IPG Photonics(IPGP) - 2022 Q4 - Annual Report

PART I ITEM 1. BUSINESS IPG Photonics develops and sells high-performance fiber lasers and amplifiers globally, primarily for materials processing, leveraging a vertically integrated model - IPG Photonics Corporation (IPG) develops, manufactures, and sells high-performance fiber lasers, fiber amplifiers, and diode lasers primarily for materials processing[15] - The company is vertically integrated, designing and manufacturing most key components from semiconductor diodes to finished fiber lasers, which helps reduce manufacturing costs, control quality, and protect proprietary technology[17] Our Company IPG Photonics is a global developer and manufacturer of high-performance fiber lasers, amplifiers, and diodes, primarily for materials processing - IPG Photonics Corporation (IPG) develops, manufactures, and sells high-performance fiber lasers, fiber amplifiers, and diode lasers, primarily for materials processing[15] - The company is vertically integrated, designing and manufacturing most key components, which helps reduce costs, control quality, and accelerate product development[17] - IPG sells its products globally to OEMs, system integrators, and end users, primarily through its direct sales force, with major manufacturing facilities in the United States, Germany, Russia, and Belarus[16] Industry Overview Laser technology is transforming diverse industries, offering enhanced precision and speed over traditional manufacturing methods - Laser technology is revolutionizing applications in manufacturing, automotive, aerospace, medical, research, consumer electronics, semiconductors, and communications[19] - Lasers are increasingly gaining market share in materials processing due to greater precision, processing speeds, and flexibility compared to traditional machine tools[20] Fiber Lasers Fiber lasers, powered by semiconductor diodes, provide superior performance, reliability, and efficiency for various applications - Fiber lasers use semiconductor diodes to pump specialty optical fibers, offering superior performance, reliability, efficiency, and ease of operation compared to other laser technologies[21] - IPG's advancements in diode technology, packaging, and optical components have significantly increased output power, efficiency, and reliability while reducing the cost per watt, making fiber lasers competitive in many applications[22][23] Our Competitive Strengths IPG's competitive strengths include vertical integration, manufacturing scale, and extensive expertise in fiber laser technology - IPG is a leading producer of fiber laser technology, leveraging its scale for cost reduction and market proliferation[24] - Key strengths include vertical integration, manufacturing scale, extensive expertise in materials sciences and engineering, and a broad product portfolio to meet diverse customer requirements[25][26][27][28] Diverse Customer Base, End Markets and Applications IPG serves a broad customer base across diverse end markets, from general manufacturing to medical and microelectronics - IPG serves a diverse customer base across various end markets, including general manufacturing, automotive, consumer goods, medical devices, energy/renewable energy, aerospace, rail, shipbuilding, and microelectronics[29][30] - Applications range from cutting, welding, and 3D printing in general manufacturing to micro-welding in consumer goods, stent manufacturing in medical devices, and wafer inspection in microelectronics[30] Products IPG offers a comprehensive product portfolio including fiber lasers, amplifiers, diodes, and laser/non-laser systems - IPG designs and manufactures a broad range of high-performance fiber lasers and amplifiers, packaged diodes, direct diode lasers, laser and non-laser systems, and communications components[33] Revenue Contribution by Laser Type (2020-2022) | Product Type | 2022 Revenue % | 2021 Revenue % | 2020 Revenue % | |:---|:---|:---|:---| | High power continuous wave (CW) lasers | 43% | 47% | 54% | | Pulsed lasers | 18% | 17% | 13% | - The company also manufactures complementary products like optical delivery cables, fiber couplers, beam switches, optical processing heads, and chillers[38] - Laser and non-laser systems accounted for 11%, 9%, and 8% of revenues in 2022, 2021, and 2020, respectively, including products like the LightWELD handheld laser welding system[39] Our Markets IPG's primary markets are materials processing, medical