
|
$
|
|
|
|
$
|
|
|
Accretion of Series A
Preferred Stock and Series B Preferred Stock
|
|
$
|
1,994
|
|
|
$
|
2,351
|
|
|
$
|
2,351
|
|
Issuance of subordinated notes upon
conversion of Series B Preferred Stock
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
|
|
Exchange of IP Fibre Devices credit
facility for stockholder note
|
|
$
|
4,614
|
|
|
$
|
|
|
|
$
|
|
|
Additions to property, plant and
equipment included in accounts payable
|
|
$
|
996
|
|
|
$
|
|
|
|
$
|
|
|
See notes to consolidated financial statements.
F-6
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Business IPG Photonics Corporation
(the Company) designs and manufactures a broad line
of high-performance fiber lasers and fiber amplifiers for
diverse applications in numerous markets, such as materials
processing, communications, medical and advanced applications.
The Companys world headquarters are located in Oxford,
Massachusetts, U.S.A. The Company also has operations in
Burbach, Germany; Milan, Italy; London, England; Fryazino,
Russia; Tokyo, Japan; Bangalore, India; and Daejon, South Korea.
In December 2006, the Company completed an initial public
offering of the Companys common stock. The Companys
shares of common stock trade on the Nasdaq Global Market under
the symbol IPGP.
Principles of Consolidation The Company was
incorporated as a Delaware corporation in December 1998. The
accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany
balances and transactions have been eliminated.
Stock Split The accompanying financial
statements reflect a
2-for-3
reverse stock split of the Companys common stock which
occurred on December 7, 2006. All share and per share
information herein has been retroactively restated to reflect
this split.
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Foreign Currency The financial information
for entities outside the United States is measured using local
currencies as the functional currency. Assets and liabilities
are translated into U.S. dollars at the exchange rate in
effect on the respective balance sheet dates. Income and
expenses are translated into U.S. dollars based on the
average rate of exchange for the corresponding period. Exchange
rate differences resulting from translation adjustments are
accounted for directly as a component of accumulated other
comprehensive income. Gains or losses from foreign currency
transactions are reflected in the consolidated statements of
operations and have not been material for any period presented.
Cash and Cash Equivalents Cash and cash
equivalents consist primarily of highly liquid investments, such
as bank deposits, with insignificant interest rate risk and
original maturities of three months or less at the date of
acquisition.
Inventories Inventories are stated at the
lower of cost or market on a
first-in,
first-out basis. Inventories include parts and components that
may be specialized in nature and subject to rapid obsolescence.
The Company periodically reviews the quantities and carrying
values of inventories to assess whether the inventories are
recoverable. The costs associated with provisions for excess
quantities, technological obsolescence, or component rejection
are charged to cost of sales as incurred.
Property, Plant, and Equipment Property,
plant, and equipment are stated at cost, less accumulated
depreciation. Depreciation is determined using the straight-line
method based on the estimated useful lives of the related
assets. In the case of leasehold improvements, the estimated
useful lives of the related assets do not exceed the remaining
terms of the corresponding leases. The following table presents
the assigned economic useful lives of property, plant, and
equipment:
|
|
|
|
|
Category
|
|
Economic Useful Life
|
|
|
Buildings
|
|
|
30 years
|
|
Machinery and equipment
|
|
|
3-5 years
|
|
Office furniture and fixtures
|
|
|
3-5 years
|
|
Other assets
|
|
|
3-5 years
|
|
F-7
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expenditures for maintenance and repairs are charged to
operations. Interest expense associated with significant capital
projects is capitalized as a cost of the project. The Company
capitalized $198,000, $239,000 and $0 of interest expense in
2006, 2005 and 2004, respectively.
Impairment of Long-Lived Assets Long-lived
assets, which consist primarily of property, plant, and
equipment, are reviewed by management for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. In cases in which undiscounted
expected future cash flows are less than the carrying value, an
impairment loss is recorded equal to the amount by which the
carrying value exceeds the fair value of assets.
Revenue Recognition The Company recognizes
revenue in accordance with SEC Accounting Bulletin, or SAB,
No. 104, Revenue Recognition.
SAB No. 104 requires that four basic criteria be met
before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured.
Revenue from the sale of the Companys products is
generally recognized upon shipment, provided that the other
revenue recognition criteria have been met. The Company has no
obligation to provide upgrades, enhancements or customer support
subsequent to the sale.
Revenue from orders with multiple deliverables is divided into
separate units of accounting when certain criteria are met. The
consideration for the arrangement is then allocated to the
separate units of accounting based on their relative fair
values. Applicable revenue recognition criteria are then applied
separately for each unit of accounting. The Company defers
revenue on multiple element arrangements if the fair values of
all deliverables are not known or if customer acceptance is
contingent on delivery of specified items or performance
conditions.
Returns and customer credits are infrequent and are recorded as
a reduction to revenue. Rights of return are generally not
included in sales arrangements. Generally, the Company receives
a customer purchase order as evidence of an arrangement and
product shipment terms are free on board (F.O.B.) shipping point.
Allowance for Doubtful Accounts The Company
maintains an allowance for doubtful accounts to provide for the
estimated amount of accounts receivable that will not be
collected. The allowance is based upon an assessment of customer
creditworthiness, historical payment experience and the age of
outstanding receivables.
Activity related to the allowance for doubtful accounts was as
follows (in thousands):
|
|
|
|
|
Balance at January 1, 2004
|
|
$
|
322
|
|
Provision for bad debts
|
|
|
35
|
|
Uncollectible accounts written off
|
|
|
(185
|
)
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
172
|
|
Provision for bad debts
|
|
|
43
|
|
Uncollectible accounts written off
|
|
|
(24
|
)
|
Foreign currency translation
|
|
|
7
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
198
|
|
Provision for bad debts
|
|
|
25
|
|
Uncollectible accounts written off
|
|
|
(4
|
)
|
Foreign currency translation
|
|
|
8
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
227
|
|
|
|
|
|
|
F-8
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranties In general, the Companys
products carry a warranty against defect for a period of one to
three years, depending upon the product type and customer
negotiations. The expected cost associated with these warranty
obligations is recorded when the revenue is recognized. Accrued
warranty costs amounted to $1,998,000 and $1,065,000 at
December 31, 2006 and 2005, respectively.
Advertising Expense The cost of advertising
is expensed as incurred. The Company conducts substantially all
of its sales and marketing efforts through trade shows,
professional and technical conferences, direct sales and use of
its website. The Companys advertising costs were not
significant for the periods presented.
Research and Development Research and
development costs are expensed as incurred.
Income Taxes Deferred tax assets and
liabilities are recognized for the future tax consequences of
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities and net
operating loss carryforwards and credits using enacted rates in
effect when those differences are expected to reverse. Valuation
allowances are provided against deferred tax assets that are not
deemed to be recoverable.
Concentration of Credit Risk Financial
instruments that potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains substantially all of its cash
in financial institutions that it believes to be high-credit,
quality financial institutions. The Company grants credit to
customers in the ordinary course of business and provides a
reserve for potential credit losses. Such losses historically
have been within managements expectations (see discussion
related to significant customers in Note 14).
Fair Value of Financial Instruments The
Companys financial instruments consist of cash, accounts
receivable, accounts payable, and long-term debt. The current
carrying amounts of such instruments are considered reasonable
estimates of their fair market value, due to the short maturity
of these instruments or as a result of the competitive market
interest rates, which have been negotiated.
Comprehensive Income Comprehensive income
includes charges and credits to equity that are not the result
of transactions with stockholders. Included in other
comprehensive income for the Company is net income and the
cumulative translation adjustment. These adjustments are
accumulated within the consolidated statements of convertible
redeemable preferred stock and stockholders equity under
accumulated other comprehensive income.
Derivative Instruments The Company has
entered into financial instruments that constitute freestanding
derivative instruments. The Company accounts for these
arrangements in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133), as well as related
interpretations. Derivative instruments are recognized as either
assets or liabilities in the balance sheets and are measured at
fair value with gains or losses recognized in earnings or other
comprehensive income depending on the nature of the derivative.
The Company determines the fair value of derivative instruments
based on available market data using appropriate valuation
models, giving consideration to all of the rights and
obligations of each instrument.
