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IPG PHOTONICS CORP - Quarter Report: 2017 March (Form 10-Q)

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 March 31, 2017
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 May 3, 2017, there were 53,681,885 shares of the registrant's common stock issued and outstanding.


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 


Table of Contents

PART I-FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
2017
 
2016
 
(In thousands, except share
and per share data)
ASSETS
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
697,778

 
$
623,855

Short-term investments
165,025

 
206,779

Accounts receivable, net
180,226

 
155,901

Inventories
261,893

 
239,010

Prepaid income taxes
41,959

 
34,128

Prepaid expenses and other current assets
44,133

 
41,289

Total current assets
1,391,014

 
1,300,962

DEFERRED INCOME TAXES, NET
47,048

 
42,442

GOODWILL
19,831

 
19,828

INTANGIBLE ASSETS, NET
27,892

 
28,789

PROPERTY, PLANT AND EQUIPMENT, NET
395,858

 
379,375

OTHER ASSETS
20,930

 
18,603

TOTAL
$
1,902,573

 
$
1,789,999

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
3,188

 
$
3,188

Accounts payable
25,388

 
28,048

Accrued expenses and other liabilities
105,737

 
102,485

Income taxes payable
23,423

 
24,554

Total current liabilities
157,736

 
158,275

DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES
41,726

 
36,365

LONG-TERM DEBT, NET OF CURRENT PORTION
36,839

 
37,635

Total liabilities
236,301

 
232,275

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

IPG PHOTONICS CORPORATION EQUITY:
 
 
 
Common stock, $0.0001 par value, 175,000,000 shares authorized; 53,636,419 and 53,425,945 shares issued and outstanding, respectively, at March 31, 2017; 53,354,579 and 53,251,805 shares issued and outstanding, respectively, at December 31, 2016
5

 
5

Treasury stock, at cost (210,474 and 102,774 shares held)
(21,485
)
 
(8,946
)
Additional paid-in capital
668,003

 
650,974

Retained earnings
1,171,198

 
1,094,108

Accumulated other comprehensive loss
(151,626
)
 
(178,583
)
Total IPG Photonics Corporation equity
1,666,095

 
1,557,558

NONCONTROLLING INTERESTS
177

 
166

Total equity
1,666,272

 
1,557,724

TOTAL
$
1,902,573

 
$
1,789,999

See notes to consolidated financial statements.

1
Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands, except per share data)
NET SALES
$
285,846

 
$
207,248

COST OF SALES
128,579

 
92,838

GROSS PROFIT
157,267

 
114,410

OPERATING EXPENSES:
 
 
 
Sales and marketing
10,827

 
8,034

Research and development
22,780

 
17,489

General and administrative
17,726

 
13,901

Loss on foreign exchange
4,453

 
4,967

Total operating expenses
55,786

 
44,391

OPERATING INCOME
101,481

 
70,019

OTHER (EXPENSE) INCOME, Net:
 
 
 
Interest income, net
308

 
192

Other (expense) income, net
(529
)
 
7

Total other (expense) income
(221
)
 
199

INCOME BEFORE PROVISION FOR INCOME TAXES
101,260

 
70,218

PROVISION FOR INCOME TAXES
(26,328
)
 
(20,890
)
NET INCOME
74,932

 
49,328

LESS: NET (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(13
)
 
2

NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION
$
74,945

 
$
49,326

NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE:
 
 
 
Basic
$
1.40

 
$
0.93

Diluted
$
1.38

 
$
0.92

WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
Basic
53,368

 
52,898

Diluted
54,370

 
53,621

See notes to consolidated financial statements.


2
Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Net income
$
74,932

 
$
49,328

Other comprehensive income, net of tax:
 
 
 
Translation adjustments
26,699

 
28,495

Unrealized loss on derivatives
(16
)
 
—

Loss on available-for-sale investments, net of tax reclassified to net income
298

 
—

Total other comprehensive loss
26,981

 
28,495

Comprehensive income
101,913

 
77,823

Comprehensive income attributable to noncontrolling interest
11

 
5

Comprehensive income attributable to IPG Photonics Corporation
$
101,902

 
$
77,818

See notes to consolidated financial statements.


3
Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
74,932

 
$
49,328

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,504

 
11,394

Deferred income taxes
4,208

 
(2,741
)
Stock-based compensation
5,351

 
4,959

Unrealized (gains) losses on foreign currency transactions
3,462

 
4,802

Other
842

 
175

Provisions for inventory, warranty & bad debt
9,002

 
8,927

Changes in assets and liabilities that (used) provided cash:
 
 
 
Accounts receivable
(22,801
)
 
8,140

Inventories
(22,408
)
 
(19,365
)
Prepaid expenses and other current assets
(3,972
)
 
(178
)
Accounts payable
(1,560
)
 
(6,749
)
Accrued expenses and other liabilities
(659
)
 
(8,378
)
Income and other taxes payable
(10,081
)
 
14,583

Net cash provided by operating activities
50,820

 
64,897

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of and deposits on property, plant and equipment
(21,875
)
 
(24,960
)
Proceeds from sales of property, plant and equipment
99

 
129

Purchases of short-term investments
(28,173
)
 
(29,899
)
Proceeds from short-term investments
70,370

 
10,000

Other
(47
)
 
46

Net cash provided by (used in) investing activities
20,374

 
(44,684
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from line-of-credit facilities
1,934

 
2,214

Payments on line-of-credit facilities
(1,934
)
 
(2,223
)
Principal payments on long-term borrowings
(797
)
 
(500
)
Exercise of employee stock options and shares withheld to cover employee restricted stock taxes
9,600

 
2,644

Purchase of treasury stock, at cost
(12,539
)
 
—

Net cash (used in) provided by financing activities
(3,736
)
 
2,135

EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
6,465

 
8,812

NET INCREASE IN CASH AND CASH EQUIVALENTS
73,923

 
31,160

CASH AND CASH EQUIVALENTS — Beginning of period
623,855

 
582,532

CASH AND CASH EQUIVALENTS — End of period
$
697,778

 
$
613,692

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
$
447

 
$
171

Cash paid for income taxes
$
31,371

 
$
11,955

Non-cash transactions:
 
 
 
Demonstration units transferred from inventory to other assets
$
802

 
$
623

Inventory transferred to machinery and equipment
$
1,051

 
$
361

(Reductions) additions to property, plant and equipment included in accounts payable
$
(1,310
)
 
$
326

See notes to consolidated financial statements.

