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IPG Photonics Announces Third Quarter 2019 Financial Results

OXFORD, Mass., Oct. 29, 2019 (GLOBE NEWSWIRE) -- IPG Photonics Corporation (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.

Contact

James Hillier
Vice President of Investor Relations
IPG Photonics Corporation
508-373-1467
jhillier@ipgphotonics.com

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.


IPG PHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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


IPG PHOTONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

December 31,

2019

2018

(In thousands, except share and per
share data)

ASSETS

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

LIABILITIES AND EQUITY

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


IPG PHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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


IPG PHOTONICS CORPORATION
SUPPLEMENTAL SCHEDULE OF ACQUISITION RELATED COSTS AND OTHER CHARGES (UNAUDITED)

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.


IPG PHOTONICS CORPORATION
SUPPLEMENTAL SCHEDULE OF STOCK-BASED COMPENSATION AND ACCOUNTING STANDARD IMPACTS TO NET INCOME AND EARNINGS PER SHARE (UNAUDITED)

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