procedures, and advanced applications, with communications no longer a focus after a 2022 divestiture - IPG classifies its principal end markets as material processing, advanced applications, communications, and medical procedures. Following the sale of telecom transmission product lines in August 2022, communications is no longer a principal market[40] Net Sales by Principal Market (2020-2022) | Market | 2022 Net Sales ($ thousands) | 2022 % of Total | 2021 Net Sales ($ thousands) | 2021 % of Total | 2020 Net Sales ($ thousands) | 2020 % of Total | |:---|:---|:---|:---|:---|:---|:---|\n| Materials processing | 1,291,262 | 90.3 % | 1,325,404 | 90.7 % | 1,082,478 | 90.2 % | | Medical procedures | 70,402 | 4.9 % | 42,936 | 2.9 % | 31,243 | 2.6 % | | Advanced applications | 54,308 | 3.8 % | 69,257 | 4.8 % | 63,859 | 5.3 % | | Communications | 13,575 | 1.0 % | 23,263 | 1.6 % | 23,144 | 1.9 % | | Total | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | 1,200,724 | 100.0 % | - Materials processing applications include cutting, welding, brazing, marking, engraving, cleaning, stripping, solar cell manufacturing, 3D printing, and micro-materials processing[41][42][43][44][45][46][47][48] - The company divested its telecom transmission product lines in August 2022 and no longer targets communications as a principal market[40][51] Technology IPG's proprietary technology platform leverages multi-clad optical fibers and advanced semiconductor diode laser processing - IPG's products are built on a proprietary technology platform, including expertise in multi-clad active and passive optical fibers and advanced semiconductor diode laser processing and packaging[52][53][54][55] - Key technological elements include side pumping of fibers, fiber block technologies for efficient diode coupling, and high-stress testing techniques to enhance reliability and accelerate product development[57][58] Research and Development IPG invests heavily in R&D to innovate products, enhance manufacturing, and expand applications while improving performance and reducing costs - IPG invests significantly in R&D to develop new products, improve existing ones, expand applications, and enhance manufacturing processes, focusing on increasing power levels, improving beam quality, and reducing costs[59][60][61] Research and Development Costs (2020-2022) | Year | R&D Costs ($ millions) | |:---|:---|\n| 2022 | 116.1 | | 2021 | 139.6 | | 2020 | 126.9 | Intellectual Property IPG protects its competitive position through a combination of trade secrets, patents, trademarks, and contractual agreements - The company relies on trade secrets, patents, trademarks, copyrights, and contractual protections to safeguard its proprietary rights and competitive position[63] - As of December 31, 2022, IPG held over 700 issued patents and more than 350 pending patent applications worldwide[64] Manufacturing Vertical integration is central to IPG's manufacturing strategy, covering components from optical preforms to final product assembly - Vertical integration is a core business strategy, encompassing the manufacturing or assembly of optical preforms, specialty fiber, semiconductor wafers, laser diodes, and final product assembly[65] - IPG operates its own semiconductor foundry and has developed proprietary components, tools, and testing methodologies to differentiate products and accelerate market introduction[66] Sales, Marketing and Support IPG utilizes a global direct sales force and OEM channels for international product marketing and comprehensive customer support - IPG primarily markets its products internationally through a direct sales force, selling to end users, OEMs, and system integrators, and also leverages OEM sales channels[67] - The company provides one to five-year parts and service warranties on lasers, with sales and service offices and application development centers globally[68] Customers IPG serves a global customer base of OEMs, system integrators, and end users, with decreasing reliance on its top five customers - IPG sells globally to thousands of OEMs, system integrators, and end users, with its top five customers accounting for a decreasing portion of consolidated net sales from 2020 to 2022[69] Top Five Customers' Contribution to Net Sales (2020-2022) | Year | % of Consolidated Net Sales | |:---|:---|\n| 2022 | 15% | | 2021 | 19% | | 2020 | 24% | Competition IPG faces intense competition in markets marked by rapid technological change, evolving