4
Table of Contents

IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
 
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands, except share and per share data)
 
Shares
 
Amount
 
Shares
 
Amount
COMMON STOCK
 
 
 
 
 
 
 
Balance, beginning of year
53,251,805

 
$
5

 
52,883,902

 
$
5

Exercise of stock options
281,840

 
—

 
82,558

 
—

Purchased common stock
(107,700
)
 
—

 
—

 
—

Balance, end of period
53,425,945

 
5

 
52,966,460

 
5

TREASURY STOCK
 
 
 
 
 
 
 
Balance, beginning of year
(102,774
)
 
(8,946
)
 
—

 
—

Purchased treasury stock
(107,700
)
 
(12,539
)
 
—

 
—

Balance, end of period
(210,474
)
 
(21,485
)
 
—

 
—

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
Balance, beginning of year
 
 
650,974

 
 
 
607,649

Stock-based compensation
 
 
5,351

 
 
 
4,959

Exercise of employee stock options and shares withheld to cover employee restricted stock taxes
 
 
9,600

 
 
 
3,548

Recently adopted accounting standards (NOTE 2)
 
 
2,078

 
 
 
—

Balance, end of period
 
 
668,003

 
 
 
616,156

RETAINED EARNINGS
 
 
 
 
 
 
 
Balance, beginning of year
 
 
1,094,108

 
 
 
833,356

Net income attributable to IPG Photonics Corporation
 
 
74,945

 
 
 
49,326

Recently adopted accounting standards (NOTE 2)
 
 
2,145

 
 
 
—

Balance, end of period
 
 
1,171,198

 
 
 
882,682

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(178,583
)
 
 
 
(181,482
)
Translation adjustments
 
 
26,675

 
 
 
28,495

Change in unrealized loss on derivatives, net of tax
 
 
(16
)
 
 
 
—

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

 
 
 
—

Balance, end of period
 
 
(151,626
)
 
 
 
(152,987
)
TOTAL IPG PHOTONICS CORPORATION EQUITY
 
 
$
1,666,095

 
 
 
$
1,345,856

NONCONTROLLING INTERESTS ("NCI")
 
 
 
 
 
 
 
Balance, beginning of year
 
 
166

 
 
 
1,137

Net (loss) income attributable to NCI
 
 
(13
)
 
 
 
2

Other comprehensive income attributable to NCI
 
 
24

 
 
 
3

Balance, end of period
 
 
177

 
 
 
1,142

TOTAL EQUITY
 
 
$
1,666,272

 
 
 
$
1,346,998

See notes to consolidated financial statements.

5
Table of Contents

IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. 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, 2016.
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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including income tax impact and classification on the consolidated statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and the Company adopted this statement effective January 1, 2017. Under ASU 2016-09, excess tax benefits and deficiencies as a result of stock option exercises and restricted stock unit vesting are to be recognized as discrete items within income tax expense or benefit in the consolidated statements of comprehensive income in the reporting period in which they occur. Upon adoption, the Company recognized excess tax benefits from stock award exercises and restricted stock unit vesting in the first quarter of 2017 as a discrete tax benefit which reduced the provision for income taxes for the three months ended March 31, 2017, by $4,130. The adoption of ASU 2016-09 also changed the calculation of fully diluted shares outstanding for the three months ended March 31, 2017. The excess tax benefits have been excluded from the calculation of assumed proceeds in the Company's calculation of diluted weighted shares under the new standard. The Company's diluted weighted shares outstanding as of March 31, 2017, increased by 184,161 shares due to adoption of the new standard.
The adoption of ASU 2016-09 also requires the cumulative effect of initially applying the standard to be recorded as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application. This resulted in a cumulative effect increase of $3,464 to retained earnings and deferred tax assets. Also, as a result of the adoption of ASU 2016-09, the Company has made an accounting policy election to record forfeitures as they occur rather than estimating expected forfeitures. The calculated cumulative effect was a decrease in retained earnings by $1,319 and an increase in deferred tax assets and additional paid-in capital by $759 and $2,078, respectively, as of January 1, 2017.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 was issued in conjunction with ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), to clarify guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new guidance clarifies what constitutes an "in substance nonfinancial asset" and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments should be applied at the same time as those in ASU 2014-09 with interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
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. ASU 2017-04 is effective for public companies for annual reporting periods beginning after December 15, 2020, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date and require a disclosure as to the nature of and reason for the change in accounting principle upon transition. Early adoption is allowed for al

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


l entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805)" ("ASU 2017-01"). ASU 2017-01 revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for public companies for annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. Early application generally is allowed for transactions that have not been reported in financial statements which have been issued or made available for issuance. The Company is currently evaluating the potential impact that the standard will have on its consolidated financial statements upon adoption.
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 will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. Deferred tax assets should be assessed to determine if realizable. Disclosures will be required for the (i) reason for and notice of change, (ii) effect of change on income from continuing operations and (iii) cumulative effect of change on retained earnings. Public entities will apply these changes in annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. Early adoption is permitted. The Company is continuing to evaluate the standard but does not expect that it will have a material effect on its consolidated financial statements upon adoption.
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 continuing to evaluate the standard but does not expect that it will have a material effect on its consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have and does not expect it to have a material effect on its consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09. ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers" ("ASU 2015-14"), which defers the effective date of ASU 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending December 31, 2018. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered "completed" for purposes of applying the transition guidance. The Company has completed an initial assessment of the new guidance and is currently evaluating the impact this standard may have on its financial statements. The Company has not decided upon which one of two retrospective application methods it will be using upon adoption.

