Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
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
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
50 Old Webster Road,
Oxford, Massachusetts
01540
(Address of principal executive offices)
(Zip code)
(508) 373-1100
(Registrant’s telephone number, including area code)
__________________________________________ 
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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
ý
  
Accelerated Filer
¨
Non-Accelerated Filer
¨
  
Smaller Reporting Company
¨
Emerging Growth Company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
As of August 8, 2018, there were 54,353,496 and 53,760,649 shares of the registrant's common stock issued and outstanding.



TABLE OF CONTENTS
 
 
Page
EX-31.1 CERTIFICATION OF CEO PURSUANT TO RULE 13a-14(a)
 
EX-31.2 CERTIFICATION OF CFO PURSUANT TO RULE 13a-14(a)
 
EX-32 CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 1350
 
EX-101.INS XBRL INSTANCE DOCUMENT
 
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA
 
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
 
EX-101.LAB XBRL TAXONOMY EXTENSION LABEL LINKBASE
 
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
 
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
 



Table of Contents

PART I-FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
 
June 30,
 
December 31,
 
2018
 
2017
 
(In thousands, except share
and per share data)
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
816,792

 
$
909,900

Short-term investments
308,970

 
206,257

Accounts receivable, net
242,128

 
237,278

Inventories
376,019

 
307,712

Prepaid income taxes
40,215

 
44,944

Prepaid expenses and other current assets
51,911

 
47,919

Total current assets
1,836,035

 
1,754,010

DEFERRED INCOME TAXES, NET
27,818

 
26,976

GOODWILL
59,616

 
55,831

INTANGIBLE ASSETS, NET
47,249

 
51,223

PROPERTY, PLANT AND EQUIPMENT, NET
514,767

 
460,206

OTHER ASSETS
44,993

 
19,009

TOTAL ASSETS
$
2,530,478

 
$
2,367,255

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
3,637

 
$
3,604

Accounts payable
42,989

 
35,109

Accrued expenses and other liabilities
134,314

 
144,417

Income taxes payable
29,339

 
15,773

Total current liabilities
210,279

 
198,903

DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES
104,491

 
100,652

LONG-TERM DEBT, NET OF CURRENT PORTION
43,551

 
45,378

Total liabilities
358,321

 
344,933

COMMITMENTS AND CONTINGENCIES (NOTE 11)

 

IPG PHOTONICS CORPORATION EQUITY:
 
 
 
Common stock, $0.0001 par value, 175,000,000 shares authorized; 54,317,292 and 53,724,445 shares issued and outstanding, respectively, at June 30, 2018; 54,007,708 and 53,629,439 shares issued and outstanding, respectively, at December 31, 2017
5

 
5

Treasury stock, at cost, 592,847 and 378,269 shares held, respectively
(99,997
)
 
(48,933
)
Additional paid-in capital
729,082

 
704,727

Retained earnings
1,672,424

 
1,443,867

Accumulated other comprehensive loss
(129,357
)
 
(77,344
)
Total IPG Photonics Corporation equity
2,172,157

 
2,022,322

TOTAL LIABILITIES AND EQUITY
$
2,530,478

 
$
2,367,255

See notes to consolidated financial statements.

1

Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share data)
NET SALES
$
413,613

 
$
369,373

 
$
773,477

 
$
655,219

COST OF SALES
178,638

 
163,077

 
335,140

 
291,656

GROSS PROFIT
234,975

 
206,296

 
438,337

 
363,563

OPERATING EXPENSES:
 
 
 
 
 
 
 
Sales and marketing
14,536

 
12,136

 
28,052

 
22,963

Research and development
31,813

 
25,960

 
60,359

 
48,740

General and administrative
24,117

 
19,875

 
49,612

 
37,601

Loss (gain) on foreign exchange
2,118

 
7,183

 
(3,176
)
 
11,636

Total operating expenses
72,584

 
65,154

 
134,847

 
120,940

OPERATING INCOME
162,391

 
141,142

 
303,490

 
242,623

OTHER INCOME (EXPENSE), Net:
 
 
 
 
 
 
 
Interest income, net
729

 
468

 
1,041

 
776

Other income (expense), net
386

 
23

 
829

 
(506
)
Total other income
1,115

 
491

 
1,870

 
270

INCOME BEFORE PROVISION FOR INCOME TAXES
163,506

 
141,633

 
305,360

 
242,893

PROVISION FOR INCOME TAXES
(41,889
)
 
(37,530
)
 
(77,409
)
 
(63,858
)
NET INCOME
121,617

 
104,103

 
227,951

 
179,035

LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 
(13
)
 

 
(26
)
NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION
$
121,617

 
$
104,116

 
$
227,951

 
$
179,061

NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE:
 
 
 
 
 
 
 
Basic
$
2.27

 
$
1.95

 
$
4.24

 
$
3.35

Diluted
$
2.21

 
$
1.91

 
$
4.14

 
$
3.29

WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
Basic
53,662

 
53,380

 
53,703

 
53,403

Diluted
54,992

 
54,471

 
55,111

 
54,450

See notes to consolidated financial statements.


2

Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
121,617

 
$
104,103

 
$
227,951

 
$
179,035

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Translation adjustments
(78,663
)
 
32,522

 
(52,025
)
 
59,221

Unrealized gain (loss) on derivatives

 
(30
)
 
2

 
(46
)
Effect of adopted accounting standards

 

 
10

 

Available-for-sale investments, net of tax, reclassified to net income

 

 

 
298

Total other comprehensive (loss) income
(78,663
)
 
32,492

 
(52,013
)
 
59,473

Comprehensive income
42,954

 
136,595

 
175,938

 
238,508

Comprehensive loss attributable to noncontrolling interest

 
(37
)
 

 
(26
)
Comprehensive income attributable to IPG Photonics Corporation
$
42,954

 
$
136,632

 
$
175,938

 
$
238,534

See notes to consolidated financial statements.


3

Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
227,951

 
$
179,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,727

 
29,714

Deferred income taxes
6,097

 
4,533

Stock-based compensation
13,724

 
11,059

Unrealized (gain) loss on foreign currency transactions
(1,056
)
 
5,538

Other
(181
)
 
688

Provisions for inventory, warranty & bad debt
20,092

 
22,754

Changes in assets and liabilities that (used) provided cash:
 
 
 
Accounts receivable
(9,491
)
 
(73,634
)
Inventories
(91,014
)
 
(25,820
)
Prepaid expenses and other current assets
(1,991
)
 
(2,768
)
Accounts payable
9,527

 
1,914

Accrued expenses and other liabilities
(17,860
)
 
2,102

Income and other taxes payable
14,026

 
(22,013
)
Net cash provided by operating activities
208,551

 
133,102

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of and deposits on property, plant and equipment
(96,516
)
 
(43,632
)
Proceeds from sales of property, plant and equipment
641

 
15,284

Purchases of investments
(289,830
)
 
(71,244
)
Proceeds from sales and maturities of investments
161,618

 
156,171

Acquisitions of businesses, net of cash acquired
(4,422
)
 
(11,307
)
Other
188

 
(568
)
Net cash (used in) provided by investing activities
(228,321
)
 
44,704

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from line-of-credit facilities
255

 
6,761

Payments on line-of-credit facilities
(255
)
 
(6,761
)
Purchase of noncontrolling interests

 
(197
)
Principal payments on long-term borrowings
(1,794
)
 
(18,260
)
Proceeds from issuance of common stock under employee stock option and purchase plans less payments for taxes related to net share settlement of equity awards
10,631

 
17,152

Purchase of treasury stock, at cost
(51,064
)
 
(24,112
)
Net cash used in financing activities
(42,227
)
 
(25,417
)
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(31,111
)
 
31,867

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(93,108
)
 
184,256

CASH AND CASH EQUIVALENTS — Beginning of period
909,900

 
623,855

CASH AND CASH EQUIVALENTS — End of period
$
816,792

 
$
808,111

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
$
1,672

 
$
975

Cash paid for income taxes
$
64,495

 
$
80,956

Non-cash transactions:
 
 
 
Demonstration units transferred from inventory to other assets
$
1,720

 
$
1,845

Inventory transferred to machinery and equipment
$
5,000

 
$
1,531

Changes in accounts payable related to property, plant and equipment
$
(1,683
)
 
$
(1,892
)
See notes to consolidated financial statements.