customer demands, and price pressures - IPG operates in highly competitive markets characterized by rapid technological change, evolving customer requirements, and declining average selling prices[70] - Competitors include other fiber laser manufacturers (e.g., Coherent, Lumentum, Trumpf), makers of other laser types (solid-state, CO2), and manufacturers of non-laser processing methods[70][71] Backlog The company's backlog includes firm orders and non-binding frame agreements, with orders generally cancellable without substantial penalties Backlog of Orders (as of December 31) | Category | 2022 ($ millions) | 2021 ($ millions) | |:---|:---|:---|\n| Total Backlog | 811.0 | 729.0 | | Firm Shipment Dates | 500.9 | 487.3 | | Frame Agreements | 310.1 | 241.7 | - Frame agreements are non-binding indications of pricing and volume, and orders are generally cancellable without substantial penalties[72] Employees and Human Capital Management IPG manages a global workforce of approximately 6,230 employees, focusing on talent attraction and retention through competitive compensation and development - As of December 31, 2022, IPG had approximately 6,230 full-time employees globally, with significant concentrations in manufacturing and service operations (4,950) and R&D (500)[74] - The company focuses on attracting and retaining talent through competitive pay and benefits, annual cash bonuses, equity grants, and professional development opportunities[76][77][79] Executive Officers of the Registrant The executive officers of the registrant are listed with their respective ages and positions as of February 27, 2023 Executive Officers as of February 27, 2023 | Name | Age | Position | |:---|:---|:---|\n| Eugene A. Scherbakov, Ph.D. | 75 | Chief Executive Officer | | Angelo P. Lopresti | 59 | General Counsel, Secretary and Senior Vice President | | Timothy P.V. Mammen | 53 | Chief Financial Officer and Senior Vice President | | Trevor D. Ness | 50 | Senior Vice President, Sales and Strategic Business Development | | Alexander Ovtchinnikov, Ph.D. | 62 | Senior Vice President, Chief Technology Officer | | Igor Samartsev, Ph.D. | 59 | Senior Vice President, Chief Scientist | | Felix Stukalin | 61 | Senior Vice President, Chief Operating Officer | Seasonality Quarterly net sales can fluctuate due to economic trends, industry cycles, foreign holidays, and customer capital expenditure timing - Net sales can fluctuate quarterly due to general economic trends, industry cycles, foreign holidays (e.g., Lunar New Year), and customer capital expenditure timing[86] - Historically, net sales have generally been higher in the second half of the year[86] Government Regulation IPG's operations are subject to extensive government regulations, including FDA laser classifications, export controls, and environmental laws - IPG's laser products are classified as Class IV Laser Products under U.S. FDA (CDRH) regulations and similar European standards, requiring self-certification, periodic reports, and compliance with safety and labeling standards[87] - The company is subject to various export controls, trade, and economic sanctions laws (e.g., U.S. Commerce Department's Export Administration Regulations, OFAC), which impact its ability to export/import components and products globally[88] - Operations are also subject to environmental laws (e.g., RoHS, REACH, China-RoHS) governing hazardous materials, product composition, and labeling, which add complexity and potential costs[89][90] ITEM 1A. RISK FACTORS IPG faces substantial risks from global economic instability, intense competition, operational challenges, legal and regulatory complexities, and shareholder-related concerns - The COVID-19 pandemic has caused economic and financial disruptions, leading to unpredictable demand volatility and supply chain constraints[94] - The Russia-Ukraine conflict has significantly impacted operations, particularly in Russia and Belarus, leading to increased regulatory constraints, compliance costs, tariffs, and asset impairments ($79.0 million in long-lived assets and $74.1 million in inventory provisions in 2022)[97][98][193] - The markets are highly competitive, characterized by significant price and technological competition, declining average selling prices, and the risk of losing market share if unable to differentiate products or reduce costs[107][108][109] - IPG's vertically integrated model results in high fixed costs and inventory levels, making it vulnerable