7
Table of Contents
IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


3. INVENTORIES
Inventories consist of the following:
 
March 31,
 
December 31,
 
2017
 
2016
Components and raw materials
$
106,829

 
$
93,284

Work-in-process
24,666

 
44,723

Finished components and devices
130,398

 
101,003

Total
$
261,893

 
$
239,010

The Company recorded inventory provisions totaling $3,971 and $3,953 for the three months ended March 31, 2017 and 2016, 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.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
 
March 31,
 
December 31,
 
2017
 
2016
Accrued compensation
$
37,607

 
$
43,761

Customer deposits and deferred revenue
43,212

 
34,571

Current portion of accrued warranty
16,974

 
15,711

Other
7,944

 
8,442

Total
$
105,737

 
$
102,485

5. FINANCING ARRANGEMENTS
The Company's borrowings under existing financing arrangements consist of the following:
 
March 31,
 
December 31,
 
2017
 
2016
Term debt:
 
 
 
Long-term notes
$
40,027

 
$
40,823

Less: current portion
(3,188
)
 
(3,188
)
Total long-term debt
$
36,839

 
$
37,635

The U.S. and Euro lines-of-credit are available to certain foreign subsidiaries and allow for borrowings in the local currencies of those subsidiaries. The U.S. line-of-credit is also available to the Company. At March 31, 2017 and December 31, 2016, there were no amounts drawn on the U.S. line-of-credit, and there were $22 and $2,828, respectively, of guarantees issued against the facility which reduces the amount of the facility available to draw. At March 31, 2017 and December 31, 2016, there were no amounts drawn on the Euro line-of-credit, and there were $12,716 and $8,221, respectively, of guarantees issued against the facility which reduces the amount of the facility available to draw.
At March 31, 2017, the amount due on the two long-term notes was $40,027 of which $3,188 is the current portion. The Company has an unsecured note of $22,860 of which $1,188 is the current portion. The interest on this unsecured note is variable at 1.20% above the LIBOR rate and is fixed using an interest rate swap at 2.85% per annum. The unsecured note matures in May 2023, at which time the outstanding debt balance will be $15,438. The Company has another note that is secured by the Company's corporate aircraft of $17,167 of which $2,000 is the current portion. The interest rate on this secured note is fixed at 2.81% per annum and the collateralized long-term note matures in October 2019, at which time the outstanding debt balance will be $12,000.

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


6. 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 March 31,
 
2017
 
2016
Net income attributable to IPG Photonics Corporation
$
74,945

 
$
49,326

Weighted average shares
53,368

 
52,898

Dilutive effect of common stock equivalents
1,002

 
723

Diluted weighted average common shares
54,370

 
53,621

Basic net income attributable to IPG Photonics Corporation per share
$
1.40

 
$
0.93

Diluted net income attributable to IPG Photonics Corporation per share
$
1.38

 
$
0.92

For the three months ended March 31, 2017 and 2016, respectively, the computation of diluted weighted average common shares excludes common stock equivalents of 73,300 shares and 65,100 shares which includes restricted stock units ("RSUs") of 44,400 and 49,600 and performance stock units ("PSUs") of 17,100 and 15,000, respectively. These common stock equivalents are excluded because the effect of including them would be anti-dilutive.
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. Under the Program, the Company's management is 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. The Program limits aggregate share repurchases to no more than $100,000 over a period ending June 30, 2018.
For the three months ended March 31, 2017, the Company repurchased 107,700 shares of its common stock with an average price of $116.42 per share in the open market. The impact on the reduction of weighted average shares for the three months ended March 31, 2017 was 31,140 shares. As the Program was announced in July 2016, there were repurchases made by the Company for the three months ended March 31, 2016.
7. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments – The Company's primary market exposures are to interest rates and foreign exchange rates. The Company uses 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. The Company has no derivatives that are not accounted for as a hedging instrument.
Cash flow hedges – The Company entered into a cash flow hedge which is an interest rate swap associated with a long-term note issued during the second quarter of 2016 that will terminate with the long-term note in May 2023. The fair value amounts in the consolidated balance sheet related to the interest rate swap was:
Notional Amounts1
 
Other Assets
 
Other Long-Term Liabilities
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31,
 
December 31,
2017
 
2016
 
2017
 
2016
 
2017
 
2016
$
22,860

 
$
23,156

 
$
50

 
$
77

 
$
—

 
$
—

  (1) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.
The derivative gains and losses in the consolidated statements of income related to the Company's interest rate swap contracts was as follows:

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


 
Three Months Ended March 31,
 
2017
 
2016
Effective portion recognized in other comprehensive income, pretax:
 
 
 
Interest rate swap
$
(27
)
 
$
—

Effective portion reclassified from other comprehensive income to interest expense, pretax:
 
 
 
Interest rate swap
$
—

 
$
—

Ineffective portion recognized in income:
 
 
 
Interest rate swap
$
—

 
$
—

8. FAIR VALUE MEASUREMENTS
The Company's financial instruments consist of cash equivalents, short-term investments, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, contingent purchase consideration and interest rate swaps.
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 cash equivalents, short-term investments, accounts receivable, accounts payable, drawings on revolving lines of credit, the long-term notes and interest rate swaps 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.

10
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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 March 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Cash equivalents
$
306,000

 
$
306,000

 
$
—

 
$
—

Short-term investments
164,928

 
164,928

 
—

 
—

Interest rate swap
50

 
—

 
50

 
—

Auction rate securities
1,146

 
—

 
—

 
1,146

Total assets
$
472,124

 
$
470,928

 
$
50

 
$
1,146

Liabilities
 
 
 
 
 
 
 
Long-term notes
$
40,500

 
$
—

 
$
40,500

 
$
—

Total liabilities
$
40,500

 
$
—

 
$
40,500

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 Fair Value Measurements at December 31, 2016
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Cash equivalents
$
179,699

 
$
179,699

 
$
—

 
$
—

Short-term investments
206,616

 
206,616

 
—

 
—

Interest rate swap
77

 
—

 
77

 
—

Auction rate securities
1,144

 
—

 
—

 
1,144

Total assets
$
387,536

 
$
386,315

 
$
77

 
$
1,144

Liabilities
 
 
 
 
 
 
 
Long-term notes
$
41,351

 
$
—

 
$
41,351

 
$
—

Total liabilities
$
41,351

 
$
—

 
$
41,351

 
$
—

Short-term investments are recorded at book value. Unrealized gains or losses are not recorded since these investments are considered held-to-maturity and 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. The fair value of the short-term investments considered available-for-sale as of December 31, 2016 was $41,591. This amount included an unrealized loss of $432. There were no short-term investments considered available-for-sale as of March 31, 2017. The fair value of the short-term investments considered held-to-maturity as of March 31, 2017 and December 31, 2016 was $164,928 and $165,025, respectively, which represents an unrealized loss of $97 and $163, respectively, as compared to the book value recorded on the Consolidated Balance Sheets for the same periods.
The fair value of the auction rate securities considered prices observed in inactive secondary markets for the securities held by the Company.
The fair value of accrued contingent purchase consideration incurred was determined using an income approach at the acquisition date and reporting date. That approach is based on significant inputs that are not observable in the market. Key assumptions include assessing the probability of meeting certain milestones required to earn the contingent purchase consideration.

