IPG Photonics Announces Third Quarter 2019 Financial Results

OXFORD, Mass., Oct. 29, 2019 (GLOBE NEWSWIRE) -- IPG Photonics Corporation (NASDAQ: IPGP) today reported financial results for the third quarter ended September 30, 2019.

  Three Months Ended September 30,   Nine Months Ended September 30,  
(In millions, except per share data and percentages) 2019 2018 Change 2019 2018 Change
Revenue $329.1 $356.3 (8)% $1,008.0 $1,129.8 (11)%
Gross margin 46.4% 54.8%   47.8% 56.1%  
Operating income $74.1 $123.9 (40)% $233.6 $427.4 (45)%
Operating margin 22.5% 34.8%   23.2% 37.8%  
Net income attributable to IPG Photonics Corporation $57.3 $100.5 (43)% $184.7 $328.5 (44)%
Earnings per diluted share $1.07 $1.84 (42)% $3.43 $5.97 (43)%

Management Comments

"Despite the challenging macroeconomic backdrop and competitive landscape in China, we demonstrated good progress selling ultra high power lasers, new products, accessories and complete laser systems." said Dr. Valentin Gapontsev, IPG Photonics' Chief Executive Officer. "Effective operational execution by our dedicated global team resulted in strong operating and free cash flow during the quarter."

Dr. Gapontsev added, "In response to the current business environment, we initiated certain expense reduction initiatives during the quarter and continue to assess our cost structure. In addition, we are responding with a multi-pronged strategy of product cost reduction, implementing differentiated features on our core products and leveraging the largest R&D investment in the laser industry to launch leading edge laser products for new markets. These measures, in conjunction with modest market recovery, should increase the Company's industry-leading margin profile from current levels."

Financial Highlights

Third quarter revenue of $329 million decreased 8% year over year. Currency depreciation relative to the exchange rates assumed in our third quarter guidance reduced revenue by $5 million. Materials processing sales decreased 8% year over year due to lower sales in cutting and 3D printing applications, while sales into other applications increased 5% year over year. Materials processing sales accounted for 93% of total revenue. The acquisition of Genesis Systems Group contributed $20 million during the quarter.

Sales of high power continuous wave (CW) lasers, representing 56% of total revenue, decreased 19% year over year. Sales of fiber lasers at 6 kilowatts of power or greater were 50% of all high power CW laser sales, and high power CW lasers at 10 kilowatts or greater increased 3% year over year. Sales of other high power lasers declined year over year due to the weaker demand environment in China and Europe and lower average selling prices. By region, sales decreased 24% in China, 10% in Europe, were flat in Japan and increased 32% in North America on a year over year basis.

Earnings per diluted share ("EPS") of $1.07 decreased 42% year over year. Foreign exchange losses reduced EPS by $0.01. The effective tax rate in the quarter was 26%, which benefited from certain discrete tax items. During the third quarter, IPG generated $92 million in cash from operations. Capital expenditures were $21 million and stock repurchases totaled $24 million.

Cost Reduction Program and Impairment Charges

During the fourth quarter IPG began implementing a cost reduction program in response to continued global macroeconomic, competitive and geopolitical headwinds. The Company expects to reduce annualized operating expenses by approximately $30 million, with the full impact being achieved as it exits the fourth quarter of fiscal 2019. As part of this program the Company will reduce global headcount by more than 300 positions and decrease other direct labor costs and expenses. IPG has implemented a hiring freeze and expects limited replacement of workforce attrition to result in further headcount reductions. IPG also anticipates consolidating a small number of facilities over time. These actions will result in restructuring charges of approximately $1 million primarily attributable to termination benefits, most of which will be recorded in the fourth quarter.