to demand declines and requiring significant capital expenditures for capacity expansion[115][116][117] - The company relies on internal production and single/limited-source suppliers for key components, making it susceptible to supply interruptions[120][122] - Intellectual property claims, cyber-attacks, and evolving data privacy regulations (e.g., GDPR, CCPA) pose significant legal, financial, and reputational risks[125][128][129][131][132][134] Risks Relating to Economic Conditions and Other External Factors Global economic conditions, including the pandemic and geopolitical conflicts, pose significant risks to demand, supply chains, and operational stability - The COVID-19 pandemic has caused economic and financial disruptions, leading to unpredictable demand volatility, supply chain constraints, and uncertainty in business operations[94][95][96] - The ongoing Russia-Ukraine conflict has adversely affected IPG's business, particularly its manufacturing operations in Russia and Belarus, due to sanctions, trade controls, increased tariffs, and logistical challenges[97][98][99] - Uncertainty in global economic conditions, especially in key markets like China (34% of 2022 net sales), can lead to decreased sales, increased bad debt exposure, and higher financing/manufacturing costs[104] - Downturns in the materials processing market, which accounts for approximately 90% of revenues, can materially impact sales and profitability due to cyclical demand for capital equipment[105] Risks Relating to Industry Dynamics and Competition The company operates in highly competitive markets, facing price pressures, technological competition, and the need for continuous innovation and market penetration - The markets are highly competitive with significant price and technological competition from other laser manufacturers and non-laser methods, leading to reduced sales, gross margins, or market share loss[107][108] - The laser and amplifier industries are experiencing declining average selling prices (ASPs), particularly from Chinese competitors, which could negatively impact gross margins if not offset by increased unit volumes or cost reductions[109] - Maintaining or increasing sales depends on developing new products, penetrating new applications and end markets, and overcoming customer reluctance to adopt new technologies due to existing investments and long qualification periods[110][112][113] - Reliance on OEM customers and system integrators means IPG's sales are affected by their ability to incorporate IPG products and their market success; some OEMs are also developing their own fiber laser sources[114] Risks Relating to Our Operations Operational risks include high fixed costs, inventory management challenges, reliance on key customers and suppliers, and dependence on specialized personnel - IPG's vertically integrated business model results in high fixed costs and inventory levels, making it difficult to adjust quickly to market changes and increasing the risk of inventory obsolescence and write-downs[115] - Significant investments in manufacturing capacity, including expansion outside Russia and Belarus, carry risks of cost overruns, delays, and lower margins until operational issues are resolved[116][117] - Reliance on a few key customers (top five accounted for 15% of 2022 net sales) and the lack of long-term purchase commitments make sales difficult to predict, potentially leading to excess inventory[118][119] - Dependence on internal production and single/limited-source suppliers for key components (e.g., semiconductor diodes, specialty optical fibers) creates supply chain vulnerability to disruptions[120][122] - Lower than expected manufacturing yields for complex processes like diode production can increase product costs and reduce gross margins[123] - The company's success is highly dependent on its CEO and other senior management and scientific staff; loss of these key personnel or inability to attract skilled talent could harm the business[124] Risks Relating to Intellectual Property, Litigation, Information Systems and Regulations The company faces risks from intellectual property litigation, cybersecurity threats, data privacy regulations, tax changes, product defects, and evolving trade controls - IPG has faced and may continue to face costly litigation alleging infringement of third-party intellectual property rights, which could result in injunctions, damages, and diversion of resources[125][126][127][128] - Inability