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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 movement in Level 3 assets and liabilities measured at fair value:
 
Three Months Ended March 31,
 
2017
 
2016
Auction Rate Securities
 
 
 
Balance, beginning of period
$
1,144

 
$
1,136

Change in fair value and accretion
2

 
2

Balance, end of period
$
1,146

 
$
1,138

Contingent Purchase Consideration
 
 
 
Balance, beginning of period
$
—

 
$
20

Period transactions
—

 
—

Change in fair value and currency fluctuations
—

 
1

Balance, end of period
$
—

 
$
21

9. GOODWILL AND INTANGIBLES
The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2017:
 
Amounts
Balance at January 1
$
19,828

Foreign exchange adjustment
3

Total goodwill arising from acquisition
—

 Balance at March 31
$
19,831

Intangible assets, subject to amortization, consisted of the following:
 
March 31, 2017
 
December 31, 2016
 
 
Gross  Carrying
Amount
Accumulated
Amortization
Net  Carrying
Amount
Weighted-
Average  Lives
Gross  Carrying
Amount
Accumulated
Amortization
Net  Carrying
Amount
Weighted-
Average  Lives
 
 
 
 
 
 
 
 
 
Patents
$
8,114

$
(5,015
)
$
3,099

7 Years
$
8,114

$
(4,926
)
$
3,188

7 Years
Customer relationships
12,777

(3,914
)
8,863

9 Years
12,727

(3,621
)
9,106

9 Years
Production know-how
6,641

(4,305
)
2,336

8 Years
6,618

(4,093
)
2,525

8 Years
Technology, trademark and tradename
18,134

(4,540
)
13,594

8 Years
17,910

(3,940
)
13,970

8 Years
 
$
45,666

$
(17,774
)
$
27,892

 
$
45,369

$
(16,580
)
$
28,789

 
Amortization expense for the three months ended March 31, 2017 and 2016 was $1,065 and $543, respectively. The estimated future amortization expense for intangibles for the remainder of 2017 and subsequent years is as follows:
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
$3,364
 
$4,421
 
$4,373
 
$3,755
 
$3,585
 
$8,394
 
$27,892
10. 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.

12
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IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)


The following table summarizes product warranty activity recorded during the three months ended March 31, 2017 and 2016.
 
2017
 
2016
Balance at January 1
$
33,978

 
$
28,210

Provision for warranty accrual
4,523

 
4,814

Warranty claims
(2,966
)
 
(3,562
)
Foreign currency translation
438

 
780

 Balance at March 31
$
35,973

 
$
30,242

Accrued warranty reported in the accompanying consolidated financial statements as of March 31, 2017 and December 31, 2016 consisted of $16,974 and $15,711 in accrued expenses and other liabilities and $18,999 and $18,267 in other long-term liabilities, respectively.
11. INCOME TAXES
A reconciliation of the total amounts of unrecognized tax benefits is as follows:
 
2017
 
2016
Balance at January 1
$
6,403

 
$
7,579

Reductions of prior period positions
—

 
—

Additions for tax positions in prior period
—

 
—

(Reductions) additions for tax positions in current period
—

 
—

 Balance at March 31
$
6,403

 
$
7,579

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.
12. 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 March 31, 2017 and through the filing date of these Financial Statements, the Company has no legal proceedings ongoing that management estimates could have a material effect on the Company's Consolidated Financial Statements.
13. 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. In the fourth quarter of 2016, the Company began assessing the possible sale of its corporate aircraft included within Property, Plant and Equipment, net in its Consolidated Balance Sheets. As a result of this assessment and certain market indications of the aircraft's value if sold, the Company prepared an updated impairment analysis of the carrying value of the aircraft as of March 31, 2017. The impairment analysis was probability weighted considering market data available, future cash flows and whether or not the Company would sell the aircraft. Based on that analysis the Company recorded a $162 impairment charge included in general and administrative expense in its Consolidated Statements of Income as of March 31, 2017. There were no impairment losses recorded by the Company for the three months ended March 31, 2016.


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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, diode lasers, laser systems and optical accessories that are used for diverse applications, primarily in materials processing. 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 complementary products used with our lasers including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers. In addition, we offer laser-based systems for certain markets and applications.
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.
Sales of our products generally are recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments.
We develop our products to standard specifications and use a common set of components within our product architectures. Our major products are based upon a common technology platform. We continually enhance these and other products by improving their components and developing new components and new product designs.
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 in any period 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.
Our product mix affects our margins because the selling price per watt is generally higher for mid-power devices and certain specialty products than for high-power devices and certain pulsed lasers sold in large volumes. 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 because they use a greater number of optical components and drive economies of scale in manufacturing. Also, the profit margins on 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.
We also regularly review our inventory for items that are slow-moving, have been rendered obsolete or determined to be excess. Any write-off of such slow-moving, obsolete or excess inventory affects our gross margins. For example, we recorded provisions for inventory totaling $4.0 million for both the three months ended March 31, 2017 and 2016, and $22.8 million, $15.4 million and $11.3 million for the years ended December 31, 2016, 2015 and 2014, 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 technologies. 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 25% for the three months ended March 31, 2017 and 22%, 25% and 23% for the full years 2016, 2015 and 2014, respectively. One of our customers accounted for 12% of our net sales for the three months ended March 31, 2017. None of our customers accounted for more than 10% of our net sales for the three months ended March 31, 2016. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our significant customers will continue to change. If any of our significant customers substantially reduced their purchases from us, our results would be adversely affected.
Results of Operations for the three months ended March 31, 2017 compared to the three months ended March 31, 2016
Net sales. Net sales increased by $78.6 million, or 37.9%, to $285.8 million for the three months ended March 31, 2017 from $207.2 million for the three months ended March 31, 2016.
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2017
 