IPG is performing its annual assessment of goodwill impairment, which occurs in the fourth quarter each year. Management is currently in the process of updating forecasts and completing strategic reviews related to its business units that have goodwill and other long-lived assets. While this process is not yet complete, the Company currently expects that impairment charges will be recorded in the fourth quarter, primarily related to the communications business. The goodwill and other long-lived assets within the communications business that are subject to assessment total approximately $60 million. The magnitude of any impairment charges depend on and are sensitive to our long term forecast models and assumptions used in the valuation process, which are being performed in the fourth quarter.

Business Outlook and Financial Guidance

"As widely reported, demand for industrial automation equipment remains subdued. This market softness impacted our third quarter book-to-bill ratio, which was under 1.0 and below normal seasonality. Looking forward, we will rely on our core scientific strengths and strong cash flow to optimize investment in strategic initiatives critical to the long-term success of the Company, including a greater mix of high power lasers, differentiated features and new solutions. Furthermore, we intend to focus our highly trained workforce on our new leading edge, higher margin products as they gain market acceptance, while reducing the resources deployed to manufacture lower margin products. When combined with planned cost reductions, we believe this strategy will enable us to better compete today and to capitalize on the eventual rebound in end market demand," said Dr. Gapontsev.

For the fourth quarter of 2019, IPG expects revenue of $270 million to $300 million. The Company expects the fourth quarter tax rate to be approximately 26%. IPG anticipates delivering earnings per diluted share in the range of $0.55 to $0.95, with 52.9 million basic common shares outstanding and 53.6 million diluted common shares outstanding. Our EPS guidance range includes approximately $0.02 impact from restructuring charges in the fourth quarter. This guidance excludes any EPS impact from charges that might arise from our annual assessment of goodwill impairment.

As discussed in more detail in the "Safe Harbor" passage of this news release, actual results may differ from this guidance due to various factors including, but not limited to, product demand, order cancellations and delays, competition, tariffs, trade policy changes and general economic conditions. This guidance is based upon current market conditions and expectations, and is subject to the risks outlined in the Company's reports with the SEC, and assumes exchange rates relative to the U.S. Dollar of Euro 0.92, Russian Ruble 64, Japanese Yen 108 and Chinese Yuan 7.07, respectively.

Supplemental Financial Information

Additional supplemental financial information is provided in the unaudited Third Quarter 2019 Financial Data Workbook available on the investor relations section of the Company's website at investor.ipgphotonics.com.

Conference Call Reminder

The Company will hold a conference call today, October 29, 2019 at 10:00 am ET. To access the call, please dial 877-407-6184 in the US or 201-389-0877 internationally. A live webcast of the call will also be available and archived on the investor relations section of the Company's website at investor.ipgphotonics.com.


James Hillier
Vice President of Investor Relations
IPG Photonics Corporation

About IPG Photonics Corporation

IPG Photonics Corporation is the leader in high-power fiber lasers and amplifiers used primarily in materials processing and other diverse applications. The Company’s mission is to make its fiber laser technology the tool of choice in mass production. IPG accomplishes this mission by delivering superior performance, reliability and usability at a lower total cost of ownership compared with other types of lasers and non-laser tools, allowing end users to increase productivity and decrease costs. A member of the S&P 500® Index, IPG is headquartered in Oxford, Massachusetts and has more than 25 facilities worldwide. For more information, visit www.ipgphotonics.com.