to protect its own intellectual property and proprietary technologies, especially in foreign jurisdictions with weaker protections, could lead to unauthorized use and harm its competitive position[129][130] - Information systems are vulnerable to cyber-attacks, interruptions, and unauthorized access, potentially leading to data loss, litigation, financial exposure, and reputational damage[131][132][133] - Compliance with evolving privacy and data protection laws (e.g., GDPR, CCPA) poses risks of increased costs, negative publicity, and significant penalties for non-compliance[134] - Changes in tax rates, liabilities, or accounting rules globally could adversely affect future results, and the company is subject to regular tax examinations[135] - Failure to comply with FDA regulations (QSR, MDR) or similar foreign requirements for medical products could result in fines, injunctions, product recalls, and suspension of operations[136][137] - Failure to maintain effective internal controls over financial reporting could lead to a loss of investor confidence and negatively impact stock price[138] - Product defects could reduce sales, harm market acceptance, or result in costly claims, particularly for medical devices, leading to significant warranty, support, and recall costs[139] - Government regulations, including tariffs and duties, especially from U.S. trade policy changes and retaliatory actions by other countries (e.g., China), could restrict international sales and increase supply chain costs[140][141] - Operations are subject to various environmental laws, with potential for substantial costs, fines, and sanctions for violations or non-compliance[142] Risks Relating to Our Common Stock Risks to common stock include concentrated voting power by the founder's trusts and anti-takeover provisions in corporate documents - Trusts and a company created by the late founder collectively control over 30% of IPG's voting power, significantly influencing director elections and other stockholder matters, including potential changes in corporate control[143] - Provisions in the company's charter documents, Delaware law, and severance arrangements could prevent or delay a change in control, even if beneficial to stockholders[144][145] General Risk Factors General risks include fluctuating quarterly results, international operational complexities, foreign currency exposure, and challenges associated with acquisitions - Quarterly operating results are subject to significant fluctuations due to factors like customer order changes, revenue recognition timing, product mix, competitive pressures, and long sales cycles, making predictions difficult and increasing stock price volatility[146][147][148][149] - International operations (substantial majority of revenues from outside the U.S.) expose the company to risks such as foreign currency fluctuations, political instability, trade barriers, and less effective intellectual property protection[150][152] - Doing business in Russia, China, and Belarus carries specific risks related to economic and political environments, geopolitical conflicts, sanctions, and potential disruptions to supply chains and asset values[155] - Foreign currency risk can negatively affect net sales, cost of sales, and operating margins, potentially leading to exchange losses due to fluctuations in currencies like the Euro, Russian ruble, Chinese yuan, and Japanese yen[156] - Acquisitions and investments in new businesses, products, or technologies involve risks such as integration difficulties, diversion of management attention, unanticipated costs, and potential impairment charges[157][158][159][160] - Exposure to credit risk and fluctuations in market values of cash, cash equivalents, and marketable securities, particularly those held internationally, could result in significant realized losses[161] - The ability to access financial markets for capital or working capital financing may be adversely affected by factors beyond control, impacting operations and strategic initiatives[162] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC - The company has no unresolved staff comments[163] ITEM 2. PROPERTIES IPG operates over 3.4 million square feet of global facilities, with strategic expansions planned outside Russia and Belarus to mitigate geopolitical risks - As of December 31, 2022, IPG occupied over 3.4 million square feet of facilities worldwide, with 2.9 million square feet owned and 