2016
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
Materials processing
 
$
264,131

 
92.4
%
 
$
198,207

 
95.6
%
 
$
65,924

 
33.3
%
Other applications
 
21,715

 
7.6
%
 
9,041

 
4.4
%
 
12,674

 
140.2
%
Total
 
$
285,846

 
100.0
%
 
$
207,248

 
100.0
%
 
$
78,598

 
37.9
%

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Sales by Product
 
Three Months Ended March 31,
 
 
 
 
 
 
2017
 
2016
 
Change
 
 
 
 
% of Total
 
 
 
% of Total
 
 
 
 
High-Power Continuous Wave ("CW") Lasers
 
$
167,944

 
58.8
%
 
$
118,220

 
57.0
%
 
$
49,724

 
42.1
 %
Medium-Power CW Lasers
 
19,742

 
6.9
%
 
22,608

 
10.9
%
 
(2,866
)
 
(12.7
)%
Low-Power CW Lasers
 
3,394

 
1.2
%
 
3,003

 
1.5
%
 
391

 
13.0
 %
Pulsed Lasers
 
32,456

 
11.3
%
 
28,625

 
13.8
%
 
3,831

 
13.4
 %
Quasi-Continuous Wave ("QCW") Lasers
 
21,368

 
7.5
%
 
8,600

 
4.2
%
 
12,768

 
148.5
 %
Other Revenue including Amplifiers, Laser Systems, Service, Parts, Accessories and Change in Deferred Revenue
 
40,942

 
14.3
%
 
26,192

 
12.6
%
 
14,750

 
56.3
 %
Total
 
$
285,846

 
100.0
%
 
$
207,248

 
100.0
%
 
$
78,598

 
37.9
 %
Materials processing
Sales for materials processing applications increased due to higher sales of high-power lasers, pulsed lasers, QCW lasers and laser systems offset by lower sales for medium-power lasers.
•
The increase in high-power laser sales related to growth in cutting and welding applications partially offset by decreases in average selling prices. High-power lasers continue to displace CO2 lasers in cutting systems sold by our OEM customers while they are also experiencing higher demand for their cutting systems. Within the cutting application, 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 growth in welding sales relates primarily to automotive applications. We are also seeing increased use of high-power lasers for deposition applications like cladding and laser sintering which is used in additive manufacturing. Some of the increase in sales of high-power lasers used for cladding and laser sintering applications has displaced medium-power laser sales as discussed below.
•
The decrease in medium-power sales related to fine cutting applications and sintering partially offset by a higher demand for medium-power lasers used for fine welding and semiconductor wafer-inspection. In part the decrease in sales for medium-power lasers used in sintering applications is due to a migration to high-power lasers by our OEM customers. Additionally, while the number of units shipped of medium-power lasers increased, this increase was offset by declines in average selling prices due to increased competition.
•
Low-power laser sales increased slightly due to the increase in scientific and semiconductor applications which was partially offset by a decrease in low-power used in medical applications.
•
Pulsed laser sales increased due to higher demand for ablative application, such as cleaning and stripping. Marking and engraving applications, which is the largest application for pulsed lasers, increased slightly. Within the pulsed laser category, increased sales of high-power pulsed lasers and green pulsed lasers were partially offset by decreased sales of pulsed lasers with lower average power.
•
QCW laser sales increased due to the demand for welding and percussion hole drilling applications.
•
Materials processing sales also increased as a result of higher parts and service sales which are included in Other Revenue in the Sales by Product chart above.
Other Applications
Sales for other applications increased due to higher sales for telecom and advanced applications. The increase in telecom sales was driven by sales from Menara Networks, Inc,, which we acquired in the second quarter of 2016, and an increase in amplifier sales used for last mile fiber access to the home applications. Sales of telecom products are included in Other Revenue in the Sales by Product chart above. Advanced Application sales are typically large and uneven from quarter to quarter. The increase in advanced applications sales was driven by increase in demand from defense, semiconductor, and scientific applications. The increase in Advanced Application sales contributed to the increase in high-power laser sales and the increase in Other Revenue in the Sales by Product chart above.
Cost of sales and gross margin. Cost of sales increased by $35.7 million, or 38.5%, to $128.6 million for the three months ended March 31, 2017 from $92.8 million for the three months ended March 31, 2016. Our gross margin decreased slightly to