The Company occasionally enters into a financial instrument that
contains a derivative instrument that is embedded in the
financial instrument. Upon entering into the instrument, the
Company assesses (i) whether the economic characteristics
of the embedded derivative are clearly and closely related to
the economic characteristics of the remaining component of the
financial instrument (i.e. the host contract), (ii) whether
a separate instrument with the same terms as the embedded
instrument would meet the definition of a derivative instrument
and (iii) whether the instrument is indexed to the
Companys own stock and would be classified in
stockholders equity. When it is determined that
(1) the embedded derivative possesses economic
characteristics that are not clearly and closely related to the
economic characteristics of the host contract, (2) a
separate instrument with the same terms would qualify as a
derivative instrument or (3) the embedded derivative is not
F-9
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indexed to the Companys own stock or would be classified
outside of stockholders equity, the embedded derivative is
separated from the host contract and carried at fair value.
Beneficial Conversion When the Company issues
debt or equity that is convertible into common stock at a
discount from the common stock fair value at the date the debt
or equity is issued, a beneficial conversion feature for the
difference between the fair value and the conversion price
multiplied by the number of shares issuable upon conversion is
recorded as a beneficial conversion charge or deemed dividend.
The beneficial conversion feature is presented as a discount to
the related debt or a deemed dividend to the related equity
holders, with an offsetting amount increasing additional paid-in
capital.
Business Segment Information The Financial
Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131),
establishes standards for reporting information about operating
segments. The Company is structured with eight distinct legal
entities in eight different countries; however, the Company
operates in one segment as each of its legal entities have
similar economic characteristics and each meets the criteria for
aggregation as defined in SFAS No. 131. All of the
Companys operations involve the design, development,
production and distribution of fiber lasers, fiber amplifiers
and related optical components. As disclosed in Note 14,
the Company monitors and maintains information on the sale of
its products into its various end markets, including
(i) materials processing, (ii) communications,
(iii) medical and (iv) advanced applications, but the
Company does not maintain separate operating financial
information for these end markets or on any other basis. The
Companys product lines, customer base and manufacturing
processes are similar throughout the world, with little
distinction between legal entity or product end market. The
Company has a single, company-wide management team that
administers all properties as a whole rather than as discrete
operating segments. The chief decision maker measures financial
performance as a single enterprise and not on legal entity or
end-market basis. Throughout the year, the chief decision maker
allocates capital resources on a
project-by-project
basis across the Companys entire asset base to maximize
profitability without regard to legal entity or end-market basis.
Reclassifications Certain reclassifications
have been made in prior years consolidated financial
statements to conform to the 2006 presentation, including the
reclassification of $2.1 million of demonstration units and
equipment leased to customers from inventory to other long-term
assets in 2005
Recent Accounting Pronouncements In July
2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transitions. FIN 48 will be effective for the Company
beginning January 1, 2007. The Company is currently
analyzing the effects, if any, of the adoption of FIN 48,
but does not anticipate that the results of adoption will have a
material impact on its reported results of operations or
financial condition.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which addresses how
companies should measure fair value when they are required to
use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles. The provisions
of SFAS No. 157 are effective for the Company
beginning after January 1, 2008. The Company has not yet
adopted this pronouncement and is currently evaluating the
expected impact that the adoption of SFAS No. 157 will
have on the Companys consolidated financial position and
results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159), which provides
companies with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements relative to
the use of fair values within the financial statements. The
provisions of SFAS No. 159 are effective
F-10
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for the Company beginning after January 1, 2008. The
Company has not yet adopted this pronouncement and is currently
evaluating the expected impact that the adoption of
SFAS No. 159 will have on the Companys
consolidated financial position and results of operations.
|
|
2.
|
STOCK-BASED
COMPENSATION
|
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123),
encouraged, but did not require, companies to record
compensation cost for stock-based employee compensation plans at
fair value. As permitted by SFAS No. 123, for the
years ended December 31, 2005 and 2004, the Company elected
to account for stock-based compensation awarded to employees
using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations and adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, for financial reporting
purposes, compensation cost for stock options granted to
employees and directors was measured as the excess, if any, of
the estimated fair market value of the Companys stock at
the deemed measurement date over the amount an employee or
director must pay to acquire the stock.
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)).
SFAS No. 123(R)established accounting for stock-based
awards exchanged for employees services and other
stock-based transactions. Stock-based compensation cost is
measured at the grant date, based on the fair value of the
award, and is recorded as compensation cost over the requisite
service period.
Stock-based compensation is included in the following financial
statement captions for the years ended December 31, as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of sales
|
|
$
|
127
|
|
|
$
|
4
|
|
|
$
|
218
|
|
Sales and marketing
|
|
|
62
|
|
|
|
1
|
|
|
|
6
|
|
Research and development
|
|
|
43
|
|
|
|
1
|
|
|
|
669
|
|
General and administrative
|
|
|
301
|
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
533
|
|
|
$
|
7
|
|
|
$
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit recognized
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
The Company adopted SFAS No. 123(R) using the
prospective transition method. Under this method, compensation
costs recorded during 2006 include: (a) compensation costs
for all share-based payment awards granted prior to, but not yet
vested as of January 1, 2006, based on the intrinsic value
in accordance with the original provisions of APB 25 and
(b) compensation costs for all share-based payment awards
granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The Company allocates
and records stock-based compensation expense on a straight-line
basis over the requisite service period.
Under SFAS No. 123(R), the Company calculates the fair
value of stock option grants using the Black-Scholes
option-pricing model. Determining the appropriate fair value
model and calculating the fair value of stock-based payment
awards require the use of highly subjective assumptions,
including the expected life of the stock-based payment awards
and stock price volatility. The assumptions used in calculating
the fair value of stock-based payment awards represent
managements best estimates, but the estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses
different assumptions, the Companys stock-based
compensation expense could be materially different in the
future. The weighted average assumptions used in the
Black-Scholes model were 6.25 years for the expected term,
65% for the expected volatility, 4.75% for the risk-free rate
and 0% for dividend yield for the year ended December 31,
2006.
F-11
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average expected option term for 2006 reflects the
application of the simplified method set forth in Securities and
Exchange Commission Staff Accounting Bulletin, or SAB,
No. 107, Share Based Payment, which was issued in
March 2005. The simplified method defines the life as the
average of the contractual term of the options and the weighted
average vesting period for all option tranches.
For the calculation of expected volatility, because there was no
public market for the Companys common stock until
December 13, 2006, and therefore a lack of company-specific
historical and implied volatility information, the Company based
its estimate of expected volatility on the expected volatility
of similar entities whose share prices are publicly available.
The Company used the following factors to identify similar
public entities: industry, stage of life cycle, size and
profitability. The Company intends to continue to consistently
apply this process using the same or similar entities until a
sufficient amount of historical information regarding the
volatility of its own share price becomes available, or unless
circumstances change such that the identified entities are no
longer similar to the Company. In this latter case, more
suitable, similar entities whose share prices are publicly
available, would be utilized in the calculation.
As stock-based compensation expense recorded in the
Companys statement of operations for the year ended
December 31, 2006 is based on options ultimately expected
to vest, it has been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
stock-based compensation recorded for the year ended
December 31, 2006 reflects an estimated forfeiture rate of
5%. For the purposes of preparing the pro forma information
required under SFAS No. 123 for the periods prior to
2006, the Company accounted for forfeitures as they occurred.
In accordance with the prospective transition method, the
Companys financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS No. 123(R).
If the compensation costs for options awarded to employees and
directors had been determined using the fair value and amortized
to expense over the vesting period of the awards, the recorded
net income would have been for the years ended December 31,
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Reported net income
|
|
$
|
7,427
|
|
|
$
|
2,012
|
|
Add stock-based employee
compensation expense included in net income net of
taxes
|
|
|
7
|
|
|
|
903
|
|
Deduct stock-based employee
compensation expense determined using the fair value for all
awards net of taxes
|
|
|
(22
|
)
|
|
|
(915
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
7,412
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
The Companys pro forma calculations for 2005 and 2004 were
made using the minimum value method with the following
weighted-average assumptions: expected life of four years; stock
volatility of 0%; risk-free interest rate of 4.5% in 2005 and
3.5% in 2004; and no dividend payments during the expected term.