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Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
 
 
Six Months Ended June 30,
 
2018
 
2017
 
(In thousands, except share and per share data)
 
Shares
 
Amount
 
Shares
 
Amount
COMMON STOCK
 
 
 
 
 
 
 
Balance, beginning of year
53,629,439

 
$
5

 
53,251,805

 
$
5

Exercise of stock options and conversion of restricted stock units
297,386

 

 
419,161

 

Common stock issued under employee stock purchase plan
12,198

 

 
19,882

 

Purchased common stock
(214,578
)
 

 
(198,532
)
 

Balance, end of period
53,724,445

 
5

 
53,492,316

 
5

TREASURY STOCK
 
 
 
 
 
 
 
Balance, beginning of year
(378,269
)
 
(48,933
)
 
(102,774
)
 
(8,946
)
Purchased treasury stock
(214,578
)
 
(51,064
)
 
(198,532
)
 
(24,112
)
Balance, end of period
(592,847
)
 
(99,997
)
 
(301,306
)
 
(33,058
)
ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
Balance, beginning of year
 
 
704,727

 
 
 
650,974

Stock-based compensation
 
 
13,724

 
 
 
11,059

Common stock issued under employee stock option plan, net of shares withheld for employee taxes
 
 
8,343

 
 
 
15,483

Proceeds from issuance of common stock issued under employee stock purchase plan
 
 
2,288

 
 
 
1,669

Effect of adopted accounting standards
 
 

 
 
 
2,078

Balance, end of period
 
 
729,082

 
 
 
681,263

RETAINED EARNINGS
 
 
 
 
 
 
 
Balance, beginning of year
 
 
1,443,867

 
 
 
1,094,108

Net income attributable to IPG Photonics Corporation
 
 
227,951

 
 
 
179,061

Effect of adopted accounting standards
 
 
606

 
 
 
2,145

Balance, end of period
 
 
1,672,424

 
 
 
1,275,314

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(77,344
)
 
 
 
(178,583
)
Translation adjustments
 
 
(52,025
)
 
 
 
59,164

Unrealized gain (loss) on derivatives, net of tax
 
 
2

 
 
 
(46
)
Unrealized loss on available-for-sale investments, net of tax
 
 

 
 
 
(240
)
Realized loss on available-for-sale investments, net of tax, reclassified to net income
 
 

 
 
 
538

Effect of adopted accounting standards
 
 
10

 
 
 

Balance, end of period
 
 
(129,357
)
 
 
 
(119,167
)
TOTAL IPG PHOTONICS CORPORATION EQUITY
 
 
$
2,172,157

 
 
 
$
1,804,357

NONCONTROLLING INTERESTS ("NCI")
 
 
 
 
 
 
 
Balance, beginning of year
 
 

 
 
 
166

Purchase of NCI
 
 

 
 
 
(197
)
Net loss attributable to NCI
 
 

 
 
 
(26
)
Other comprehensive income attributable to NCI
 
 

 
 
 
57

Balance, end of period
 
 

 
 
 

TOTAL EQUITY
 
 
$
2,172,157

 
 
 
$
1,804,357

See notes to consolidated financial statements.

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Table of Contents

IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared by IPG Photonics Corporation, or "IPG", "its" or the "Company". Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated financial statements include the Company's accounts and those of its subsidiaries. All intercompany balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
In the opinion of the Company's management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The results reported in these consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.
The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC.
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers," ("ASC 606" or the "new revenue standard"), the following significant accounting policies have been adopted as of January 1, 2018.
Revenue Recognition — Revenue is recognized when transfer of control to the customer occurs in an amount reflecting the consideration that the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer's ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct as the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company's standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment.
The Company often receives orders with multiple delivery dates that may extend across several reporting periods. The Company allocates the transaction price of the contract to each delivery based on the product standalone selling price. The Company invoices for each scheduled delivery upon shipment and recognizes revenues for such delivery at that point, assuming transfer of control has occurred. As scheduled delivery dates are generally within one year, under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed.
Rights of return generally are not included in customer contracts. Accordingly, upon application of steps one through five above, product revenue is recognized upon shipment and transfer of control. Returns are infrequent and are recorded as a reduction of revenue.
In certain subsidiaries the Company provides sales commissions to sales representatives based on sales volume. The Company has determined that the incentive portion of its sales commissions qualify as contract costs. The Company has elected the practical expedient in ASC 340-40-25-4 to expense sales commissions when incurred as the amortization period of the asset that would otherwise have been recognized is one year or less.
Revenue Recognition at a Point in Time Revenues recognized at a point in time consist primarily of product, installation and service sales. The Company sells products to original equipment manufacturers ("OEMs") that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. The Company also sells products to end users that use IPG products directly to build their own systems, which

6

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


incorporate IPG products or use IPG products as an energy or light source. The Company recognizes revenue for laser and spare part sales following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Installation revenue is recognized upon completion of the installation service, which typically occurs within 90 days of delivery. For laser systems that carry customer specific processing requirements, revenue is recognized at the latter of customer acceptance date or shipment date if the customer acceptance is made prior to shipment. When sales contracts contain multiple performance obligations, such as the shipment or delivery of products and installation, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations.
Revenue Recognition over Time — The Company offers extended warranty agreements, which extend the standard warranty periods. Warranties are limited and provide that the product meets specifications and is free from defects in materials and workmanship. Extended warranties are sold separately from products and represent a distinct performance obligation. Revenue related to the performance obligation for extended warranties is recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company. The customer receives the assurance that the product will operate in accordance with agreed-upon specifications evenly during the extended warranty period regardless of whether they make a claim during that period, and therefore, revenue at time of sale is deferred and recognized over the time period of the extended warranty period.
Customer Deposits and Deferred Revenue When the Company receives consideration from a customer or such consideration is unconditionally due prior to transferring goods or services under the terms of a sales contract, the Company records customer deposits or deferred revenue, which represent contract liabilities. The Company recognizes deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria are met.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Pronouncements
On January 1, 2018, the Company adopted ASC 606 and all related amendments using the modified retrospective method for contracts that were not completed as of the date of initial application. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be immaterial to net income on an ongoing basis.
A majority of revenue continues to be recognized at a point in time when control transfers based on the terms of underlying contact. Under the new revenue standard, the Company changed from deferring revenue for installation services in an amount equal to the greater of the cash received related to installation or the fair value to deferring the standalone selling price for these services.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("the Act"). The Company adopted this standard during the first quarter of 2018, which resulted in the reclassification of $10 related to the tax effect of unrealized gains on derivatives.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets other than Inventory" ("ASU 2016-16"). ASU 2016-16 eliminates the current exception that prohibits the recognition of current and deferred income tax consequences for intra-entity asset transfers (other than inventory) until the asset has been sold to an outside party. The amendments have been applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. The Company adopted this standard during the first quarter of 2018, which resulted in the reclassification of prepaid income taxes, deferred income taxes and retained earnings.