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55.0% for the three months ended March 31, 2017 from 55.2% for the three months ended March 31, 2016. Gross margin decreased due to lower average selling prices, a decrease in absorption of manufacturing costs in the quarter and also due to an increase in expenses related to the amortization of intangibles related to the Menara transaction which occurred during the second quarter of 2016. These impacts were partially offset by a reduction in the cost of internally manufactured components, increased manufacturing efficiency and product mix which included increased sales of high-power, QCW and pulsed lasers with higher average powers.
Sales and marketing expense. Sales and marketing expense increased by $2.8 million, or 34.8%, to $10.8 million for the three months ended March 31, 2017 from $8.0 million for the three months ended March 31, 2016, primarily as a result of an increase in expenses related to personnel, commissions, trade fairs and exhibitions, travel, depreciation and premises. As a percentage of sales, sales and marketing expense decreased to 3.8% for the three months ended March 31, 2017 from 3.9% for three months ended March 31, 2016.
Research and development expense. Research and development expense increased by $5.3 million, or 30.3%, to $22.8 million for the three months ended March 31, 2017, compared to $17.5 million for the three months ended March 31, 2016, primarily as a result of an increase in expenses related to personnel, stock-based compensation, consultants, contractors and 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 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 decreased to 8.0% for the three months ended March 31, 2017 from 8.4% for the three months ended March 31, 2016.
General and administrative expense. General and administrative expense increased by $3.8 million, or 27.5%, to $17.7 million for the three months ended March 31, 2017 from $13.9 million for the three months ended March 31, 2016. This was primarily as a result of increased personnel expense, stock-based compensation, recruitment, subscription and increased bad debt expense. As a percentage of sales, general and administrative expense was 6.2% for the three months ended March 31, 2017 and 6.7% for the three months ended March 31, 2016.
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 74, Japanese Yen 115 and Chinese Yuan 6.54, respectively, we would have expected net sales to be $9.7 million higher, gross profit to be $7.0 million higher and total operating expenses would have been $0.8 million lower.
Loss on foreign exchange. We incurred a foreign exchange loss of $4.5 million for the three months ended March 31, 2017 as compared to a $5.0 million loss for the three months ended March 31, 2016. Foreign exchange losses for the three months ended March 31, 2017 were primarily attributable to the appreciation of the Euro and Russian Ruble as compared to the U.S. Dollar. Foreign exchange losses for the three months ended March 31, 2016 were primarily attributable to the depreciation of the Chinese Yuan compared to the U.S. Dollar which was partially offset by the depreciation of the Russian Ruble compared to the U.S. Dollar and appreciation of the Japanese Yen compared to the Euro.
Interest income, net. Interest income, net, increased to $0.3 million of income for the three months ended March 31, 2017 from $0.2 million of income for the three months ended March 31, 2016 as a result of higher yielding interest and increases in short-term investments.
Other (expense) income, net. Other (expense) income, net, decreased to $0.5 million of expense for the three months ended March 31, 2017 from $7 thousand of income for the three months ended March 31, 2016 as a result of the loss incurred upon sale of available-for-sale-securities partially offset by net rental income from a building in the United States purchased in the second quarter of 2016 that is partially leased to third parties.
Provision for income taxes. Provision for income taxes was $26.3 million for the three months ended March 31, 2017 compared to $20.9 million for the three months ended March 31, 2016. The effective tax rates were 26.0% and 29.8% for the three months ended March 31, 2017 and 2016, respectively. The decrease in the effective rate was primarily due to excess tax benefits related to option exercises during the quarter upon adoption of ASU No. 2016-09 that were previously required to be applied against Additional paid-in capital.
Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation increased by $25.6 million to $74.9 million for the three months ended March 31, 2017 compared to $49.3 million for the three months

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ended March 31, 2016. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 2.4 percentage points to 26.2% for the three months ended March 31, 2017 from 23.8% for the three months ended March 31, 2016 due to the factors described above.
Liquidity and Capital Resources
Our principal sources of liquidity as of March 31, 2017 consisted of cash and cash equivalents of $697.8 million, short-term investments of $165.0 million, unused credit lines and overdraft facilities of $71.4 million and other working capital (excluding cash and cash equivalents and short-term investments) of $370.5 million. This compares to cash and cash equivalents of $623.9 million, short-term investments of $206.8 million, unused credit lines and overdraft facilities of $71.5 million and other working capital (excluding cash and cash equivalents and short-term investments) of $312.1 million as of December 31, 2016. The increase in cash and cash equivalents of $73.9 million relates primarily to cash provided by operating activities in the three months ended March 31, 2017 of $50.8 million and cash provided by investing activities of $20.4 million which was primarily related to net proceeds from short-term investments partially offset by capital expenditures. The increase was partially offset by cash used in financing activities of $3.7 million which was primarily related to our continued purchase of treasury stock partially offset by exercises of employee stock options and shares withheld to cover employee restricted stock taxes. Additionally, the effect of exchange rates reduced cash and cash equivalents by $6.5 million.
Short-term investments 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.
Our long-term debt consists of two long-term notes totaling $40.0 million of which $3.2 million is the current portion. We have an unsecured note with an outstanding balance at March 31, 2017 of $22.9 million of which $1.2 million is the current portion. The interest on this unsecured note is variable at 1.20% above the LIBOR rate and is fixed using an interest rate swap at 2.85% per annum. The unsecured note matures in May 2023, at which time the outstanding debt balance will be $15.4 million. The Company has another note that is secured by the Company's corporate aircraft. The outstanding balance on this secured note at March 31, 2017 was $17.2 million of which $2.0 million is the current portion. The interest rate on this secured note is fixed at 2.81% per annum and it matures in October 2019, at which time the outstanding debt balance will be $12.0 million.
We believe that our existing cash and cash equivalents, short-term investments, our cash flows from operations and our existing lines of credit provides 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 at based upon market conditions and the strategic importance and valuation of the target company. We may consider issuing debt to finance acquisitions depending on the timing and size of the acquisition. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of economic environment on our sales levels, the timing and extent of spending to support development efforts, the expansion of the global sales and marketing activities, government regulation including trade sanctions, the timing and 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 March 31, 2017: 
 
 
 
 
 
 
 
 
 
Description
 
Total Facility
 
Interest Rate
 
Maturity
 
Security
U.S. Revolving Line of Credit (1)
 
Up to $50.0 million
 
LIBOR plus 0.80% to 1.20%, depending on our performance
 
April 2020
 
Unsecured
Euro Credit Facilities (Germany) (2)
 
Euro 30.0 million ($32.0 million)
 
Euribor plus 1.00% or EONIA 1.25%
 
July 2017
 
Unsecured, guaranteed by parent company and Germany subsidiary
Euro Overdraft Facilities (3)
 
Euro 2.0 million
($2.1 million)
 
1.0%-6.5%
 
October 2017
 
Common pool of assets of Italian subsidiary
(1)
This facility is available to certain foreign subsidiaries in their respective local currencies. At March 31, 2017, there were no drawings however, there were $22 thousand of guarantees issued against the facility which reduces the amount of the facility available to draw.