Incentive Plans In April 2000, the
Companys board of directors adopted the 2000 Incentive
Compensation Plan, or 2000 plan, and in February 2006, the
Companys board of directors adopted the 2006 Incentive
Compensation Plan, or 2006 plan, which provide for the issuance
of stock options and other stock and non-stock based awards to
the Companys directors, employees, consultants and
advisors. The Company reserved 5,833,333 shares under the
2000 plan and 4,000,000 shares under the 2006 plan for the
issuance of awards under the plans. In June 2006, the
Companys board of directors adopted the Non-Employee
Directors Stock Plan (the Directors Plan), or the
directors plan. Only non-employee directors are eligible to
receive awards under the Directors Plan. The Company reserved
166,667 shares for issuance under the Directors Plan. Under
the three plans, the Company may grant nonstatutory stock
options at exercise prices at least equal to the fair market
value of the Companys common stock on the date of grant,
unless the board of directors or
F-12
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation committee determines otherwise on the date of
grant. Incentive stock options may be granted under the 2000
plan and the 2006 plans at exercise prices equal to or exceeding
the fair market value of the common stock on the date of grant.
Options generally become exercisable over periods of two to five
years and expire seven to ten years from the date of the grant.
The awards under the 2000 plan and the 2006 plans may become
exercisable earlier upon the occurrence of certain change of
control events at the election of the board of directors or
compensation committee, and all awards under the directors plan
automatically become exercisable upon a
change-of-control.
At December 31, 2006, 3,129,461 shares were available
for future grant under the three option plans.
Stock Options A summary of option activity is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Outstanding
January 1, 2004
|
|
|
2,882,448
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,357,966
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(296,967
|
)
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(123,170
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2004
|
|
|
3,820,277
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
834,667
|
|
|
|
1.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(667,636
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,589
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2005
|
|
|
3,919,719
|
|
|
|
1.59
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,213,913
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(705,501
|
)
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(35,970
|
)
|
|
|
3.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2006
|
|
|
4,392,161
|
|
|
$
|
2.70
|
|
|
|
7.31
|
|
|
$
|
93,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to
vest December 31, 2006
|
|
|
4,284,031
|
|
|
$
|
2.67
|
|
|
|
7.27
|
|
|
$
|
91,124
|
|
Exercisable
December 31, 2006
|
|
|
2,239,561
|
|
|
$
|
1.57
|
|
|
|
5.87
|
|
|
$
|
50,230
|
|
Exercisable
December 31, 2005
|
|
|
2,308,992
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2004
|
|
|
2,441,097
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of the options
granted to employees in the year ended December 31, 2006
was $3.20 and the minimum fair value of options granted to
employees in the years ended December 31, 2005 and 2004 was
$0.39, and less than $0.01, respectively. The intrinsic value of
the options exercised during the year ended December 31,
2006 was $1,495,000. Options exercised in each of the years
ended December 31, 2005 and 2004, had no intrinsic value.
F-13
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional information regarding options outstanding is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Number
|
|
Exercise Price
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
$1.50
|
|
|
2,565,670
|
|
|
|
6.05
|
|
|
|
2,070,243
|
|
1.87
|
|
|
595,705
|
|
|
|
8.74
|
|
|
|
137,111
|
|
3.41
|
|
|
149,347
|
|
|
|
9.17
|
|
|
|
|
|
5.35
|
|
|
692,210
|
|
|
|
9.06
|
|
|
|
32,207
|
|
6.45
|
|
|
305,895
|
|
|
|
9.48
|
|
|
|
|
|
8.40
|
|
|
73,334
|
|
|
|
8.40
|
|
|
|
|
|
9.60
|
|
|
10,000
|
|
|
|
9.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,392,161
|
|
|
|
7.31
|
|
|
|
2,239,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total compensation cost related to nonvested awards not yet
recorded at December 31, 2006 was $3,220,000, which is
expected to be recognized over 3.9 years on a
weighted-average basis.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Components and raw materials
|
|
$
|
19,244
|
|
|
$
|
9,985
|
|
Work-in-process
|
|
|
12,886
|
|
|
|
10,010
|
|
Finished goods
|
|
|
10,032
|
|
|
|
6,530
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,162
|
|
|
$
|
26,525
|
|
|
|
|
|
|
|
|
|
|
The Company recorded inventory provisions totaling $1,037,000
and $1,861,000 in 2006 and 2005, respectively. These provisions
were recorded as a result of the changes in market prices of
certain components, the realizable value of those inventories
through finished product sales and uncertainties related to the
recoverability of the value of inventories due to technological
changes and excess quantities. These provisions are reported as
a reduction to components and raw materials and finished goods.
No inventory provision was recorded in 2004.
4. PROPERTY,
PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
6,656
|
|
|
$
|
5,817
|
|
Buildings
|
|
|
41,916
|
|
|
|
35,397
|
|
Machinery and equipment
|
|
|
51,621
|
|
|
|
43,783
|
|
Office equipment and fixtures
|
|
|
7,465
|
|
|
|
5,625
|
|
Construction-in-progress
|
|
|
10,191
|
|
|
|
1,084
|
|
|
|
|
|
|
|
|
|
|
Total property, plant, and
equipment
|
|
|
117,849
|
|
|
|
91,706
|
|
Accumulated depreciation
|
|
|
(50,696
|
)
|
|
|
(40,711
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant, and
equipment net
|
|
$
|
67,153
|
|
|
$
|
50,995
|
|
|
|
|
|
|
|
|
|
|
F-14
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and other liabilities consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued compensation
|
|
$
|
5,527
|
|
|
$
|
4,248
|
|
Customer deposits and deferred
revenue
|
|
|
3,581
|
|
|
|
2,078
|
|
Accrued warranty
|
|
|
1,998
|
|
|
|
1,065
|
|
Other
|
|
|
2,834
|
|
|
|
2,516
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,940
|
|
|
$
|
9,907
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
FINANCING
ARRANGEMENTS
|
The Companys existing borrowings under financing
arrangements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revolving
Line-of-Credit
Facilities:
|
|
|
|
|
|
|
|
|
Euro Overdraft Facility
|
|
$
|
84
|
|
|
$
|
3,060
|
|
U.S. Line of Credit
|
|
|
|
|
|
|
1,000
|
|
Japanese Line of Credit
|
|
|
2,519
|
|
|
|
|
|
IPFD Credit Facility (related
party)
|
|
|
|
|
|
|
4,686
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,603
|
|
|
$
|
8,746
|
|
|
|
|
|
|
|
|
|
|
Term Debt:
|
|
|
|
|
|
|
|
|
U.S. Construction Loan
|
|
$
|
5,589
|
|
|
$
|
5,983
|
|
Subordinated Notes
|
|
|
20,000
|
|
|
|
|
|
Convertible Supplier Note
|
|
|
|
|
|
|
4,942
|
|
Euro Construction Loan
|
|
|
2,886
|
|
|
|
7,588
|
|
Euro Variable Rate Loan
|
|
|
6,267
|
|
|
|
|
|
NTO Note Payable to IPFD
(related party)
|
|
|
|
|
|
|
595
|
|
Other term debt
|
|
|
3,625
|
|
|
|
6,973
|
|
|
|
|
|
|
|
|
|
|
Total term debt
|
|
|
38,367
|
|
|
|
26,081
|
|
Less current portion
|
|
|
(8,299
|
)
|
|
|
(10,438
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
30,068
|
|
|
$
|
15,643
|
|
|
|
|
|
|
|
|
|
|
F-15
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Principal maturities of long-term debt as of December 31,
2006 are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
8,299
|
|
2008
|
|
|
2,561
|
|
2009
|
|
|
22,411
|
|
2010
|
|
|
2,000
|
|
2011
|
|
|
1,259
|
|
2012 and thereafter
|
|
|
1,837
|
|
|
|
|
|
|
Total
|
|
$
|
38,367
|
|
|
|
|
|
|
Revolving
Line-of -Credit Facilities:
Euro Overdraft Facilities The Company
maintains a syndicated overdraft facility with available
principal of Euro 4,895,500 (approximately $6,458,000 at
December 31, 2006). Of the total amount,
Euro 1,873,000 (approximately $2,471,000 at
December 31, 2006) is available at least through March
2010, Euro 2,000,000 (approximately $2,639,000 at
December 31, 2006) is available through September 2007
and Euro 1,022,500 (approximately $1,349,000 at
December 31, 2006) is available through May 2007. This
facility bears interest at market rates that vary depending upon
the principal outstanding (from 7.5% to 8.6% at
December 31, 2006). This facility and the Euro Construction
Loan are collateralized by a common pool of the assets of the
German entity. A portion of this loan is partially guaranteed by
the Companys largest stockholder. At December 31,
2006, the availability under the Euro Overdraft Facility totaled
$6,458,000.