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Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption of ASC 606, ASU 2018-02 and ASU 2016-16 was as follows:
 
Balance at
 
Adoption of
 
Adoption of
 
Adoption of
 
Balance at
 
12/31/2017
 
ASC 606
 
ASU 2018-02
 
ASU 2016-16
 
1/1/2018
Balance Sheet
 
 
 
 
 
 
 
 
 
Prepaid income taxes
$
44,944

 
$

 
$

 
$
(1,203
)
 
$
43,741

Deferred income tax assets
26,976

 
(55
)
 

 
1,229

 
28,150

Customer deposits and deferred revenue (short-term)
47,324

 
(816
)
 

 

 
46,508

Income taxes payable
15,773

 
37

 

 

 
15,810

Deferred income tax liabilities
21,362

 
134

 

 

 
21,496

Retained earnings
1,443,867

 
590

 
(10
)
 
26

 
1,444,473

Accumulated other comprehensive loss
(77,344
)
 

 
10

 

 
(77,334
)
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350)" ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. The amendments are applied prospectively upon adoption. The Company early adopted this standard during the first quarter of 2018. The Company performs its annual goodwill impairment assessment on October 1 of each year. The new impairment test will be used in the annual assessment or if events or changes in circumstances indicate that the carrying amount may not be recoverable and an impairment analysis is performed.
Other Pronouncements Currently Under Evaluation
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than twelve months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The Company is currently reviewing its population of leases, implementing a software solution to assist with lease accounting, and evaluating footnote disclosures.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718)" ("ASU 2018-07"). ASU 2018-07 aligns the accounting for share-based payments issued to employees and non-employees. ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the standard but does not expect that it will have a material effect on its consolidated financial statements upon adoption.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables represent a disaggregation of revenue from contracts with customers for the three and six months ended June 30, 2018:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Sales by Application
 
 
 
Materials processing
$
392,001

 
$
731,215

Other applications
21,612

 
42,262

Total
$
413,613

 
$
773,477


8

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Sales by Product
 
 
 
High Power Continuous Wave ("CW") Lasers
$
266,075

 
$
496,649

Medium Power CW Lasers
27,797

 
49,268

Low Power CW Lasers
3,175

 
7,104

Pulsed Lasers
41,582

 
79,835

Quasi-Continuous Wave ("QCW") Lasers
20,092

 
36,292

Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
54,892

 
104,329

Total
$
413,613

 
$
773,477

Sales by Geography
 
 
 
United States and other North America
$
47,766

 
$
86,943

Europe:


 
 
Germany
31,989

 
65,225

Other including Eastern Europe/CIS
76,347

 
159,325

Asia and Australia:


 
 
China
203,026

 
352,999

Japan
19,428

 
39,057

Other
33,314

 
67,521

Rest of World
1,743

 
2,407

Total
$
413,613

 
$
773,477

Timing of Revenue Recognition
 
 
 
Goods and services transferred at a point in time
$
412,241

 
$
771,094

Services transferred over time
1,372

 
2,383

Total
$
413,613

 
$
773,477

Before the transition date (under ASC 605, Revenue Recognition), the Company deferred revenue for installation services in an amount equal to the greater of the cash received or the fair value for installation. Under the new revenue standard, the standalone selling price for installation services is deferred until control has transferred. The standalone selling price for installation services is determined based on the estimated number of days of service technician time required for installation at standard service rates. The impact of applying ASC 606 was a decrease in revenue recognized during the three months ended June 30, 2018 of $6 and a decrease for the six months ended June 30, 2018 of $39 as compared to revenue accounted for under ASC 605.
The Company enters into contracts to sell lasers and spare parts, for which revenue is generally recognized upon shipment or delivery, depending on the terms of the contract. The Company also provides installation services and extended warranties. The Company frequently receives consideration from a customer prior to transferring goods to the customer under the terms of a sales contract. The Company records customer deposits related to these prepayments, which represent a contract liability. The Company also records deferred revenue related to installation services when consideration is received before the services have been performed. The Company recognizes customer deposits and deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria is met. The Company bills customers for extended warranties upon entering into the agreement with the customer, resulting in deferred revenue. Revenue is recognized ratably over the term of the extended warranty agreement as the customer receives and consumes the benefits of such services.



9

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


The following table reflects the changes in the Company's contract liabilities for the six months ended June 30, 2018:
 
June 30,
 
January 1,
 
 
 
 
 
2018
 
2018
 
Change
Contract liabilities
 
 
 
 
 
 
 
Customer deposits
$
37,785

 
$
36,937

 
$
848

 
2.3
 %
Deferred revenue - current
9,201

 
9,571

 
(370
)
 
(3.9
)%
Deferred revenue - long-term
1,414

 
182

 
1,232

 
676.9
 %
During the three and six months ended June 30, 2018, the Company recognized revenue of $7,197and $35,529, respectively, that was included in the customer deposits and deferred revenue balances at the beginning of the period.
The following table represents the Company's remaining performance obligations for sales of installation services and extended warranties and contracts with customer acceptance provisions included in deferred revenue as of June 30, 2018:
 
 
Remaining Performance Obligations
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
Total
Revenue expected to be recognized upon customer acceptance
 
$
6,158

 
$

 
$

 
$

 
$

 
$

 
$
6,158

Revenue expected to be recognized on contracts for installation services
 
506

 

 

 

 

 

 
506

Revenue expected to be recognized for extended warranty agreements
 
1,925

 
1,256

 
428

 
243

 
96

 
3

 
3,951

     Total
 
$
8,589

 
$
1,256

 
$
428

 
$
243

 
$
96

 
$
3

 
$
10,615

4. FAIR VALUE MEASUREMENTS
The Company's financial instruments consist of cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, drawings on revolving lines of credit, long-term debt, contingent purchase consideration, an interest rate swap and a foreign currency hedge.
The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The carrying amounts of money market fund deposits, term deposits, accounts receivable, accounts payable and drawings on revolving lines of credit are considered reasonable estimates of their fair market value due to the short maturity of most of these instruments or as a result of the competitive market interest rates, which have been negotiated. The Company's bond securities are reported at fair value based upon quoted prices for instruments with identical terms in active markets. The Company's commercial paper securities reported at fair value are based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. At June 30, 2018 and December 31, 2017, the Company's long-term debt consisted of a variable rate long-term note and a fixed rate long-term note. The book value of the long-term notes approximates the fair market value.

10

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


The following table presents information about the Company's assets and liabilities measured at fair value:
 
 Fair Value Measurements at June 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market fund deposits and term deposits
$
499,180

 
$
499,180

 
$

 
$

U.S. Treasury and agency obligations
13,449

 
13,449

 

 

Commercial paper
118,341

 

 
118,341

 

Short-term investments
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
60,962

 
60,962

 

 

Corporate bonds
138,305

 
138,305

 

 

Commercial paper
109,590

 

 
109,590

 

 Long-term investments and other assets:
 
 
 
 
 
 
 
Corporate bonds
25,585

 
25,585

 

 

Auction rate securities
1,174

 

 

 
1,174

Interest rate swap
18

 

 
18

 

Total
$
966,604

 
$
737,481

 
$
227,949

 
$
1,174

Liabilities
 
 
 
 
 
 
 
Long-term debt
$
47,188

 
$

 
$
47,188

 
$

Contingent purchase consideration
902

 

 

 
902

Foreign currency hedge
713

 

 
713

 

Total
$
48,803

 
$

 
$
47,901

 
$
902

 
 
 
 
 
 
 
 
 
 Fair Value Measurements at December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market fund deposits and term deposits
$
425,917

 
$
425,917

 
$

 
$

Short-term investments
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
41,217

 
41,217

 

 

Corporate bonds
131,048

 
131,048

 

 

Commercial paper
33,896

 
33,896

 

 

 Long-term investments and other assets:
 
 
 
 
 
 
 
Auction rate securities
1,016

 

 

 
1,016

Interest rate swaps
16

 

 
16

 

Total
$
633,110

 
$
632,078

 
$
16

 
$
1,016

Liabilities
 
 
 
 
 
 
 
Long-term debt
$
48,982

 
$

 
$
48,982

 
$

Contingent purchase consideration
902

 

 

 
902

Total
$
49,884

 
$

 
$
48,982

 
$
902

The fair value of the short-term investments considered held-to-maturity as of June 30, 2018 and December 31, 2017 was $308,857 and $206,161, respectively, which represents an unrealized loss of $113 and $96, respectively, as compared to the book value recorded on the Consolidated Balance Sheets for the same periods. The fair value of the long-term investments considered held-to-maturity as of June 30, 2018 was $26,759, which represented an unrealized gain of $132, as compared to the book value of $26,627 recorded within Other Assets on the Consolidated Balance Sheets for the same period.