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(2)
This facility is also available to certain foreign subsidiaries in their respective local currencies. At March 31, 2017, there were no drawings however, there were $12.7 million of guarantees issued against the facility which reduces the amount of the facility available to draw.
(3)
At March 31, 2017, there were no drawings.
Our largest committed credit lines are with Bank of America N.A. and Deutsche Bank AG in the amounts of $50.0 million and $32.0 million (or 30 million Euro as described above), respectively, and neither of them is syndicated.
We are required to meet certain financial covenants associated with our U.S. revolving line of credit and long-term debt facility. These covenants, tested quarterly, include a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. The debt service coverage covenant requires that we maintain a trailing twelve month ratio of cash flow to debt service that is at least 1.5:1. Debt service is defined as required principal and interest payments during the period. Debt service in the calculation is decreased by our cash held in the U.S.A. in excess of $50 million up to a maximum of $250 million. Cash flow is defined as EBITDA less unfunded capital expenditures. The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than three times our trailing twelve months EBITDA. We were in compliance with all such financial covenants as of and for the three months ended March 31, 2017.
Operating activities. Net cash provided by operating activities decreased by $14.1 million to $50.8 million for the three months ended March 31, 2017 from $64.9 million for the three months ended March 31, 2016. As the business and net income has grown, cash provided by net income after adding back non-cash charges has generally increased. For the three months ended March 31, 2017, this increase was more than offset by continued growth in working capital to support the growth of the business. Our largest working capital items are inventory and accounts receivable. Items such as accounts payable to third parties, prepaid expenses and other current assets and accrued expenses and other liabilities are not as significant as our working capital investment in accounts receivable and inventory because of the amount of value added within IPG due to our vertically integrated structure. Accruals and payables for personnel costs including bonuses and income and other taxes payable are largely dependent on the timing of payments for those items. The decrease in cash flow from operating activities for the three months ended March 31, 2017 primarily resulted from:
•
An increase in cash paid for income taxes. Cash used for income and other taxes payable was $10.1 million for the three months ended March 31, 2017 as compared to cash provided by income and other taxes payable of $14.6 million for the same period in 2016;
•
An increase in cash used by accounts receivable of $22.8 million for the three months ended March 31, 2017 as compared to a decrease of $8.1 million for the same period in 2016 due to the timing of sales in the quarter.
•
An increase in inventory of $22.4 million for the three months ended March 31, 2017 as compared to an increase of $19.4 million for the same period in 2016; partially offset by
•
An increase of $35.5 million in cash provided by net income after adding back non-cash charges of $112.3 million for the three months ended March 31, 2017 as compared to $76.8 million for the same period in 2016.
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 products, the rate at which we turn inventory has historically been comparatively low when compared to our cost of sales. Also, our historic growth rates required investment in inventories to support future sales and enable us to quote short delivery times to our customers, providing what we believe is a competitive advantage. Furthermore, if there was a disruption to the manufacturing capacity of any of our key technologies, our inventories of components should enable us to continue to build finished products for a reasonable period of time. We believe that we will continue to maintain a relatively high level of inventory compared to our cost of sales. As a result, we expect to have a significant amount of working capital invested in inventory. 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 at which we are able to convert our inventory into cash would decrease.
Investing activities. Net cash provided by investing activities was $20.4 million for the three months ended March 31, 2017 as compared to cash used in investing activities of $44.7 million in 2016. The cash provided by investing activities in 2017 related to $42.2 million of net proceeds from purchases and sales of short-term investments partially offset by $21.9 million of capital expenditures for the construction of new buildings in the United States, Germany and Russia, and for purchases of machinery and equipment. The cash used in investing activities in 2016 related to $25.0 million of capital expenditures for the construction and purchase of new buildings in the United States, Germany and Russia, and for purchases of machinery and equipment and $19.9 million of net purchases of short-term investments. 

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We expect to incur between $90 million and $100 million in capital expenditures, excluding acquisitions. Capital expenditures include investments in facilities and equipment to add capacity worldwide to support anticipated revenue growth and an anticipated upgrade of our corporate aircraft. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. If we obtain financing for certain projects, our cash expenditures would be reduced in the year of expenditure. Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer to a later period.
Financing activities. Net cash used in financing activities was $3.7 million for the three months ended March 31, 2017 as compared to net cash provided by financing activities of $2.1 million in 2016. The cash used in financing activities in 2017 was primarily related to the purchase of treasury stock of $12.5 million and payments on our long-term borrowings partially offset by cash provided by the exercise of stock options and shares withheld to cover employee restricted stock taxes. The cash provided by financing activities in 2016 was primarily related to the cash provided by the exercise of stock options and shares withheld to cover employee restricted stock taxes partially offset by the payments on our long-term borrowings and net payments of line-of-credit facilities.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, "Business" and Item 1A, "Risk Factors" of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016. 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.
Recent Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including income tax impact and classification on the consolidated statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and we adopted this statement effective January 1, 2017. Under ASU 2016-09, excess tax benefits and deficiencies as a result of stock option exercises and restricted stock unit vesting are to be recognized as discrete items within income tax expense or benefit in the consolidated statements of comprehensive income in the reporting period in which they occur. Upon adoption, we recognized excess tax benefits from stock award exercises and restricted stock unit vesting in the first quarter of 2017 as a discrete tax benefit which reduced the provision for income taxes for the three months ended March 31, 2017, by $4.1 million. The adoption of ASU 2016-09 also changed the calculation of fully diluted shares outstanding for the three months ended March 31, 2017. The excess tax benefits have been excluded from the calculation of assumed proceeds in our calculation of diluted weighted shares under the new standard. Our diluted weighted shares outstanding as of March 31, 2017, increased by 184,161 shares due to adoption of the new standard.
The adoption of ASU 2016-09 also requires the cumulative effect of initially applying the standard to be recorded as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application. This resulted in a cumulative effect increase of $3.5 million to retained earnings and deferred tax assets. Also, as a result of the adoption of ASU 2016-09, we have made an accounting policy election to record forfeitures as they occur rather than estimating expected forfeitures. The calculated cumulative effect was a decrease in retained earnings by $1.3 million and