The Company also maintains Euro credit lines in Italy with
available principal of Euro 650,000 (approximately $858,000 as
of December 31, 2006) which bear interest at rates
ranging from 5.2% to 7.0%. At December 31, 2006, the
remaining availability under the Euro credit lines was $774,000.
U.S. Line of Credit The Company
maintains a credit line with available principal of 80% of
eligible receivables, up to $7,000,000, on a revolving basis.
This facility bears interest at a variable rate of LIBOR plus 3%
(8.33% at December 31, 2006). The facility terminates in
June 2007, and is collateralized by all the assets held by the
U.S. parent company. At December 31, 2006, the
availability under the U.S. Line of Credit totaled
$4,009,000.
Japanese Line of Credit In September 2006,
the Company negotiated two credit lines with available principal
of 100% of eligible receivables, up to JPY 600,000,000
(approximately $5,037,000 at December 31, 2006), on a
revolving basis. These facilities bear interest at rates ranging
from 2.0% to 2.13% at December 31, 2006. The facility is
renewable annually and collateralized by accounts receivable and
inventory in Japan. At December 31, 2006, the availability
under the Japanese Line of Credit totaled $2,518,000.
IPFD Credit Facility Through July 31,
2006, the Company maintained a credit line with available
principal of $4,600,000 on a revolving basis with its affiliate
and stockholder, IPFD. Principal drawn under the facility
accrued interest at a rate equal to the three-month LIBOR rate
in effect on the date of the drawdown plus 2%. As discussed in
Note 8, the IPFD Credit Facility was terminated on
July 31, 2006.
Term
Debt:
U.S. Construction Loan Outstanding
principal under the U.S. Construction Loan bore interest at
a fixed rate of 7.9% and was collateralized by the real estate
and building housing the Companys U.S. operations. In
January 2007, the Company repaid the U.S. Construction Loan.
Subordinated Notes The Company issued
subordinated notes to the holders of its Series B
convertible redeemable preferred stock upon conversion of their
shares in December 2006. The subordinated notes bear interest at
the greater of the short-term applicable Federal rate (4.97% at
December 31, 2006), as published by
F-16
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Internal Revenue Service, or 4% in the first year, 7% in the
second year and 10% in the third year. The notes mature in
December 2009 and may be prepaid without penalty.
Convertible Supplier Note In connection with
a settlement with a component supplier, who subsequently became
a stockholder, the Company issued a note with a face value
totaling $5,100,000. The note did not require any interest
payments. Upon issuance in 2003, the Company recorded a discount
totaling $726,000, reflecting imputed interest. During the years
ended December 31, 2006, 2005 and 2004, imputed interest
expense totaling $158,000, $247,000 and $235,000, respectively,
was accreted to the carrying value of the note. The Company
could settle the note prior to August 2006 for cash totaling
$5,100,000 or by issuing 2,684,211 shares of Series D
preferred stock. In August 2006, the note was fully settled in
cash.
Euro Construction Loan The Company maintains
a financing agreement with a syndicate of banks used to finance
construction of a manufacturing facility in Germany and to meet
the working capital needs of the German operation. Principal and
interest payments were due semiannually through March 2010.
Interest accrued at 5.25%. A portion of this loan was personally
guaranteed by the Companys largest stockholder. In January
2007, the Company repaid the Euro Construction Loan.
Euro Variable Rate Loan In September 2006,
the Company entered into a Euro-denominated variable rate term
loan with total principal of Euro 4,750,000 (approximately
$6,266,000 at December 31, 2006). The interest rate was
reset quarterly using the
3-month
EURIBOR rate plus 1.5% (5.163% at December 31, 2006).
Principal was payable in equal quarterly installments through
December 2011. The loan was secured by mortgages on land and
building totaling $3.9 million and the remaining
$2.7 million of the loan was unsecured. In January 2007,
the Company repaid the Euro Variable Rate Loan.
NTO Note Payable to IPFD At
December 31, 2005, there was an unsecured $560,000 note
payable to IPFD, maturing in January 2006. Interest accrued at
4.4% annually. The principal balance included $35,000 of accrued
interest at December 31, 2005. The note was repaid in May
2006.
Other Term Debt Other term debt consisted
principally of Euro-denominated notes payable with fixed and
variable rates ranging from 4.2% to 6.5% and various maturities
ranging from 2007 to 2019. These notes were collateralized by
property, plant, and equipment in Germany. In January 2007, the
Company repaid the Euro-denominated notes.
|
|
7.
|
COMMON
STOCK, CONVERTIBLE REDEEMABLE PREFERRED STOCK, PREFERRED STOCK
AND WARRANTS
|
Authorized Capital The Company has authorized
capital stock consisting of 175,000,000 shares of common
stock, par value $0.0001 per share, and
5,000,000 shares of preferred stock, par value
$0.0001 per share.
Initial Public Offering The Company received
proceeds of $93.2 million, net of expenses, from its
issuance and sale of 6,241,379 shares of common stock.
Preferred Stock There are no shares of
preferred stock outstanding as of December 31, 2006. Upon
the Companys initial public offering in December 2006,
488,000 outstanding shares of Series A convertible
preferred stock (the Series A) converted into
359,463 shares of common stock, 3,800,000 outstanding
shares of Series B convertible redeemable preferred stock
(the Series B) converted into
7,252,927 shares of common stock and $20.0 million
principal amount of subordinated promissory notes, and 2,684,211
outstanding shares of Series D convertible redeemable
preferred stock (the Series D) converted into
1,683,168 shares of common stock.
F-17
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The rights and preferences of the preferred stock prior to their
conversion were as follows:
Dividends The holders of the Series A,
Series B, and Series D, are not entitled to dividends
at any fixed rate, but are entitled to receive dividends at the
rate paid, if any, on the common shares.
Liquidation In the event of any voluntary or
involuntary liquidation or dissolution of the Company, each
holder of the Series A, Series B, and Series D
was entitled to be paid, before any distributions are made to
the common stockholders or other junior stockholders, a
liquidation preference. The holders of the Series A,
Series B, and Series D were entitled to be paid an
amount equal to the preference value of $10.00, $25.00 and
$1.90 per share, respectively, plus, in each case, accrued
and unpaid dividends. In addition, the holders of the
Series B would have participated in further distributions
available for the common shares in the amount that would have
been payable per share if the Series B had been converted
to common shares.
Voting Rights The holders of Series A
were not entitled to vote on any matters other than those
affecting the rights and preferences of their shares. The
holders of the Series B and Series D were entitled to
vote on matters with holders of common shares in an amount equal
to the number of common shares into which the Series B and
Series D were then convertible.
Redemption Prior to their conversion into
common stock, the holders of Series B and Series D had
redemption rights. The Series B was being accreted to its
redemption value through the redemption dates. Accretion totaled
$1,994,000, $2,351,000 and $2,351,000 for each of the years
ended December 31, 2006, 2005 and 2004, respectively.
Conversion The Series A, Series B
and Series D were convertible into the number of shares of
common stock of the Company determined by dividing their
respective preference values by their respective conversion
values then in effect. The preference values of the
Series A, Series B and Series D were $10.00,
$25.00 and $1.90 per share, respectively, and the
conversion values at the time of their conversion were $14.27,
$33.83 and $3.03 per share, respectively. In December 2005
and January 2006, the conversion rights and obligations of the
Series B and Series A, respectively, were amended to
modify their automatic conversion right into common shares upon
public offerings that met specific conditions.
Upon a public offering meeting certain conditions, all
Series A automatically converted into common stock at the
lower of the conversion price then in effect or the offering
price to the public.
Upon a qualified public offering meeting certain
conditions, all Series B automatically converted into
subordinated debt and common shares. One of the conditions was
that the Company repurchase all of the warrants to purchase its
common stock that were granted to the holders of the
Series B. In a qualified public offering, the holders of
the Series B received consideration equal to the greater of
(A) what the holders of the Series B would have
received if the Company were sold to a third party using the
public offering price to compute the total sale price, which
amount would have included the liquidation preference of the
Series B plus an additional participation amount, as set
forth in the Companys certificate of incorporation, and
(B) what the holders of the
Series B would have received if it converted upon the
public offering at $15.00 per share. The Companys
initial public offering in December 2006 met the conditions for
a qualified public offering and the holders of the Series B
received upon conversion of their shares consideration
consisting of subordinated three-year notes totaling $20,000,000
in principal amount and the remainder in the form of the
Companys common stock valued at $16.50, the per share
offering price to the public.