11

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


The fair values of the interest rate swap and foreign currency hedge considered pricing models whose inputs are observable for the securities held by the Company.
The fair value of the auction rate securities was determined using prices observed in inactive markets with limited observable data for the securities held by the Company.
The fair value of contingent purchase consideration was determined using an income approach at the respective business combination date and at the reporting date. That approach is based on significant inputs that are not observable in the market and include key assumptions such as assessing the probability of meeting certain milestones required to earn the contingent purchase consideration.
The following table presents information about the Company's movement in Level 3 assets and liabilities measured at fair value:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Auction rate securities
 
 
 
 
 
 
 
Balance, beginning of period
$
1,019

 
$
1,146

 
$
1,016

 
$
1,144

Change in fair value and accretion
155

 
2

 
158

 
4

Balance, end of period
$
1,174

 
$
1,148

 
$
1,174

 
$
1,148

Contingent purchase consideration
 
 
 
 
 
 
 
Balance, beginning of period
$
902

 
$

 
$
902

 
$

Balance, end of period
$
902

 
$

 
$
902

 
$


The following table presents the effective maturity dates of held to maturity investments as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Investment maturity
 
 
 
 
 
 
 
Less than 1 year
$
940,015

 
$
939,828

 
$
632,078

 
$
632,078

1 through 5 years
25,605

 
25,585

 

 

Greater than 5 years
1,022

 
1,174

 
1,016

 
1,016

Total
$
966,642

 
$
966,587

 
$
633,094

 
$
633,094


5. INVENTORIES
Inventories consist of the following:
 
June 30,
 
December 31,
 
2018
 
2017
Components and raw materials
$
227,876

 
$
145,261

Work-in-process
35,411

 
43,646

Finished components and devices
112,732

 
118,805

Total
$
376,019

 
$
307,712

The Company recorded inventory provisions totaling $3,497 and $5,435 for the three months ended June 30, 2018 and 2017, respectively, and $6,854 and $9,406 for the six months ended June 30, 2018 and 2017, respectively. These provisions relate 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 components and devices.


12

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


6. GOODWILL AND INTANGIBLES
The following table sets forth the changes in the carrying amount of goodwill for the six months ended June 30, 2018:
 
Amounts
Balance at January 1
$
55,831

Foreign exchange adjustment
(445
)
Goodwill arising from acquisition
4,230

 Balance at June 30
$
59,616

Intangible assets, subject to amortization, consisted of the following:
 
June 30, 2018
 
December 31, 2017
 
 
Gross  Carrying
Amount
Accumulated
Amortization
Net  Carrying
Amount
Weighted-
Average  Lives
Gross  Carrying
Amount
Accumulated
Amortization
Net  Carrying
Amount
Weighted-
Average  Lives
 
 
 
 
 
 
 
 
 
Patents
$
8,036

$
(5,757
)
$
2,279

8 Years
$
8,036

$
(5,486
)
$
2,550

8 Years
Customer relationships
25,029

(5,028
)
20,001

11 Years
26,768

(5,584
)
21,184

11 Years
Production know-how
6,779

(5,404
)
1,375

8 Years
6,820

(5,035
)
1,785

8 Years
Technology, trademark and tradename
32,479

(8,885
)
23,594

8 Years
32,564

(6,860
)
25,704

8 Years
Total
$
72,323

$
(25,074
)
$
47,249

 
$
74,188

$
(22,965
)
$
51,223

 
During the second quarter of 2018, the Company acquired 100% of the shares of robot concept GmbH ("RC"). RC is located near Munich, Germany and is an integrator of laser-based systems. The Company paid $4,453 to acquire RC, which represents the fair value on that date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $4,230. The goodwill arising from the acquisition will not be deductible for tax purposes.
The purchase price allocations included in the Company's financial statements are not complete. They represent the preliminary fair value estimates as of June 30, 2018 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to intangibles, goodwill or income, as applicable.
Amortization expense for the three months ended June 30, 2018 and 2017 was $1,908 and $1,168, respectively. Amortization for the six months ended June 30, 2018 and 2017 was $3,839 and $2,233, respectively. The estimated future amortization expense for intangibles for the remainder of 2018 and subsequent years is as follows:
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
$3,648
 
$7,293
 
$6,665
 
$6,492
 
$5,667
 
$17,484
 
$47,249
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
 
June 30,
 
December 31,
 
2018
 
2017
Accrued compensation
$
53,855

 
$
63,203

Customer deposits and deferred revenue
46,986

 
47,324

Current portion of accrued warranty
22,207

 
25,059

Other
11,266

 
8,831

Total
$
134,314

 
$
144,417




13

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


8. PRODUCT WARRANTIES
The Company typically provides one to three-year parts and service warranties on lasers and amplifiers. Most of the Company's sales offices provide support to customers in their respective geographic areas. Warranty reserves have generally been sufficient to cover product warranty repair and replacement costs.
The following table summarizes product warranty accrual activity recorded during the six months ended June 30, 2018 and 2017.
 
2018
 
2017
Balance at January 1
$
47,517

 
$
33,978

Provision for warranty accrual
12,830

 
12,626

Warranty claims
(8,986
)
 
(7,476
)
Foreign currency translation
(812
)
 
1,687

 Balance at June 30
$
50,549

 
$
40,815

Accrued warranty reported in the accompanying consolidated financial statements as of June 30, 2018 and December 31, 2017 consisted of $22,207 and $25,059 in accrued expenses and other liabilities and $28,342 and $22,458 in other long-term liabilities, respectively.
9. FINANCING ARRANGEMENTS
The Company's borrowings under existing financing arrangements consist of the following:
 
June 30,
 
December 31,
 
2018
 
2017
Long-term notes
$
47,188

 
$
48,982

Less: current portion
(3,637
)
 