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an increase in deferred tax assets and additional paid-in capital by $0.8 million and $2.1 million, respectively, as of January 1, 2017.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 was issued in conjunction with ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), to clarify guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new guidance clarifies what constitutes an "in substance nonfinancial asset" and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments should be applied at the same time as those in ASU 2014-09 with interim and annual reporting periods beginning after December 15, 2017, which would be our fiscal year ending December 31, 2018. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
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. ASU 2017-04 is effective for public companies for annual reporting periods beginning after December 15, 2020, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date and require a discloser as to the nature of and reason for the change in accounting principle upon transition. Early adoption is allowed for all entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805)" ("ASU 2017-01"). ASU 2017-01 revises the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for public companies for annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. Early application generally is allowed for transactions that have not been reported in financial statements which have been issued or made available for issuance. We are currently evaluating the potential impact that the standard will have on our consolidated financial statements upon adoption.
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 will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings. Deferred tax assets should be assessed to determine if realizable. Disclosures will be required for the (i) reason for and notice of change, (ii) effect of change on income from continuing operations and (iii) cumulative effect of change on retained earnings. Public entities will apply these changes in annual reporting periods beginning after December 15, 2017, and interim reporting periods within such period. Early adoption is permitted. We are continuing to evaluate the standard but does not expect that it will have a material effect on our consolidated financial statements upon adoption.
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 12 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. We are continuing to evaluate the standard but does not expect that it will have a material effect on our consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. We are currently evaluating the impact that the standard will have and do not expect it to have a material effect on our consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU No. 2014-09. ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers" ("ASU 2015-14"), which defers the effective date of ASU 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017, which would be our fiscal year ending December 31, 2018. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based

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on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered "completed" for purposes of applying the transition guidance. We have completed an initial assessment of the new guidance and are currently evaluating the impact this standard may have on our financial statements. We have not decided upon which one of two retrospective application methods we will be using upon adoption.
ITEM 3. 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. We maintain a portfolio of cash, cash equivalents and short-term investments, consisting primarily of bank deposits, money market funds, certificates of deposit, corporate notes and government and agency securities. None of these investments have a maturity date in excess of one year. 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.
We are also exposed to market risk as a result of increases or decreases in the amount of interest expense we must pay on our bank debt and borrowings on our bank credit facilities. Our interest obligations on our long-term debt are fixed either by the underlying agreement or by means of an interest rate swap agreement. Although our U.S. revolving line of credit and our Euro credit facility have variable rates, 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, the Russian Ruble, the Chinese Yuan 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, the Russian Ruble, the Chinese Yuan and the Japanese Yen. The loss on foreign exchange transactions totaled $4.5 million for the three months ended March 31, 2017 and a loss of $5.0 million for the three months ended March 31, 2016. Management attempts to minimize these exposures by partially or fully off-setting foreign currency denominated assets and liabilities at our subsidiaries that operate in different functional currencies. The effectiveness of this strategy can be limited by the volume of underlying transactions at various subsidiaries and by our ability to accelerate or delay inter-company cash settlements. As a result, we are unable to create a perfect offset of the foreign currency denominated assets and liabilities. At March 31, 2017, our material foreign currency exposure is net U.S. Dollar denominated assets at subsidiaries where the Euro or the Russian Ruble is the functional currency and U.S. Dollar denominated liabilities where the Chinese Yuan is the functional currency. The net U.S. Dollar denominated assets are comprised of cash, third party receivables, inter-company receivables and inter-company notes offset by third party and inter-company U.S. Dollar denominated payables. The U.S. Dollar denominated liabilities are comprised of inter-company payables. A 5% change in the relative exchange rate of the U.S. Dollar to the Euro as of March 31, 2017 applied to the net U.S. Dollar asset balances, would result in a foreign exchange gain of $5.8 million if the U.S. Dollar appreciated and a $5.8 million foreign exchange loss if the U.S. Dollar depreciated.
In addition we are exposed to foreign currency translation risk for those subsidiaries whose functional currency is not the U.S. Dollar as changes in the value of their functional currency relative to the U.S. Dollar can adversely affect the translated amounts of our revenue, expenses, net income, assets and liabilities. This can, in turn, affect the reported value and relative growth of sales and net income from one period to the next. In addition changes in the translated value of assets and liabilities due to changes in functional currency exchange rates relative to the U.S. Dollar result in foreign currency translation adjustments that are a component of other comprehensive income or loss.
Foreign currency derivative instruments can also be used to hedge exposures and reduce the risks of certain foreign currency transactions; however, these instruments provide only limited protection and can carry significant cost. We have no foreign currency derivative instrument hedges as of March 31, 2017. 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. Exchange rate fluctuations may adversely affect our financial results in the future.

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ITEM 4. 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 Quarterly Report on Form 10-Q (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.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated 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.

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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings and other disputes incidental to our business. There have been no material developments to those proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Date
 
Total Number of
Shares (or Units)
Purchased
 
 
 
Average Price
Paid per Share
(or Unit)
 
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
January 1, 2017 — January 31, 2017
 
15,300

 
(2)
 
99.69

 
—

 
89,529

February 1, 2017 — February 28, 2017
 
12,013

 
(1),(2)
 
119.60

 
—

 
88,094

March 1, 2017 — March 31, 2017
 
96,583

 
(1),(2)
 
119.40

 
—

 
$
78,516

Total
 
123,896

 
 
 
$
116.99

 
—

 
$
78,516

 
(1)
In 2012, our Board of Directors approved "withhold to cover" as a tax payment method for vesting of restricted stock awards for certain employees. Pursuant to the "withhold to cover" method, we withheld from such employees the shares noted in the table above to cover tax withholding related to the vesting of their awards. For the three months ended March 31, 2017, 16,196 shares were withheld at an average price of $120.75.

(2)
In July 2016, the Board of Directors authorized a share repurchase program (the "Program"). Under the Program, the Company's management is 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. The Program limits aggregate share repurchases to no more than $100 million over a period ending June 30, 2018. For the three months ended March 31, 2017, the Company repurchased 107,700 shares of its common stock with an average price of $116.42 per share in the open market.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

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ITEM 6. EXHIBITS
(a) Exhibits
 
Exhibit
No.
 
Description
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
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase


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SIGNATURES
Pursuant to the requirements 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.
 
 
 
IPG PHOTONICS CORPORATION
 
 
 
 
 Date: May 8, 2017
 
By:
/s/ Valentin P. Gapontsev
 
 
 
Valentin P. Gapontsev
 
 
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 Date: May 8, 2017
 
By:
/s/ Timothy P.V. Mammen
 
 
 
Timothy P.V. Mammen
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)


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