Safe Harbor Statement
Information and statements provided by IPG and its employees, including statements in this press release, that relate to future plans, events or performance are forward-looking statements. These statements involve risks and uncertainties. Any statements in this press release that are not statements of historical fact are forward-looking statements, including, but not limited to,
our strategy to employ product cost reductions, implement differentiated features on core products and leverage R&D investment for leading edge laser products for new markets, any market or demand recovery, our ability to increase our margin profile from current levels, a reduction in annualized operating expenses and the timing thereof in connection with our cost reduction program, headcount reductions, decrease of other direct labor costs and expenses, consolidation of facilities, restructuring charges and the timing thereof, amount and type of expected impairment charges and the timing thereof, reliance on core scientific strengths and strong cash flow to optimize investment in strategic initiatives, our workforce focus on leading edge, higher margin products, reduction of resources deployed to manufacture of lower margin products, our ability to better compete and capitalize on a rebound in end market demand, revenue, tax rate and earnings guidance for Q4 2019 and the impact of restructuring charges and goodwill impairment on EPS.  Factors that could cause actual results to differ materially include risks and uncertainties, including risks associated with the strength or weakness of the business conditions in industries and geographic markets that IPG serves, particularly the effect of downturns in the markets IPG serves; uncertainties and adverse changes in the general economic conditions of markets; IPG's ability to penetrate new applications for fiber lasers and increase market share; the rate of acceptance and penetration of IPG's products; inability to manage risks associated with international customers and operations; changes in trade controls and trade policies; foreign currency fluctuations; high levels of fixed costs from IPG's vertical integration; the appropriateness of IPG's manufacturing capacity for the level of demand; competitive factors, including declining average selling prices; the effect of acquisitions and investments; inventory write-downs; asset impairment charges; intellectual property infringement claims and litigation; interruption in supply of key components; manufacturing risks; government regulations and trade sanctions; and other risks identified in IPG's SEC filings. Readers are encouraged to refer to the risk factors described in IPG's Quarterly Report on Form 10-Q (filed with the SEC on August 6, 2019) and its reports filed with the SEC, as applicable. Actual results, events and performance may differ materially. Readers are cautioned not to rely on the forward-looking statements, which speak only as of the date hereof. IPG undertakes no obligation to update the forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.


  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
  (In thousands, except per share data)
Net sales $329,138 $356,346 $1,007,954 $1,129,823
Cost of sales 176,280 161,162 525,948 496,303
Gross profit 152,858 195,184 482,006 633,520
Operating expenses:        
Sales and marketing 18,969 13,479 58,907 41,531
Research and development 32,160 30,909 99,528 91,268
General and administrative 26,776 25,245 82,526 74,857
Loss (gain) on foreign exchange 808 1,688 7,495 (1,489)
Total operating expenses 78,713 71,321 248,456 206,167
Operating income 74,145 123,863 233,550 427,353
Other income (expense), net:        
Interest income, net 3,734 3,884 11,737 4,925
Other income (expense), net (520) 423 129 1,252
Total other income 3,214 4,307 11,866 6,177
Income before provision of income taxes 77,359 128,170 245,416 433,530
Provision for income taxes (20,232) (27,418) (60,852) (104,827)
Net income 57,127 100,752 184,564 328,703
Less: net (loss) income attributable to non-controlling interests (126) 235 (120) 235
Net income attributable to IPG Photonics Corporation $57,253 $100,517 $184,684 $328,468
Net income attributable to IPG Photonics Corporation per share:        
Basic $1.08 $1.88 $3.48 $6.12
Diluted $1.07 $1.84 $3.43 $5.97
Weighted average shares outstanding:        
Basic 52,928 53,571 53,073 53,677
Diluted 53,622 54,696 53,864 54,995