(3,604
)
Total long-term debt
$
43,551

 
$
45,378

At June 30, 2018, the Company has an unsecured long-term note of $21,375 of which $1,188 is the current portion. The interest on this unsecured long-term note is variable at 1.20% above LIBOR and is fixed using an interest rate swap at 2.85% per annum. The unsecured long-term note matures in May 2023, at which time the outstanding principal balance will be $15,438. Also at June 30, 2018, the Company has another long-term note that is secured by its corporate aircraft with a outstanding principal balance of $25,813 of which $2,449 is the current portion. The interest on this collateralized long-term note is fixed at 2.74% per annum. The collateralized long-term note matures in July 2022, at which time the outstanding principal balance will be $15,375.
The Company also maintains U.S. and Euro lines-of-credit which are available to certain foreign subsidiaries and allow for borrowings in the local currencies of those subsidiaries. At June 30, 2018 and December 31, 2017, there were no amounts drawn on the U.S. line-of-credit, and there were $398 and $520, respectively, of guarantees issued against the facility which reduce the amount of the facility available to draw. At June 30, 2018 and December 31, 2017, there were no amounts drawn on the Euro lines-of-credit, and there were $567 and $798, respectively, of guarantees issued against those facilities which reduce the amount available to draw. After providing for the guarantees used, the total unused credit lines and overdraft facilities are $109,616 at June 30, 2018.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments The Company's primary market exposures are to interest rates and foreign exchange rates. The Company from time to time may use certain derivative financial instruments to help manage these exposures. The Company executes these instruments with financial institutions it judges to be credit-worthy. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. During the second quarter of 2018, the Company entered into foreign currency forward contracts to hedge the value of intercompany dividends declared in Euros by the Company's German subsidiary. The dividends were partially paid in the second quarter, and the remaining will be paid during the third quarter of 2018. These contracts are not designated as

14

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


hedging instruments for accounting purposes. The Company also has an interest rate swap that is classified as a cash flow hedge of its variable rate debt.
The fair value amounts in the consolidated balance sheets were:
 
Notional Amounts1
 
Other Assets
 
Other Current Liabilities
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$
116,465

 
$

 
$

 
$

 
$
713

 
$

Derivative designated as a cash flow hedge:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
21,375

 
21,969

 
18

 
16

 

 

  (1) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

Gains associated with derivative instruments not designated as hedging instruments are as follows:
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Classification
 
2018
 
2017
 
2018
 
2017
Loss recognized in income
 
Loss on foreign exchange
 
$
1,188

 
$

 
$
1,188

 
$


The following table reflects the effect of the interest rate swap contract designated as a cash flow hedging instrument in the Company's financial statements:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Effective portion recognized in other comprehensive income, pretax:
 
 
 
 
 
 
 
Interest rate swap
$

 
$
(13
)
 
$
2

 
$
(40
)
11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business.
These proceedings may include allegations of infringement of intellectual property, commercial disputes and employment
matters. As of June 30, 2018 and through the filing date of these Consolidated Financial Statements, the Company has no legal proceedings ongoing that management estimates could have a material effect on the Company's Consolidated Financial Statements.
12. INCOME TAXES
The effective tax rates for the three months ended June 30, 2018 and 2017 were 25.6% and 26.5%, respectively. For the six months ended June 30, 2018 and 2017, the effective tax rates were 25.4% and 26.3%, respectively. The reduction in the tax rate is primarily due to the reduction in the U.S. statutory tax rate to 21%, which was offset in part by the impact of other changes made in the U.S. tax legislation passed in December 2017. There were discrete tax benefits of $2,407 and $5,096 for the three months ended June 30, 2018 and 2017, respectively, and $8,907 and $9,047 for the six months ended June 30, 2018 and 2017, respectively. The discrete items were primarily the result of stock-based compensation.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The following is a summary of the activity of the Company’s unrecognized tax benefits for six months ended June 30, 2018 and 2017:

15

Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


 
2018
 
2017
Balance at January 1
$
10,370

 
$
6,403

Change in prior period positions

 
(2,240
)
Additions for tax positions in current period
745

 

 Balance at June 30
$
11,115

 
$
4,163

Substantially all of the liability for uncertain tax benefits related to various federal, state and foreign income tax matters would benefit the Company's effective tax rate, if recognized. The Company has been notified of tax audits in Germany (2013 - 2016) and Japan (2015 - 2017), which will start later this year.
SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act, provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As noted at year end, the Company was able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax. The Company has not made any additional measurement-period adjustments related to these items during the quarter, however, the Company is continuing to gather additional information to complete its accounting for these items and expects to complete its accounting within the prescribed measurement period. For the six months ended June 30, 2018, the Company also recognized an incremental tax expense of $7,600 for the Global Intangible Low Taxed Income ("GILTI") provisions which was partially offset by a benefit of $2,516 related to Foreign Derived Intangible Income ("FDII") deduction in the Tax Act that were effective for the first time during 2018.
13. NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE
The following table sets forth the computation of diluted net income attributable to IPG Photonics Corporation per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to IPG Photonics Corporation
$
121,617

 
$
104,116

 
$
227,951

 
$
179,061

Weighted average shares
53,662

 
53,380

 
53,703

 
53,403

Dilutive effect of common stock equivalents
1,330

 
1,091

 
1,408

 
1,047

Diluted weighted average common shares
54,992

 
54,471

 
55,111

 
54,450

Basic net income attributable to IPG Photonics Corporation per share
$
2.27

 
$
1.95

 
$
4.24

 
$
3.35

Diluted net income attributable to IPG Photonics Corporation per share
$
2.21

 
$
1.91

 
$
4.14

 
$
3.29

For the three months ended June 30, 2018 and 2017, respectively, the computation of diluted weighted average common shares excludes 10,000 and 45,900 common stock equivalents because the effect of including them would be anti-dilutive. The shares excluded for the three months ended June 30, 2018 and 2017, respectively are comprised of 4,000 and 6,400 restricted stock units ("RSUs") and 2,000 and 200 performance stock units ("PSUs"), and 4,000 and 39,300 non-qualified stock options, respectively. For the six months ended June 30, 2018 and 2017, respectively, the computation of diluted weighted average common shares excludes 90,300 and 95,400 common stock equivalents because the effect of including them would be anti-dilutive.The shares excluded for the six months ended June 30, 2018 and 2017, respectively, are comprised of 19,500 and 23,200 RSUs, 63,900 and 64,100 non-qualified stock options and 6,900 and 8,100 performance stock units.
On July 28, 2016, the Company announced that its Board of Directors authorized a share repurchase program (the “Program”) to mitigate the dilutive impact of shares issued upon exercise or release under the Company's various employee and director equity compensation and employee stock purchase plans. The Program limited aggregate share repurchases to no more than $100,000 over the period ended June 30, 2018. Under the Program, the Company's management was authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees and directors under its various employee and director equity compensation and employee stock purchase plans from January 1, 2016 through December 31, 2017.
For the three months ended June 30, 2018, the Company repurchased 131,680 shares of its common stock with an average price of $235.37 per share in the open market. The impact on the reduction of weighted average shares for the three

16

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IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


months ended June 30, 2018 and 2017 was 82,546 shares and 59,256 shares, respectively. During the six months ended June 30, 2018, the Company repurchased a total of 214,578 shares of its common stock with an average price of $237.98 per share in the open market. The impact on the reduction of weighted average shares for the six months ended June 30, 2018 and 2017 was 97,185 shares and 99,421 shares, respectively.
14. SUBSEQUENT EVENTS
On July 31, 2018, the Company announced that its Board of Directors authorized a new $125 million anti-dilutive stock repurchase program following the completion of its previous $100 million repurchase program. Under the new anti-dilutive program, IPG management is authorized to repurchase shares of common stock in an amount not to exceed the greater of (a) the number of shares issued to employees and directors under the Company's various employee and director equity compensation and employee stock purchase plans from January 1, 2018 through March 31, 2019 and (b) $125 million, exclusive of any fees, commissions or other expenses.