0.5 million square feet leased[164] - Principal manufacturing facilities are located in the United States (Oxford, Marlborough), Germany (Burbach), Russia (Fryazino), and Belarus (Minsk)[164] - The company plans to expand manufacturing operations in Germany, the United States, Italy, and Poland to meet demand and reduce reliance on Russia and Belarus due to the Russia-Ukraine conflict[165] ITEM 3. LEGAL PROCEEDINGS IPG is involved in various legal proceedings, including an ongoing BIS investigation into export practices, though no material financial impact is currently estimated - The company is party to various legal claims and proceedings, such as employment, intellectual property, or product issues[166] - As of December 31, 2022, and through February 27, 2023, there are no ongoing legal proceedings estimated to have a material effect on the Consolidated Financial Statements[433] - The U.S. Department of Commerce's Bureau of Industry and Security (BIS) continues an investigation into IPG's export practices, following voluntary self-disclosures, but the ultimate impact cannot be estimated[100][434] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[167] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES IPG's common stock trades on Nasdaq, with no anticipated cash dividends, and the company actively repurchased shares in Q4 2022 - IPG Photonics' common stock is quoted on the Nasdaq Global Select Market under the symbol 'IPGP'[169] - As of February 24, 2023, 47,627,143 shares of common stock were outstanding[5] - The company intends to retain future earnings for business use and does not anticipate paying cash dividends in the foreseeable future[174] Stock Price Performance Graph The report presents a comparative graph of IPG's stock performance against key market indices over a five-year period - The report includes a graph comparing IPG's common stock cumulative shareholder returns against the S&P 500 Index, Russell 3000 Index, and S&P 1500 Composite / Electronic Equipment Instruments & Components Index[171] - IPG ceased being a member of the S&P 500 Index in June 2022[171] 5-Year Cumulative Total Return (Base Period 12/31/2017 = $100) | Index/Company | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | |:---|:---|:---|:---|:---|:---|:---|\n| IPG Photonics Corporation | $100.00 | $52.91 | $67.68 | $104.51 | $80.39 | $44.21 | | S&P 500 Index | $100.00 | $95.62 | $125.72 | $148.85 | $191.58 | $156.88 | | Russell 3000 Index | $100.00 | $93.01 | $119.55 | $142.06 | $176.16 | $140.08 | | S&P 1500 Composite / Electronic Equipment Instruments & Components Index | $100.00 | $87.48 | $116.05 | $143.73 | $185.67 | $145.24 | Dividends The company plans to retain future earnings for business use and does not anticipate paying cash dividends in the foreseeable future - The company currently intends to retain future earnings for business use and does not anticipate paying cash dividends in the foreseeable future[174] Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities No recent sales of unregistered securities or use of proceeds from registered securities were reported - There were no recent sales of unregistered securities or use of proceeds from registered securities to report[175] Issuer Purchases of Equity Securities The company repurchased 1,299,357 shares in Q4 2022 under its publicly announced program, with $112.153 million remaining in authorization Issuer Purchases of Equity Securities (Q4 2022) | Date | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs ($ thousands) | |:---|:---|:---|:---|:---|\n| October 1, 2022 — October 31, 2022 | 680,578 | 86.67 | 680,578 | 169,759 | | November 1, 2022 — November 30, 2022 | 286 | 87.87 | — | 169,759 | | December 1, 2022 — December 31, 2022 | 618,493 | 93.15 | 618,416 | 112,153 | | Total | 1,299,357 | 89.75 | 1,298,994 | 112,153 | - The company repurchased 1,298,994 shares in Q4 2022 under the August 2022 authorization, which allows for up to $300 million in repurchases[177][178] - 363 shares were withheld in Q4 2022 to cover tax withholding related to the vesting of restricted stock awards[178] ITEM 6. RESERVED This item is reserved and contains no information - The company has no unresolved staff comments[163] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes IPG's financial condition and results, detailing sales decline, gross margin compression, and strategic shifts due to geopolitical and market factors - Net sales decreased by 2.1% in 2022 to $1,429.5 