  September 30, December 31,
  2019 2018
  (In thousands, except share and per
share data)
Current assets:    
Cash and cash equivalents $580,329 $544,358
Short-term investments 498,508 500,432
Accounts receivable, net 252,926 255,509
Inventories 417,163 403,579
Prepaid income taxes 50,693 43,782
Prepaid expenses and other current assets 65,896 57,764
Total current assets 1,865,515 1,805,424
Deferred income taxes, net 23,415 19,165
Goodwill 109,954 100,722
Intangible assets, net 85,561 87,139
Property, plant and equipment, net 596,138 543,068
Other assets 50,321 18,932
Total assets $2,730,904 $2,574,450
Current liabilities:    
Current portion of long-term debt $3,722 $3,671
Accounts payable 30,466 36,302
Accrued expenses and other liabilities 151,431 154,640
Income taxes payable 19,944 51,161
Total current liabilities 205,563 245,774
Deferred income taxes and other long-term liabilities 105,772 80,734
Long-term debt, net of current portion 38,909 41,707
Total liabilities 350,244 368,215
Commitments and contingencies    
IPG Photonics Corporation equity:    
Common stock, $0.0001 par value, 175,000,000 shares authorized; 54,662,933 and 53,035,843 shares issued and outstanding, respectively, at September 30, 2019; 54,371,701 and 52,941,607 shares issued and outstanding, respectively, at December 31, 2018 5 5
Treasury stock, at cost, 1,627,090 and 1,430,094 shares held at September 30, 2019 and December 31, 2018, respectively. (250,919) (224,998)
Additional paid-in capital 772,152 744,937
Retained earnings 2,033,184 1,848,500
Accumulated other comprehensive loss (174,311) (162,896)
Total IPG Photonics Corporation equity 2,380,111 2,205,548
Non-controlling interests 549 687
Total equity 2,380,660 2,206,235
Total liabilities and equity $2,730,904 $2,574,450


  Nine Months Ended September 30,
  2019 2018
  (In thousands)
Cash flows from operating activities:    
Net income $184,564 $328,703
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 72,531 58,894
Provisions for inventory, warranty & bad debt 38,748 30,582
Other 29,244 20,682
Changes in assets and liabilities that used cash:    
Accounts receivable and accounts payable (15,699) (27,377)
Inventories (51,032) (122,051)
Other (64,774) (9,182)
Net cash provided by operating activities 193,582 280,251
Cash flows from investing activities:    
Purchases of property, plant and equipment (107,540) (133,355)
Proceeds from sales of property, plant and equipment 348 755
Purchases of investments (557,674) (566,498)
Proceeds from sales of investments 568,501 286,346
Acquisitions of businesses, net of cash acquired (15,115) (4,423)
Other 243 307
Net cash used in investing activities (111,237) (416,868)
Cash flows from financing activities:    
Principal payments on long-term borrowings (2,747) (2,696)
Proceeds from issuance of common stock under employee stock option and purchase plans less payments for taxes related to net share settlement of equity awards 1,644 12,115
Cash contributed by non-controlling interest  378
Purchase of treasury stock, at cost (25,921) (111,926)
Net cash used in financing activities (27,024) (102,129)
Effect of changes in exchange rates on cash and cash equivalents (16,561) (23,548)
Net increase (decrease) in cash, cash equivalents and restricted cash 38,760 (262,294)
Cash and cash equivalents  — Beginning of period 544,358 909,900
Cash, cash equivalents and restricted cash — End of period $583,118 $647,606
Supplemental disclosures of cash flow information:    
Cash paid for interest $1,655 $2,402
Cash paid for income taxes $97,172 $94,801


  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
  (In thousands) (In thousands)
Step-up of inventory (1):        
Cost of sales $ $50 $ $556
Amortization of intangible assets:        
Cost of sales 1,484 1,513 4,318 4,026
Sales and marketing 1,973 469 5,783 1,635
Research and development 160  480 160
Total acquisition related costs and other charges $3,617 $2,032 $10,581 $6,377

(1) 2018 amount relates to ILT step-up adjustments on inventory sold during the period.


  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
  (In thousands) (In thousands)
Cost of sales $2,575 $1,920 $6,806 $5,243
Sales and marketing 1,266 737 2,907 1,964
Research and development 2,035 1,781 5,955 4,894
General and administrative 2,678 3,281 10,096 9,342
Total stock-based compensation 8,554 7,719 25,764 21,443
Tax benefit recognized (2,074) (1,813) (6,121) (5,054)
Net stock-based compensation $6,480 $5,906 $19,643 $16,389

  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
  (In thousands) (In thousands)
Excess tax benefit on exercise of stock options included in net income $240 $1,713 $4,469 $13,780

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