17

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."
Overview
We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used in numerous applications, primarily in materials processing. In addition, we offer laser-based systems for certain markets and applications. We sell our products globally to original equipment manufacturers ("OEMs"), system integrators and end users. We market our products internationally primarily through our direct sales force.
We are vertically integrated such that we design and manufacture most of the key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. We also manufacture certain complementary products used with our lasers, including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers.
Factors and Trends That Affect Our Operations and Financial Results
In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.
Net sales. We derive net sales primarily from the sale of fiber lasers and amplifiers. We also sell diode lasers, communications systems, laser systems and complementary products. We sell our products through our direct sales organization and our network of distributors and sales representatives, as well as system integrators. We sell our products to OEMs that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. We also sell our products to end users that build their own systems, which incorporate our products or use our products as an energy or light source. Our scientists and engineers work closely with OEMs, systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications. Our sales cycle varies substantially, ranging from a period of a few weeks to as long as one year or more, but is typically several months.
We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. The majority of our revenue is recognized at a point in time following the transfer of control of products or services to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts.
We develop our products to standard specifications and use a common set of components within our product architectures. Our major products are based upon a common technology platform. We continually enhance these and other products by improving their components and developing new components and new product designs.
The average selling prices of our products generally decrease as the products mature. These decreases result from factors such as decreased manufacturing costs and increases in unit volumes, increased competition, the introduction of new products and market share considerations. In the past, we have lowered our selling prices in order to penetrate new markets and applications. Furthermore, we may negotiate discounted selling prices from time to time with certain customers that purchase multiple units.
Gross margin. Our total gross margin can be significantly affected by total net sales in any period, by product mix, that is, the percentage of our revenue in the period that is attributable to higher or lower power products and the mix of sales between laser and amplifier sources and complete systems, by sales mix between OEM customers who purchase devices from us in high unit volumes and other customers, by mix of sales in different geographies and by other factors, some of which are not under our control.
Within each of our product categories, lasers with a higher average power generally have a higher gross margin; higher power lasers use a greater number of optical components, improving absorption of fixed overhead costs and enabling economies of scale in manufacturing. In addition, certain specialty products have a gross margin which is above our corporate average while the profit margins on some systems can be lower than margins for our laser and amplifier sources, depending on the configuration, volume and competitive forces, among other factors.

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The mix of sales between OEM customers and other customers can affect gross margin because we provide sales price discounts on products based on the number of units ordered. As the number of OEM customers increase and the number of units ordered increases, the average sales price per unit will be reduced. We expect that the impact of reduced sales price per unit will be offset by the manufacturing efficiency provided by high unit volume orders, but the timing and extent of achieving these efficiencies may not always match the mix of sales in any given time period or be realized at all.
Fluctuations in foreign exchange rates can affect gross margin. Generally, when the U.S. Dollar weakens as compared to the Euro, Chinese Yuan or other foreign currencies in which our product is sold, it will benefit gross margin. When the U.S. dollar strengthens as compared to foreign currencies in which our product is sold, it will be a detriment to gross margin.
We also regularly review our inventory for items that are slow-moving, have been rendered obsolete or determined to be excess. Any provision for such slow-moving, obsolete or excess inventory affects our gross margins. For example, we recorded provisions for slow-moving, obsolete or excess inventory totaling $3.5 million and $5.4 million for the three months ended June 30, 2018 and 2017, respectively, and $16.9 million, $22.8 million and $15.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Sales and marketing expense. We expect to continue to expand our worldwide direct sales organization, build and expand applications centers, hire additional sales and marketing personnel at our existing and new geographic locations as well as to support sales of new product lines, increase the number of units for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales. As such, we expect that our sales and marketing expenses will increase in the aggregate.
Research and development expense. We plan to continue to invest in research and development to improve our existing components and products and develop new components, products, systems and applications technology. The amount of research and development expense we incur may vary from period to period. In general, if net sales continue to increase we expect research and development expense to increase in the aggregate.
General and administrative expense. We expect our general and administrative expenses to increase as we continue to invest in systems and resources in management, finance, legal, information technology, human resources and administration to support our worldwide operations. Legal expenses vary from quarter to quarter based primarily upon the level of litigation and transaction activities.
Foreign Exchange. Because we are a U.S. based company doing business globally, we have both translational and transactional exposure to fluctuations in foreign currency exchange rates. Changes in the relative exchange rate between the U.S. dollar and the foreign currencies in which our subsidiaries operate directly affects our sales, costs and earnings. Differences in the relative exchange rates between where we sell our products and where we incur manufacturing and other operating costs (primarily in the U.S., Germany and Russia) also affects our costs and earnings. Certain currencies experiencing significant exchange rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen and Chinese Yuan have had and could have an additional significant impact on our sales, costs and earnings. Our ability to adjust the foreign currency selling prices of products in response to changes in exchange rates is limited and may not offset the impact of the changes in exchange rates on the translated value of sales or costs. In addition, if we increase the selling price of our products in local currencies, this could have a negative impact on the demand for our products.
Major customers. While we have historically depended on a few customers for a large percentage of our annual net sales, the composition of this group can change from year to year. Net sales derived from our five largest customers as a percentage of our net sales was 28% for the six months ended June 30, 2018 and 28%, 22% and 25% for the full years 2017, 2016 and 2015, respectively. One of our customers accounted for 13% and 15% of our net sales for the six months ended June 30, 2018 and 2017. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our significant customers will continue to change. If any of our significant customers substantially reduced their purchases from us, our results would be adversely affected.
Results of Operations for the three months ended June 30, 2018 compared to the three months ended June 30, 2017
Net sales. Net sales increased by $44.2 million, or 12.0%, to $413.6 million for the three months ended June 30, 2018 from $369.4 million for the three months ended June 30, 2017.

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Sales by Application
 
Three Months Ended June 30,
 
 
 
 
 
 
2018
 
2017
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
Materials processing
 
$
392,001

 
94.8
%
 
$
353,065

 
95.6
%
 
$
38,936

 
11.0
%
Other applications
 
21,612

 
5.2
%
 
16,308

 
4.4
%
 
5,304

 
32.5
%
Total
 
$
413,613

 
100.0
%
 
$
369,373

 
100.0
%
 
$
44,240

 
12.0
%
Sales by Product
 
Three Months Ended June 30,
 
 
 
 
 
 
2018
 
2017
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
High Power Continuous Wave ("CW") Lasers
 
$
266,075

 
64.3
%
 
$
222,204

 
60.2
%
 
$
43,871

 
19.7
 %
Medium Power CW Lasers
 
27,797

 
6.7
%
 
29,988

 
8.1
%
 
(2,191
)
 
(7.3
)%
Low Power CW Lasers
 
3,175

 
0.8
%
 
3,285

 
0.9
%
 
(110
)
 
(3.3
)%
Pulsed Lasers
 
41,582

 
10.1
%
 
41,106

 
11.1
%
 
476

 
1.2
 %
Quasi-Continuous Wave ("QCW") Lasers
 
20,092

 
4.9
%
 
29,482

 
8.0
%
 
(9,390
)
 