million, driven by a weakening macroeconomic environment and increased competition in the Chinese cutting market[199][233] - Gross margin decreased to 38.9% in 2022 from 47.7% in 2021, primarily due to a $74.1 million inventory provision and related charges tied to Russian operations, increased manufacturing costs, and higher shipping costs/tariffs[237] Key Financial Highlights (2020-2022) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | |:---|:---|:---|:---|\n| Net sales | 1,429,547 | 1,460,860 | 1,200,724 | | Gross profit | 555,413 | 696,398 | 538,996 | | Operating income | 169,500 | 367,883 | 198,659 | | Net income attributable to IPG Photonics Corporation common stockholders | 109,909 | 278,416 | 159,572 | - The company is executing plans to reduce reliance on Russian and Belarusian operations by adding capacity in other countries, increasing inventories, and qualifying third-party suppliers, which will involve additional investments and ongoing operating costs[191][192] Overview IPG Photonics develops and manufactures high-performance fiber lasers, amplifiers, and diodes for materials processing, medical, and advanced applications - IPG Photonics develops, manufactures, and sells high-performance fiber lasers, fiber amplifiers, and diode lasers for diverse applications, primarily materials processing, medical, and advanced applications[179] - The company is vertically integrated, designing and manufacturing most key components, which helps reduce manufacturing costs, control quality, and accelerate product development[180] Description of Our Net Sales, Costs and Expenses Net sales are generated from a diverse product range, while costs include raw materials, labor, manufacturing overhead, and operational expenses - Net sales are primarily derived from fiber lasers, diode lasers, laser and non-laser systems, amplifiers, and complementary products, sold to OEMs, system integrators, and end users[181] - Cost of sales includes raw materials, direct labor, manufacturing overhead, personnel costs, shipping, and reserves for inventory obsolescence and warranty obligations[184] - Sales and marketing expenses cover compensation, trade shows, travel, and other marketing costs, while R&D expenses include compensation, product design, and prototype materials[186][187] - General and administrative expenses consist of executive, finance, legal, HR, and IT personnel costs, professional fees, and corporate expenses[188] Factors and Trends That Affect Our Operations and Financial Results Geopolitical conflicts, global demand uncertainty, supply chain constraints, and foreign exchange fluctuations significantly impact IPG's operations and financial results - The Russia-Ukraine conflict and associated sanctions have increased uncertainty and risks, leading to increased operating costs, shipping limitations, and asset impairments in Russia and Belarus[190][192][193][194] - Global demand trends remain uncertain due to the ongoing COVID-19 pandemic, impacting forecasting and potentially leading to additional restrictions[196][197] - Supply chain constraints, particularly for electronic components, have led to increased lead times, higher freight costs, and delays in customer deliveries, though IPG believes it can meet near-term demand[198] - Net sales decreased by 2.1% in 2022 due to macroeconomic weakening and increased competition in China, partially offset by new product sales and growth in welding/EV battery applications[199] - Gross margin is significantly affected by sales volume, production volumes, competitive factors, product mix, and foreign exchange rates. New technologies and systems may have lower gross margins but higher returns on capital[206] - The company recorded $128.0 million in inventory provisions and related charges in 2022, including $74.1 million attributable to Russian operations, impacting gross margins[210] - Research and development expenses decreased in 2022 due to the divestiture of the telecommunications transceiver business but are expected to increase for continuing products[212] - Foreign exchange fluctuations, particularly involving the Euro, Russian ruble, Chinese yuan, and Japanese yen, significantly impact sales, costs, and earnings[215] - Reliance on a few major customers (top five accounted for 15% of net sales in 2022) means substantial reductions in their purchases could adversely affect results[216][217] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition, inventory