Because of the anti-dilution provision in the Series A and
Series B, as a result of the initial public offering, the
Company recorded a deemed dividend related to the beneficial
conversion of the Series A and Series B of $63,000 and
$18,204,000, respectively. The deemed dividend was recorded to
give effect to the additional shares issued to the holders of
Series A and Series B.
F-18
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2004, two employees exercised 80,000 stock options and
paid the exercise price with 12,000 shares of Series A.
Warrants In connection with the issuance of
the Series B, the Company issued Series B Warrants to
purchase, in the aggregate, $47,500,000 of the Companys
common stock at an equivalent per-share price of 50% of the fair
value on the date of an initial public offering of common stock
or the sale, merger or liquidation of the Company. The Company
repurchased all of the Series B Warrants in connection with
its initial public offering in December 2006 for $22,087,000.
The Series B Warrants constituted freestanding derivatives
that were accounted for as liabilities at fair value, which was
estimated to be $14,644,000 at December 31, 2005. The
Series B Warrants were a binary financial instrument with a
fair value of either $23,750,000 if the Series B Warrants
were exercised prior to their expiration or zero if the term of
the Series B Warrants expired before they were exercised.
At each balance sheet date, the fair value of the Series B
Warrants was estimated by the Company by assessing the
probability that the Series B Warrants would be exercised
prior to their expiration. To calculate the estimated fair
value, the determined probability percentage was multiplied by
the total potential value of the Series B Warrants. A
discount relating to the time value of money was applied to the
estimated value if the Series B Warrants were not expected
to be exercised within twelve months. As freestanding derivative
instruments, changes in fair value of the Series B Warrants
were recognized in earnings and reported as other income
(expense). For the years ended December 31, 2006, 2005 and
2004, the fair value of the Series B Warrants increased by
$7,443,500, $745,000 and $615,000, respectively.
Notes Receivable From Issuances of
Shares The Company has received notes from an
individual in connection with this individuals exercise of
126,667 nonqualified stock options in March 2000, as well as the
issuance of 166,667 shares of common stock in connection
with professional services. This individual later became a
member of the Companys Board of Directors. The notes
receivable had principal balances of $190,000 and $250,000,
accruing interest at 1.68% and 1.52%, respectively, and were
collateralized by 326,667 shares of the Companys
common stock. The loans were repaid in 2006.
During 2001, an employee exercised stock options and paid the
exercise price and taxes with a nonrecourse note payable in a
principal amount of $23,000 with a weighted-average interest
rate of 4.76%.
The notes receivable are presented in the consolidated balance
sheets as a decrease in stockholders equity. Interest
income recognized from these notes totaled approximately $5,000,
$8,000 and $10,000 during the years ended December 31,
2006, 2005 and 2004, respectively.
Minority Interests Minority interests
reported in the accompanying consolidated financial statements
consist of the 20% of IPG Fibertech S.r.l., Italy
(Fibertech) held by the management of Fibertech; 49%
of NTO IRE-POLUS, Russia (NTO) held by certain
Company employees and other parties; 20% of IPG Photonics
(Japan) Ltd., Japan (IPG Japan) held by the
Companys Japanese distributor which also holds shares of
the Companys common stock; and 10% of IPG Photonics
(Korea) (IPG Korea) held by the management of IPG
Korea. During 2005 and 2004, the minority stockholders of IPG
Korea and IPG Japan contributed $11,000 and $142,000,
respectively, in capital in connection with the formation of
those companies.
|
|
8.
|
RELATED-PARTY
TRANSACTIONS
|
In 2001, the Company loaned three officers of the Company,
including the Companys chief executive officer, a total of
$6,736,000, bearing interest as of December 31, 2005, at a
weighted-average interest rate of 2.15%. In July 2003,
$1,681,000 in outstanding principal and interest was repaid by
the chief executive officer. Interest earned and accrued on such
loans totaled $47,000 during 2006, $130,000 during 2005, and
$127,000 during 2004, and was included in the carrying value of
the loans.
F-19
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005, the Company had an amount payable to
IPFD totaling $4,686,000 under the IPFD Credit Facility
discussed in Note 6. Interest expense on the IPFD Credit
Facility totaled $94,000, $161,000 and $156,000 for the years
ended December 31, 2006, 2005, and 2004, respectively. In
July 2006, IPFD purchased from the Companys chief
executive officer 770,670 shares of the Companys
common stock in exchange for $357,000 in cash and
$4.6 million in the form of the assignment of the amounts
due under the IPFD Credit Facility. Simultaneously, the Company
exchanged with the chief executive officer the note due from him
with a remaining principal amount of $5.0 million for
$357,000 in cash and $4.6 million in the form of the
assignment of amounts due under the IPFD Credit Facility. As a
result of these transactions, the IPFD Credit Facility and the
note receivable from the chief executive officer were fully
repaid and were no longer outstanding.
The principal of the stockholder loans and accrued interest due
from the two other officers were repaid in January and August
2006.
At December 31, 2005, there was a $560,000 note payable to
IPFD from NTO. Interest expense, accruing at 4.4% annually, for
the years ended December 31, 2006, 2005 and 2004 totaled
$9,000, $25,000 and $20,000, respectively, and was included in
the carrying value of the note. This note was repaid in full in
May 2006.
In November 2003, NTO advanced $175,000 to an officer of the
Company. The loan was secured by real property. In 2004, the
officer repaid $103,000 and, in 2005, the remaining outstanding
principal of $72,000 was repaid.
In November 2004, the chief executive officer provided a
personal guarantee for the U.S. Line of Credit for the
Company. In consideration of the personal guarantee, the Company
approved a guarantee fee to the executive equal to interest on
his loan from the Company (with a tax
gross-up)
for each quarter that the U.S. Line of Credit is
outstanding. The Company paid $71,000, $136,000 and $16,000 in
2006, 2005 and 2004, respectively, related to the guarantee fee.
The Company leases office space from IPFD and reimburses IPFD
for general and administrative expenses. The costs related to
the lease and services totaled $115,000, $116,000 and $148,000
for the years ended December 31, 2006, 2005 and 2004,
respectively. In addition, during 2004, the Company purchased
optical components from IPFD for $297,000.
Interest expense on the Note Payable to Supplier totaled
$45,000 and $187,000 for the years ended December 31, 2005
and 2004, respectively. The Company repaid the total amount of
outstanding principal and accrued interest in May 2005. Also
discussed in Note 6 is a Convertible Supplier Note that was
payable to the same supplier as the Note Payable to
Supplier. The Convertible Supplier Note was repaid in August
2006.
In April 2006, the chairman of the board of directors of one of
the Companys customers joined the Board of Directors of
the Company. Sales to this customer totaled $10,366,000,
$7,007,000 and $1,457,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
|
|
9.
|
NET
INCOME (LOSS) PER SHARE
|
For periods during which the Company had two classes of equity
securities issued and outstanding, it followed EITF Issue
No. 03-6,
Participating Securities and the Two-Class Method under
FASB Statement No. 128 (EITF
03-6),
which established standards regarding the computation of net
income (loss) per share by companies that have issued securities
other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company. EITF
03-6
requires earnings available to common stockholders for the
period, after deduction of preferred stock accretion and deemed
dividends related to beneficial conversion features, to be
allocated between the common and convertible securities based on
their respective rights to receive dividends. Basic net income
(loss) per share is then calculated by dividing income
F-20
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(loss) applicable to common stockholders by the weighted average
number of shares outstanding. The Companys preferred stock
does not participate in losses, and therefore is not included in
the computation of net loss per share, as applicable. EITF
03-6 does
not require the presentation of basic and diluted net income
(loss) per share for securities other than common stock;
therefore, the following per share amounts only pertain to the
Companys common stock.
The Company calculates diluted net income (loss) per share under
the if-converted method unless the conversion of the convertible
preferred stock is anti-dilutive to basic net income (loss) per
share. To the extent convertible preferred stock is
anti-dilutive, the Company calculates diluted net income (loss)
per share under the two-class method to include the effect of
potential common shares.