(31.8
)%
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
 
54,892

 
13.3
%
 
43,308

 
11.7
%
 
11,584

 
26.7
 %
Total
 
$
413,613

 
100.0
%
 
$
369,373

 
100.0
%
 
$
44,240

 
12.0
 %
Materials processing
Sales for materials processing applications increased by 11.0% driven by higher sales of high power lasers, a record quarter for laser sintering and strong growth for laser systems.
The growth in high power lasers related to strength in sales in cutting applications. The demand for cutting is being driven by an accelerated replacement cycle of CO2 laser-based cutting systems and displacement on non-laser machine tools such as punch-press machines. Within cutting applications, we continue to see a migration to lasers with higher output powers, which improve processing speeds and enable processing of thicker materials. The shift towards lasers with higher output powers has also benefited sales due to their higher average selling prices. Sales of high power lasers used in sintering and 3D printing applications also increased. The growth in high power lasers used in cutting applications was partially offset by a decline in high power lasers used in welding applications including automotive and battery welding.
The decrease in medium power sales related to fine cutting applications which is partially attributable to a move to kilowatt scale high power lasers for these applications. The decrease in sales related to fine cutting applications was partially offset by an increase in laser sintering and 3D printing applications and welding applications. Based upon the strong sales for laser sintering and 3D printing applications in the first half of 2018, we expect shipments for the remainder of the year to be at reduced levels.
Pulsed laser sales were relatively flat as the demand for marking and engraving application sales decreased, which was offset by the growth in sales of our newer green pulsed lasers for solar cell manufacturing applications.
QCW laser sales decreased due to the expected reduction in demand related to the consumer electronics investment cycle.
Materials processing sales also increased as a result of higher laser systems, accessories including beam delivery, and parts and service sales, which are included in Other Revenue in the Sales by Product table above. The increase in laser systems sales was driven by welding, cutting and cladding applications. Our acquisition of Innovative Laser Technologies during the third quarter of 2017 contributed to the increased sales for laser systems.
Other Applications
Sales from other applications increased 32.5%, with strong growth in advanced applications and communications, partially offset by a decline in medical applications. Within advanced applications, government sales increased largely from directed energy.

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Cost of sales and gross margin. Cost of sales increased by $15.5 million, or 9.5%, to $178.6 million for the three months ended June 30, 2018 from $163.1 million for the three months ended June 30, 2017. Our gross margin increased to 56.8% for the three months ended June 30, 2018 from 55.9% for the three months ended June 30, 2017. Gross margin increased due to product mix, which included increased sales of high power, medium power and pulsed lasers with higher average powers, along with manufacturing efficiencies and lower provision for inventory reserves. These increases in gross margin were partially offset by lower average selling prices.
Sales and marketing expense. Sales and marketing expense increased by $2.4 million, or 19.8%, to $14.5 million for the three months ended June 30, 2018 from $12.1 million for the three months ended June 30, 2017. This change was primarily a result of increases in personnel and depreciation expense. As a percentage of sales, sales and marketing expense increased to 3.5% of sales for the three months ended June 30, 2018 from 3.3% for the three months ended June 30, 2017 .
Research and development expense. Research and development expense increased by $5.8 million, or 22.5%, to $31.8 million for the three months ended June 30, 2018, compared to $26.0 million for the three months ended June 30, 2017. This change was primarily a result of increases in personnel, contractors, R&D materials and depreciation expense. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as UV, visible and mid-IR, lasers with ultrafast pulses, laser based systems for material processing, projection, display and medical as well as accessories such as welding and cutting heads. In addition to new products research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense increased to 7.7% for the three months ended June 30, 2018 from 7.0% for the three months ended June 30, 2017.
General and administrative expense. General and administrative expense increased by $4.2 million, or 21.3%, to $24.1 million for the three months ended June 30, 2018 from $19.9 million for the three months ended June 30, 2017. This change was primarily a result of increases in personnel, consultants and depreciation expense. As a percentage of sales, general and administrative expense increased to 5.8% for the three months ended June 30, 2018 from 5.4% for the three months ended June 30, 2017.
Effect of exchange rates on net sales, gross profit and operating expenses. We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro 0.91, Russian Ruble 57, Japanese Yen 111 and Chinese Yuan 6.86, respectively, we would have expected net sales to be $22.5 million lower, gross profit to be $14.9 million lower and total operating expenses to be $0.2 million lower.
(Gain) loss on foreign exchange. We incurred a foreign exchange loss of $2.1 million for the three months ended June 30, 2018 as compared to a $7.2 million loss for the three months ended June 30, 2017. The foreign exchange loss for the three months ended June 30, 2018 was primarily attributable to depreciation of the Chinese Yuan offset by a gain attributable to depreciation of the Euro and the Russian Ruble. The foreign exchange loss for the three months ended June 30, 2017 was primarily attributable to the appreciation of the Euro offset by depreciation of the Russian Ruble and appreciation of the Chinese Yuan as compared to the U.S. Dollar.
Provision for income taxes. Provision for income taxes was $41.9 million for the three months ended June 30, 2018 compared to $37.5 million for the three months ended June 30, 2017. The effective tax rates were 25.6% and 26.5% for the three months ended June 30, 2018 and 2017, respectively. For the three months ended June 30, 2018, the effective tax rate benefited from the lower effective tax rate for income earned in the United States due to enactment of the Tax Cuts and Jobs Act (the "Tax Act") and an increase in excess tax benefits related to equity compensation, which were partially offset by provisions for uncertain tax positions and other matters.
Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation increased by $17.5 million to $121.6 million for the three months ended June 30, 2018 compared to $104.1 million for the three months ended June 30, 2017. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 1.2 percentage points to 29.4% for the three months ended June 30, 2018 from 28.2% for the three months ended June 30, 2017 due to the factors described above.
Results of Operations for the six months ended June 30, 2018 compared to the six months ended June 30, 2017
Net sales. Net sales increased by $118.3 million, or 18.0%, to $773.5 million for the six months ended June 30, 2018 from $655.2 million for the six months ended June 30, 2017.

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Sales by Application
 
Six Months Ended June 30,
 
 
 
 
 
 
2018
 
2017
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
Materials processing
 
$
731,215

 
94.5
%
 
$
617,196

 
94.2
%
 
$
114,019

 
18.5
%
Other applications
 
42,262

 
5.5
%
 
38,023

 
5.8
%
 
4,239

 
11.1
%
Total
 
$
773,477

 
100.0
%
 
$
655,219

 
100.0
%
 
$
118,258

 
18.0
%
Sales by Product
 
Six Months Ended June 30,
 
 
 
 
 
 
2018
 
2017
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
High-Power CW Lasers
 
$
496,649

 
64.2
%
 
$
390,148

 
59.5
%
 
$
106,501

 
27.3
 %
Medium-Power CW Lasers
 
49,268

 
6.4
%
 
49,729

 
7.6
%
 
(461
)
 
(0.9
)%
Low-Power CW Lasers
 
7,104

 
0.9
%
 
6,680

 
1.0
%
 
424

 
6.4
 %
Pulsed Lasers
 
79,835

 
10.3
%
 
73,561

 
11.2
%
 
6,274

 
8.5
 %
QCW Lasers
 
36,292

 
4.7
%
 
50,850

 
7.8
%
 
(14,558
)
 
(28.6
)%
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
 
104,329

 
13.5
%
 
84,251

 
12.9
%
 
20,078

 
23.8
 %
Total
 
$
773,477

 
100.0
%
 
$
655,219

 
100.0
%
 
$
118,258

 
18.0
 %
Materials processing
Sales for materials processing applications increased due to higher sales of high-power lasers, pulsed lasers, and laser systems.
The growth in high power lasers related to strength in sales of cutting applications. The demand for cutting is being driven by an accelerated replacement cycle of CO2 laser-based cutting systems and displacement on non-laser machine tools such as punch-press machines. Within the cutting applications, we continue to see a migration to lasers with higher output powers which improve processing speeds and enable processing of thicker materials. The shift towards lasers with higher output powers has also benefited sales due to their higher average selling prices. The increase in high-power sales was partially offset by a decrease in high-power metal welding sales including automotive and battery welding.
Medium-power laser sales were consistent due to growth in laser sintering and 3D printing being offset by a decline in sales for fine cutting. The decline in sales for fine cutting is partially attributable to a move to kilowatt scale high power lasers for fine cutting applications. Based upon the strong sales for laser sintering and 3D printing applications in the first half of 2018, we expect shipments for the remainder of the year to be at reduced levels.
Pulsed laser sales increased due to growth in marking and engraving and cleaning, stripping and ablation, which was partially offset by decreases in welding and cutting applications. Within the pulsed laser category, the rate of sales increases was larger for green pulsed lasers than for the low power and high power pulsed lasers.
QCW laser sales decreased due to the expected reduction in demand related to the consumer electronics investment cycle.
Materials processing sales also increased as a result of higher laser systems, accessories including beam delivery, and parts and service sales, which are included in Other Revenue in the Sales by Product chart above. The increase in laser systems sales was driven by welding, cutting, and cladding applications as well as from the acquisition of ILT during the third quarter of 2017.
Other Applications
Sales from other applications increased by 11.1% with strong growth in advanced applications and growth in medical, partially offset by a decline in communications. Within advanced applications, government sales increased largely from directed energy.