The share count used to compute basic and diluted net income
(loss) per share is calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted-average common shares
outstanding used to compute basic net income (loss) per share
|
|
|
27,117
|
|
|
|
26,232
|
|
|
|
25,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding used to compute basic net income (loss) per share
after conversion of convertible redeemable preferred stock; one
class of common shares was outstanding for the period from
December 13 to December 31, 2006
|
|
|
42,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
27,896
|
|
|
|
26,232
|
|
|
|
25,698
|
|
Add dilutive common equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,351
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
|
|
|
|
357
|
|
|
|
|
|
Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D preferred stock
|
|
|
1,665
|
|
|
|
1,789
|
|
|
|
|
|
Convertible supplier note payable
|
|
|
1,093
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net
income (loss) per share
|
|
|
33,005
|
|
|
|
30,167
|
|
|
|
25,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the securities outstanding during
the respective periods that have been excluded from the
calculations because the effect on net income (loss) per share
would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock options
|
|
|
|
|
|
|
3,920
|
|
|
|
3,820
|
|
Series A preferred
stock if converted
|
|
|
342
|
|
|
|
|
|
|
|
357
|
|
Series B preferred
stock if converted
|
|
|
2,810
|
|
|
|
2,890
|
|
|
|
2,890
|
|
Series D preferred
stock if converted
|
|
|
|
|
|
|
|
|
|
|
1,789
|
|
Convertible supplier note
payable if converted
|
|
|
|
|
|
|
|
|
|
|
1,789
|
|
The Series B Warrants were only exercisable upon the
completion of an initial public offering of the Companys
common stock or the sale, liquidation, or merger of the Company
and, as such, any shares that would have been issued upon the
exercise of the Series B Warrants were excluded from the
computations of net income (loss) per share for all periods
presented.
F-21
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Calculation of basic net income
(loss) per share two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(1)
|
|
$
|
27,790
|
|
|
$
|
7,427
|
|
|
$
|
2,012
|
|
Accretion of Series B
Preferred Stock
|
|
|
(1,994
|
)
|
|
|
(2,351
|
)
|
|
|
(2,351
|
)
|
Beneficial conversion feature
|
|
|
(18,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), net of assumed
stock dividends
|
|
$
|
7,529
|
|
|
$
|
5,076
|
|
|
$
|
(339
|
)
|
Percent of net income (loss)
applicable to common stockholders(2)
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
100
|
%
|
Net income (loss) applicable to
common stockholders
|
|
|
6,435
|
|
|
|
4,258
|
|
|
|
(339
|
)
|
Weighted-average common shares
outstanding
|
|
|
27,117
|
|
|
|
26,232
|
|
|
|
25,698
|
|
Basic net income (loss) per
share two-class method
|
|
$
|
0.24
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for period during which
single class of equity securities was outstanding(1)
|
|
$
|
1,443
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,902
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
for period during which a single class of equity securities was
outstanding
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of diluted net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to
common stockholders
|
|
$
|
7,877
|
|
|
$
|
4,258
|
|
|
$
|
(339
|
)
|
Interest expense on convertible
supplier note payable
|
|
|
158
|
|
|
|
247
|
|
|
|
|
|
Net income applicable to dilutive
convertible preferred
|
|
|
384
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
8,419
|
|
|
|
4,853
|
|
|
|
(339
|
)
|
Weighted-average diluted shares
outstanding
|
|
|
33,005
|
|
|
|
30,167
|
|
|
|
25,698
|
|
Diluted net income (loss) per share
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net income for the year ended December 31, 2006 was
allocated between the periods during which two classes of equity
securities were outstanding and a single class of equity
securities was outstanding based on the respective number of
days in each such period. The preferred stock was converted into
common stock upon the Companys initial public offering on
December 13, 2006. |
|
(2) |
|
Calculation of percentage of net income (loss) applicable to
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted-average common shares
outstanding
|
|
|
27,896
|
|
|
|
26,232
|
|
|
|
25,698
|
|
Weighted-average dilutive
convertible preferred stock outstanding
|
|
|
1,665
|
|
|
|
2,146
|
|
|
|
|
|
Weighted-average anti-dilutive
convertible preferred stock outstanding
|
|
|
3,079
|
|
|
|
2,890
|
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares and
preferred shares
|
|
|
32,640
|
|
|
|
31,268
|
|
|
|
30,744
|
|
Percent of net income (loss)
applicable to common stockholders
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
84
|
%
|
Percent of net income (loss)
applicable to dilutive convertible preferred stockholders
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
F-22
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating Leases The Company leases certain
facilities under cancelable and noncancelable operating lease
agreements which expire through November 2011. In addition, the
Company leases capital equipment under several operating leases.
Rent expense for the years ended December 31, 2006, 2005
and 2004, totaled $383,000, $570,000 and $633,000, respectively.
Commitments under the noncancelable lease agreements as of
December 31, 2006, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31
|
|
Facilities
|
|
|
Equipment
|
|
|
Total
|
|
|
|
|
|
2007
|
|
$
|
1,044
|
|
|
$
|
530
|
|
|
$
|
1,574
|
|
|
|
|
|
2008
|
|
|
933
|
|
|
|
247
|
|
|
|
1,180
|
|
|
|
|
|
2009
|
|
|
590
|
|
|
|
110
|
|
|
|
700
|
|
|
|
|
|
2010
|
|
|
285
|
|
|
|
45
|
|
|
|
330
|
|
|
|
|
|
2011
|
|
|
76
|
|
|
|
10
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,928
|
|
|
$
|
942
|
|
|
$
|
3,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Agreements The Company has entered
into employment agreements with certain members of senior
management. The terms of these agreements are up to three years
and include noncompete and nondisclosure provisions, as well as
provide for defined severance payments in the event of
termination.
Product Sales Agreement In August 2003, the
Company settled a contract dispute and related litigation with a
component supplier. Under the terms of the settlement, the
Company entered into two supply agreements, pursuant to which
(a) the Company agreed to sell to the component supplier
certain products at discounted amounts and (b) the Company
agreed to purchase from the component supplier certain
percentages (but not fixed dollar amounts) of the Companys
external requirements, if any, for specified components for five
years. The Company sold products to the supplier totaling
$266,000, $119,000 and $189,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
In April 2005, the Company was sued for patent infringement
relating to optical fiber. The plaintiff has made a complaint
with unspecified damages. The Company answered the complaint on
June 2, 2005, and filed a counterclaim, denying
infringement and raising additional defenses. On the same day,
the plaintiff in the case filed its complaint, the plaintiff
requested that the United States Patent and Trademark Office
reexamine the plaintiffs patent, and the patent office
granted that request. In view of the pending reexamination, the
litigation was stayed until the conclusion of the patent office
reexamination. The patent expires in January 2011. The Company
believes it has meritorious defenses and intends to vigorously
contest the claims after the patent office concludes the
reexamination and the stay of litigation is lifted. As such, no
amounts have been accrued in respect of this contingency.
In June 2006, another company filed a claim against the Company
alleging infringement of a United States patent related to diode
pumping of single mode core optical fibers. The plaintiff in
this case seeks damages of over $20.0 million, treble
damages and injunctive relief. In January 2007, the Company
settled the claim. The settlement did not have a material impact
on the Companys financial statements.
On November 20, 2006, the Company was sued for patent
infringement relating to certain unspecified fiber amplifier
products. The plaintiff has made a complaint for damages of over
$10 million, treble damages
F-23
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for alleged willful infringement and injunctive relief. The
Company believes it has meritorious defenses and intends to
vigorously contest the claims. As such, no amounts have been
accrued in respect of this contingency.
|
|
12.
|
EMPLOYEE
BENEFIT PLANS
|
Retirement Savings Plan The Company maintains
a 401(k) retirement savings plan covering all of its
U.S. employees. The Company makes matching contributions
equal to 50% of the employees pretax contributions,
subject to a maximum of 6% of eligible compensation.
Compensation expense related to the Companys contribution
to the plan for the years ended December 31, 2006, 2005 and
2004, approximated $321,000, $263,000 and $157,000, respectively.
The income before the impact of income taxes and minority
interests in consolidated subsidiaries consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
U.S.
|
|
$
|
1,307
|
|
|
$
|
1,211
|
|
|
$
|
(1,637
|
)
|
Foreign
|
|
|
26,812
|
|
|
|
10,722
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,119
|
|
|
$
|
11,933
|
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys benefit from (provision for) income taxes
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
2,859
|
|
|
$
|
|
|
|
$
|
1,569
|
|
Foreign
|
|
|
(10,023
|
)
|
|
|
(1,348
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(7,164
|
)
|
|
|
(1,348
|
)
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,329
|
)
|
|
|
(682
|
)
|
|
|
(189
|
)
|
State
|
|
|
(290
|
)
|
|
|
(56
|
)
|
|
|
(97
|
)
|
Foreign
|
|
|
(2,902
|
)
|
|
|
(2,992
|
)
|
|
|
586
|
|
Change in valuation allowance
|
|
|
17,680
|
|
|
|
998
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
10,159
|
|
|
|
(2,732
|
)
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from (provision for)
income taxes
|
|
$
|
2,995
|
|
|
$
|
(4,080
|
)
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company completed audits performed by the
Internal Revenue Service for the years ended 2001 and 2000. The
completion of the audits allowed the Company to release
$1,569,000 of accrued tax contingencies related to those years
under audit. In addition, the benefit from (provision for)
income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to income before
income taxes due primarily to the valuation allowance that has
been provided against the net operating losses that are not
deemed to be recoverable. In 2006, the Company determined that
it was more likely than not that a benefit would be realized
from the domestic deferred tax assets and released $13,060,000
related to the valuation allowance in addition to a favorable
change of $4,620,000 resulting from the use of net operating
F-24
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
losses in 2006. The favorable changes to the valuation allowance
in 2005 and 2004 reflect the actual net operating losses
utilized in those periods.
A reconciliation of income tax expense at the U.S. federal
statutory income tax rate to the recorded tax benefit
(provision) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tax at statutory rate
|
|
$
|
(9,560
|
)
|
|
$
|
(4,057
|
)
|
|
$
|
(167
|
)
|
Non-U.S. rate
differential net
|
|
|
(1,388
|
)
|
|
|
(658
|
)
|
|
|
492
|
|
State income taxes net
|
|
|
(121
|
)
|
|
|
(18
|
)
|
|
|
97
|
|
Resolution of prior year tax
contingencies and reserves
|
|
|
|
|
|
|
|
|
|
|
1,569
|
|
Fair value adjustment to
series B warrants
|
|
|
(2,531
|
)
|
|
|
(253
|
)
|
|
|
(209
|
)
|
Stock compensation expense
|
|
|
(76
|
)
|
|
|
|
|
|
|
(307
|
)
|
Change in valuation allowance
|
|
|
17,680
|
|
|
|
998
|
|
|
|
162
|
|
Other net
|
|
|
(1,009
|
)
|
|
|
(92
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,995
|
|
|
$
|
(4,080
|
)
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Property, plant, and equipment
|
|
$
|
(518
|
)
|
|
$
|
(790
|
)
|
Inventory provisions
|
|
|
2,474
|
|
|
|
4,961
|
|
Allowances and accrued liabilities
|
|
|
1,031
|
|
|
|
3,433
|
|
Other tax credits
|
|
|
1,132
|
|
|
|
1,056
|
|
Net operating loss carryforwards
|
|
|
10,752
|
|
|
|
13,654
|
|
Valuation allowance
|
|
|
(1,711
|
)
|
|
|
(19,391
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
13,160
|
|
|
$
|
2,923
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has U.S. federal
and state tax net operating loss carryforwards available for
future periods of approximately $26,418,000 and $23,318,000. The
federal and state tax net operating loss carryforwards begin
expiring in 2022 and 2007, respectively.
F-25
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
GEOGRAPHIC
AND PRODUCT INFORMATION
|
The Company markets and sells its products throughout the world
through both direct sales and distribution channels. The
geographic sources of the Companys net sales, based on
billing addresses of the Companys customers are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United States and other North
America
|
|
$
|
45,519
|
|
|
$
|
38,512
|
|
|
$
|
20,911
|
|
South America
|
|
|
446
|
|
|
|
|
|
|
|
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
24,454
|
|
|
|
13,137
|
|
|
|
11,898
|
|
Other including Eastern Europe/ CIS
|
|
|
24,037
|
|
|
|
10,745
|
|
|
|
7,441
|
|
Asia and Australia:
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
35,585
|
|
|
|
25,354
|
|
|
|
16,022
|
|
Other
|
|
|
13,184
|
|
|
|
8,215
|
|
|
|
4,210
|
|
Rest of the World
|
|
|
|
|
|
|
422
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,225
|
|
|
$
|
96,385
|
|
|
$
|
60,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales are derived from products for different applications:
fiber lasers and diode lasers for materials processing, fiber
amplifiers for communications applications, fiber lasers and
diode lasers for medical applications, and fiber lasers and
amplifiers for advanced applications. Net sales for these
product lines are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Materials processing
|
|
$
|
102,317
|
|
|
$
|
59,659
|
|
|
$
|
41,990
|
|
Communications
|
|
|
15,187
|
|
|
|
15,751
|
|
|
|
9,697
|
|
Medical
|
|
|
11,163
|
|
|
|
7,319
|
|
|
|
1,544
|
|
Advanced applications
|
|
|
14,558
|
|
|
|
13,656
|
|
|
|
7,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,225
|
|
|
$
|
96,385
|
|
|
$
|
60,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has one customer that individually comprised 10%,
13% and 20% of net sales during the years ended
December 31, 2006, 2005 and 2004, respectively. Accounts
receivable related to this customer totaled approximately 10%
and 18% of the net accounts receivable balance as of
December 31, 2006 and 2005, respectively.
The geographic location of the net book value of the
Companys long-lived assets, based on physical location of
the assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
32,798
|
|
|
$
|
27,071
|
|
Germany
|
|
|
30,108
|
|
|
|
22,107
|
|
Russia
|
|
|
3,183
|
|
|
|
1,438
|
|
Other
|
|
|
1,064
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,153
|
|
|
$
|
50,995
|
|
|
|
|
|
|
|
|
|
|
F-26
IPG
PHOTONICS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Net Sales
|
|
$
|
32,743
|
|
|
$
|
32,184
|
|
|
$
|
36,201
|
|
|
$
|
42,097
|
|
Gross profit
|
|
|
12,465
|
|
|
|
13,343
|
|
|
|
17,337
|
|
|
|
20,149
|
|
Net income (loss) applicable to
common stockholders, two-class method
|
|
|
2,174
|
|
|
|
3,637
|
|
|
|
3,624
|
|
|
|
(5,326
|
)(1)
|
Net income (loss) for period
during which single class of equity securities was outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,255
|
(1)(2)
|
Basic earnings per share,
two-class method
|
|
|
0.08
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
(0.19
|
)(1)
|
Basic earnings per share for
period during which single class of equity securities was
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.08
|
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
applicable to common stockholders
|
|
|
0.08
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
(0.11
|
)(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
applicable to common stockholders
|
|
|
0.07
|
|
|
|
0.12
|
|
|
|
0.12
|
|
|
|
(0.11
|
)(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
2005
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Net Sales
|
|
$
|
18,788
|
|
|
$
|
22,843
|
|
|
$
|
20,607
|
|
|
$
|
34,147
|
|
Gross profit
|
|
|
5,851
|
|
|
|
7,342
|
|
|
|
7,282
|
|
|
|
13,429
|
|
Net income applicable to common
stockholders
|
|
|
328
|
|
|
|
499
|
|
|
|
648
|
|
|
|
2,847
|
(3)
|
Basic earnings per share
applicable to common stockholders
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.11
|
(3)
|
Diluted earnings per share
applicable to common stockholders
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.11
|
(3)
|
|
|
|
(1) |
|
Includes a $3.1 million charge related to the change in the
fair value of the Companys Series B Warrants and a
$13.1 million benefit related to the release of a deferred
tax valuation allowance in the fourth quarter of 2006. |
|
(2) |
|
Includes a one-time deemed dividend of $18.3 million
related to the beneficial conversion of preferred stock in the
Companys initial public offering in 2006 and accretion
relating to preferred stock. |
|
(3) |
|
Includes a $0.3 million charge related to the change in the
fair value of the Companys Series B Warrants. |
F-27
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Form of Second Amended and
Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.2 to Registration
Statement
No. 333-136521
filed with the Securities and Exchange Commission (the
Commission) on August 11, 2006)
|
|
3
|
.2
|
|
Form of Certificate of Amendment
of Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.4 to Registration Statement
No. 333-136521
filed with the Commission on November 24, 2006)
|
|
3
|
.3
|
|
Amended and Restated By-laws of
the Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
4
|
.1
|
|
Specimen Stock Certificate
(incorporated by reference to Exhibit 4.1 to Registration
Statement
No. 333-136521
filed with the Commission on November 14, 2006)
|
|
4
|
.2
|
|
Registration Rights Agreement by
and among the Registrant and the Investors named therein, dated
as of August 30, 2000, as amended (incorporated by
reference to Exhibit 4.2 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
4
|
.3
|
|
Registration Rights Agreement by
and among the Registrant and JDS Uniphase Corporation, dated as
of August 13, 2003, as amended (incorporated by reference
to Exhibit 4.3 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.1
|
|
2000 Incentive Compensation Plan
(incorporated by reference to Exhibit 10.1 to Registration
Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.2
|
|
2006 Incentive Compensation Plan
(incorporated by reference to Exhibit 10.2 to Registration
Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.3
|
|
Non-Employee Directors
Compensation Plan (incorporated by reference to
Exhibit 10.3 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.4
|
|
Non-Employee Directors Stock Plan
(incorporated by reference to Exhibit 10.4 to Registration
Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.5
|
|
Senior Executive Short-Term
Incentive Plan (incorporated by reference to Exhibit 10.5
to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.6
|
|
Form of Subordinated Note of the
Registrant to be issued to holders of series B preferred
stock (incorporated by reference to Exhibit 10.6 to
Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.7
|
|
Form of Warrant to Purchase Common
Stock of the Registrant issued to holders of series B
preferred stock, as amended (incorporated by reference to
Exhibit 10.7 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.8