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Cost of sales and gross margin. Cost of sales increased by $43.5 million, or 14.9%, to $335.1 million for the six months ended June 30, 2018 from $291.7 million for the six months ended June 30, 2017. Our gross margin increased to 56.7% from 55.5% for the six months ended June 30, 2018 and 2017, respectively. Gross margin increased due to product mix, which included increased sales of high-power and pulsed lasers with higher average powers, along with manufacturing efficiencies and lower provision for inventory reserves. These increases in gross margin were partially offset by lower average selling prices.
Sales and marketing expense. Sales and marketing expense increased by $5.1 million, or 22.2%, to $28.1 million for the six months ended June 30, 2018 from $23.0 million for the six months ended June 30, 2017, primarily as a result of increased expenses for personnel, trade show and exhibitions, and depreciation. As a percentage of sales, sales and marketing expense increased to 3.6% of sales for the six months ended June 30, 2018 from 3.5% for the six months ended June 30, 2017.
Research and development expense. Research and development expense increased by $11.7 million, or 23.8%, to $60.4 million for the six months ended June 30, 2018, compared to $48.7 million for the six months ended June 30, 2017, primarily as a result of an increase in expenses related to personnel, contractors, consultants, materials used for research and development projects and depreciation. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as ultra-violet, visible and mid-infrared; lasers with ultra-fast pulses; laser-based systems for material processing, projection, display and medical; new telecom products including pluggable transceivers; and laser accessories such as scanners, welding and cutting heads. In addition to new products research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense increased to 7.8% for the six months ended June 30, 2018 from 7.4% for the six months ended June 30, 2017.
General and administrative expense. General and administrative expense increased by $12.0 million, or 31.9%, to $49.6 million for the six months ended June 30, 2018 from $37.6 million for the six months ended June 30, 2017, primarily as a result of increased expenses for personnel, consultants, information technology, and accounting. As a percentage of sales, general and administrative expense increased to 6.4% for the six months ended June 30, 2018 from 5.7% for the six months ended June 30, 2017.
Effect of exchange rates on net sales, gross profit and operating expenses. We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro 0.92, Russian Ruble 58, Japanese Yen 112 and Chinese Yuan 6.88, respectively, we would have expected net sales for the six months ended June 30, 2018 to be $52.3 million lower, gross profit to be $33.4 million higher and total operating expenses would have been $2.0 million lower.
(Gain) Loss on foreign exchange. We incurred a foreign exchange gain of $3.2 million for the six months ended June 30, 2018 as compared to a loss of $11.6 million for the six months ended June 30, 2017. The gain for the six months ended June 30, 2018 was primarily attributable to the depreciation of the Euro and the Russian Ruble as compared to the U.S. Dollar, which was partially offset by a loss attributable to depreciation of the Chinese Yuan. The loss for the six months ended June 30, 2017 was primarily attributable to appreciation of the Euro compared to the U.S. Dollar partially offset by the appreciation of the Russian Ruble and the Chinese Yuan compared to the U.S. Dollar.
Provision for income taxes. Provision for income taxes was $77.4 million for the six months ended June 30, 2018 compared to $63.9 million for the six months ended June 30, 2017, representing an effective tax rate of 25.4% and 26.3% for the six months ended June 30, 2018 and 2017, respectively. The effective tax rate benefited from the lower effective tax rate for income earned in the United States due to enactment of the Tax Cuts and Jobs Act (the "Tax Act") and an increase in excess tax benefits related to equity compensation, which were partially offset by provisions for uncertain tax positions and other matters.
Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation increased by $48.9 million to $228.0 million for the six months ended June 30, 2018 compared to $179.1 million for the six months ended June 30, 2017. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 2.2 percentage points to 29.5% for the six months ended June 30, 2018 from 27.3% for the six months ended June 30, 2017 due to the factors described above.

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Liquidity and Capital Resources
Our principal sources of liquidity as of June 30, 2018 consisted of cash and cash equivalents of $816.8 million, short-term investments of $309.0 million, unused credit lines and overdraft facilities of $109.6 million and other working capital (excluding cash and cash equivalents and short-term investments) of $500.0 million. This compares to cash and cash equivalents of $909.9 million, short-term investments of $206.3 million, unused credit lines and overdraft facilities of $111.0 million and other working capital (excluding cash and cash equivalents and short-term investments) of $439.0 million as of December 31, 2017. The decrease in cash and cash equivalents of $93.1 million relates primarily to cash used in investing activities of $228.3 million and cash used in financing activities of $42.2 million. The cash used in investing activities includes$128.2 million of net investment purchases. During second quarter of 2018, we declared and partially paid an intercompany dividend from our Germany subsidiary to the U.S. parent in order to centralize cash in our functional currency, minimize foreign currency exposure and generate investment income. These outflows were partially offset by cash provided by operating activities in the six months ended June 30, 2018 of $208.6 million. In addition, the effect of exchange rates decreased cash and cash equivalents by $31.1 million.
Short-term investments at June 30, 2018, consist of liquid investments including U.S. government and government agency notes, corporate notes, commercial paper and certificates of deposit with original maturities of greater than three months but less than one year. We also hold long-term investments, included in other assets on the consolidated balance sheets, which consist of the corporate bonds detailed above with maturities of less than two years and auction rate securities totaling $26.6 million.
Our long-term debt consists of two long-term notes with a combined total outstanding balance at June 30, 2018 of $47.2 million of which $3.6 million is the current portion. We have an unsecured long-term note with an outstanding principal balance at June 30, 2018 of $21.4 million of which $1.2 million is the current portion. The interest on this unsecured long-term note is variable at 1.20% above LIBOR and is fixed using an interest rate swap at 2.85% per annum. The unsecured long-term note matures in May 2023, at which time the outstanding principal balance will be $15.4 million. We have another long-term note that is secured by our corporate aircraft with an outstanding principal balance of $25.8 million of which $2.4 million is the current portion. The interest on this collateralized long-term note is fixed at 2.74% per annum. The collateralized long-term note matures in July 2022, at which time the outstanding principal balance will be $15.4 million.
We believe that our existing cash and cash equivalents, short-term investments, our cash flows from operations and our existing lines of credit provide us with the financial flexibility to meet our liquidity and capital needs, as well as to complete certain acquisitions of businesses and technologies. We intend to continue to pursue acquisition opportunities based upon market conditions and the strategic importance and valuation of the target company. We may consider issuing debt or equity to finance acquisitions depending on the timing and size of the acquisition. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of the economic environment on our sales growth, the timing and extent of spending to support development efforts, the expansion of the global sales and marketing activities, government regulation including trade sanctions, the timing and introductions of new products, the need to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products.
The following table details our line-of-credit facilities as of June 30, 2018: 
 
 
 
 
 
 
 
 
 
Description
 
Total Facility
 
Interest Rate
 
Maturity
 
Security
U.S. Revolving Line of Credit (1)
 
Up to $50.0 million