|
|
Employment Agreement by and
between the Registrant and Valentin P. Gapontsev, dated as of
March 1, 2006 (incorporated by reference to
Exhibit 10.8 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.9
|
|
Service Agreement by and between
the Registrant and Eugene Shcherbakov, dated as of March 1,
2006 (incorporated by reference to Exhibit 10.9 to
Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.10
|
|
Employment Agreement by and
between the Registrant and Tim Mammen, dated as of March 1,
2006 (incorporated by reference to Exhibit 10.10 to
Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.11
|
|
Employment Agreement by and
between the Registrant and Angelo P. Lopresti, dated as of
March 1, 2006 (incorporated by reference to
Exhibit 10.11 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.12
|
|
Employment Agreement by and
between the Registrant and Denis Gapontsev, dated as of
March 1, 2006 (incorporated by reference to
Exhibit 10.12 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.13
|
|
Form of Indemnification Agreement
between the Registrant and each of its Directors and Executive
Officers (incorporated by reference to Exhibit 10.13 to
Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.14
|
|
Form of Stock Option Agreement
under the 2000 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.14 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.15
|
|
Form of Stock Option Agreement
under the 2006 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.15 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.16
|
|
Form of Stock Option Agreement
under the 2006 Non-Employee Directors Stock Plan (incorporated
by reference to Exhibit 10.16 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.17
|
|
Form of Confidentiality,
Non-Competition and Confirmatory Assignment Agreement
(incorporated by reference to Exhibit 10.16 to Registration
Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.18
|
|
Construction Loan Agreement, dated
as of April 28, 2000, between the Registrant and Family
Bank, FSB, as amended (incorporated by reference to
Exhibit 10.18 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.19
|
|
Loan and Security Agreement, dated
as of November 15, 2004, between the Registrant and
BankNorth, N.A. as Lender, as amended (incorporated by reference
to Exhibit 10.19 to Registration Statement
No. 333-136521
filed with the Commission on August 11, 2006)
|
|
10
|
.20
|
|
Assignment, Research and
Development Agreement between the Registrant, IPG Laser GmbH,
IPG Fibertech S.R.L. and NTO IRE-Polus, dated as of
August 30, 2000 (incorporated by reference to
Exhibit 10.21 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.21
|
|
Investment Agreement between NTO
IRE-Polus and IPG Laser GmbH, dated as of March 1, 2001
(incorporated by reference to Exhibit 10.22 to Registration
Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.22
|
|
Loan and Security Agreement
between the Registrant and IP Fibre Devices (UK) Ltd., dated as
of August 23, 2002 (incorporated by reference to
Exhibit 10.23 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.23
|
|
Non-Recourse Promissory Note by
Valentin P. Gapontsev, dated April 1, 2003 (incorporated by
reference to Exhibit 10.24 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.24
|
|
Amended and Restated Non-Recourse
Promissory Note by John H. Dalton, dated April 13, 2001
(incorporated by reference to Exhibit 10.25 to Registration
Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.25
|
|
Stock Purchase Agreement of John
H. Dalton, dated December 14, 2004 (incorporated by
reference to Exhibit 10.26 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.26
|
|
Guaranty of Valentin P. Gapontsev,
dated as of August 9, 2006 (incorporated by reference to
Exhibit 10.27 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.27
|
|
Stock Purchase Agreement between
the Registrant and the Investors named therein, dated as of
August 30, 2000 (incorporated by reference to
Exhibit 10.28 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.28
|
|
Loan Agreement between IP Fibre
Devices (UK) Ltd. and NTO IRE-Polus, dated January 3, 2002,
as amended (incorporated by reference to Exhibit 10.29 to
Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.29
|
|
Exchange Agreement between the
Registrant and Valentin P. Gapontsev, dated as of July 31,
2006 (incorporated by reference to Exhibit 10.30 to
Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.30
|
|
Subscription Agreement between the
Registrant and JDS Uniphase Corporation, dated August 13,
2003 (incorporated by reference to Exhibit 10.31 to
Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.31
|
|
Confidential Settlement Agreement
between the Registrant and JDS Uniphase Corporation, dated as of
June 25, 2003 (incorporated by reference to
Exhibit 10.32 to Registration Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.32
|
|
Convertible Promissory Note
between the Registrant and JDS Uniphase Corporation, dated
August 13, 2003 (incorporated by reference to
Exhibit 10.33 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.33
|
|
Secured Promissory Note between
the Registrant and JDS Uniphase Corporation, dated
August 13, 2003 (incorporated by reference to
Exhibit 10.34 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.34
|
|
Non-Recourse Promissory Note by
Robert A. Blair, dated September 30, 2003 (incorporated by
reference to Exhibit 10.35 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.35
|
|
Non-Recourse Promissory Note by
Robert A. Blair, dated December 3, 2003 (incorporated by
reference to Exhibit 10.36 to Registration Statement
No. 333-136521
filed with the Commission on September 27, 2006)
|
|
10
|
.36
|
|
Pledge Agreement between the
Registrant and Robert A. Blair, dated September 30, 2003
(incorporated by reference to Exhibit 10.37 to Registration
Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.37
|
|
Pledge Agreement between the
Registrant and Robert A. Blair, dated December 3, 2003
(incorporated by reference to Exhibit 10.38 to Registration
Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.38
|
|
Pledge Agreement between the
Registrant and John H. Dalton, dated April 13, 2001, as
amended (incorporated by reference to Exhibit 10.39 to
Registration Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.39
|
|
Pledge Agreement between the
Registrant and Dr. Valentin P. Gapontsev, dated
March 5, 2001, as amended (incorporated by reference to
Exhibit 10.40 to Registration Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.40
|
|
Pledge Agreement between the
Registrant and Vincent Au-Yeung, dated January 22, 2001
(incorporated by reference to Exhibit 10.41 to Registration
Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.41
|
|
Promissory Note by Vincent
Au-Yeung, dated January 22, 2001 (incorporated by reference
to Exhibit 10.42 to Registration Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.42
|
|
Stockholders Agreement by and
among the Registrant, the Founders named therein and the
Investors named therein, dated as of August 30, 2000, as
amended (incorporated by reference to Exhibit 10.43 to
Registration Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.43
|
|
Series D Preferred
Stockholders Agreement by and among the Registrant and JDS
Uniphase Corporation, dated as of August 13, 2003
(incorporated by reference to Exhibit 10.44 to Registration
Statement
No. 333-136521
filed with the Commission on October 18, 2006)
|
|
10
|
.44
|
|
Sublease Agreement between IP
Fibre Devices (UK) Ltd. and IPG Photonics (UK) Ltd., dated
October 31, 2006 (incorporated by reference to
Exhibit 10.45 to Registration Statement
No. 333-136521
filed with the Commission on November 14, 2006)
|
|
10
|
.45
|
|
Right of First Offer Agreement
between IPG Laser GmbH and Dr. Valentin P. Gapontsev, dated
November 1, 2006 (incorporated by reference to
Exhibit 10.46 to Registration Statement
No. 333-136521
filed with the Commission on November 14, 2006)
|
|
10
|
.46
|
|
Right of First Offer Agreement
between IPG Laser GmbH and Igor Samartsev, dated
November 1, 2006 (incorporated by reference to
Exhibit 10.47 to Registration Statement
No. 333-136521
filed with the Commission on November 14, 2006)
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
23
|
.1
|
|
Consent of Deloitte &
Touche LLP
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Section 1350
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Section 1350
|
|
|
|
|
|
Portions of this exhibit are the subject of a confidential
treatment request and have been omitted. These portions have
been submitted separately to the Securities and Exchange
Commission. |