valuation, long-lived asset impairment, and income tax expense - Revenue recognition involves judgment, especially for contracts with multiple delivery dates or customized large-scale systems, where revenue is recognized over time based on estimated progress[218][219][220] - Inventory valuation requires significant estimates for excess or obsolete items, with a $74.1 million provision recorded in Q4 2022 related to Russian operations due to new sanctions[221][222][223][224] - Long-lived asset impairment reviews involve significant judgment in estimating undiscounted operating cash flows and fair values, leading to a $79.0 million charge in Q4 2022 for Russian assets[225][226][227] - Income tax expense and deferred taxes require significant judgment due to inter-company transactions, differing tax rates, and the need to assess valuation allowances against deferred tax assets, including a $35.5 million allowance for Russian deferred tax assets in 2022[228][229][230][231] Results of Operations This section details the company's financial performance, including net sales, gross profit, operating expenses, and net income for 2020-2022 Consolidated Statements of Income (2020-2022) | Metric | 2022 ($ thousands) | 2022 % of Net Sales | 2021 ($ thousands) | 2021 % of Net Sales | 2020 ($ thousands) | 2020 % of Net Sales | |:---|:---|:---|:---|:---|:---|:---|\n| Net sales | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | 1,200,724 | 100.0 % | | Cost of sales | 874,134 | 61.1 % | 764,462 | 52.3 % | 661,728 | 55.1 % | | Gross profit | 555,413 | 38.9 % | 696,398 | 47.7 % | 538,996 | 44.9 % | | Sales and marketing | 76,643 | 5.3 % | 78,180 | 5.4 % | 70,583 | 5.9 % | | Research and development | 116,114 | 8.1 % | 139,573 | 9.6 % | 126,898 | 10.6 % | | General and administrative | 131,253 | 9.2 % | 125,882 | 8.6 % | 110,005 | 9.2 % | | Goodwill impairment | — | — | — | — | 44,589 | 3.7 % | | Gain on divestiture and sale of asset | (31,846) | (2.2) % | — | — | — | — | | Impairment of long-lived assets | 79,949 | 5.6 % | — | — | 671 | 0.1 % | | Other restructuring charges | 9,697 | 0.7 % | — | — | 506 | — | | Loss (gain) on foreign exchange | 4,103 | 0.3 % | (15,120) | (1.0) % | (12,915) | (1.1) % | | Total operating expenses | 385,913 | 27.0 % | 328,515 | 22.6 % | 340,337 | 28.4 % | | Operating income | 169,500 | 11.8 % | 367,883 | 25.2 % | 198,659 | 16.5 % | | Interest income (expense), net | 12,620 | 0.9 % | (1,839) | (0.1) % | 6,270 | 0.5 % | | Other income, net | 1,231 | 0.1 % | 437 | — | 763 | 0.1 % | | Income before provision for income taxes | 183,351 | 12.8 % | 366,481 | 25.1 % | 205,692 | 17.1 % | | Provision for income taxes | 72,589 | 5.1 % | 88,615 | 6.1 % | 45,354 | 3.8 % | | Net income | 110,762 | 7.7 % | 277,866 | 19.0 % | 160,338 | 13.3 % | | Net income attributable to IPG Photonics Corporation common stockholders | 109,909 | 7.6 % | 278,416 | 19.0 % | 159,572 | 13.2 % | | Basic EPS | 2.17 | | 5.21 | | 3.00 | | | Diluted EPS | 2.16 | | 5.16 | | 2.97 | | Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021 This section compares financial performance for 2022 versus 2021, detailing changes in sales by application, product, geography, and key expense items Sales by Application (2021 vs 2022) | Application | 2022 ($ thousands) | 2022 % of Total | 2021 ($ thousands) | 2021 % of Total | Change ($ thousands) | Change % | |:---|:---|:---|:---|:---|:---|:---|\n| Materials Processing | 1,291,262 | 90.3 % | 1,325,404 | 90.7 % | (34,142) | (2.6)% | | Other Applications | 138,285 | 9.7 % | 135,456 | 9.3 % | 2,829 | 2.1 % | | Total | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | (31,313) | (2.1)% | Sales by Product Type (2021 vs 2022) | Product Type | 2022 ($ thousands) | 2022 % of Total | 2021 ($ thousands) | 2021 % of Total | Change ($ thousands) | Change % | |:---|:---|:---|:---|:---|:---|:---|\n| High Power Continuous Wave ("CW") Lasers | 613,734 | 42.9 % | 687,406 | 47.1 % | (73,672) | (10.7)% | | Medium Power CW Lasers | 77,079 | 5.4 % | 80,501 | 5.5 % | (3,422) | (4.3)% | | Pulsed Lasers | 250,677 | 17.5 % | 240,978 | 16.5 % | 9,699 | 4.0 % | | Quasi-Continuous Wave ("QCW") Lasers | 50,212 | 3.5 % | 60,668 | 4.2 % | (10,456) | (17.2)% | | Laser and Non-Laser Systems | 153,471 | 10.8 % | 126,642 | 8.7 % | 26,829 | 21.2 % | | Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue | 284,374 | 19.9 % | 264,665 | 18.0 % | 19,709 | 7.4 % | | Total | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | (31,313) | (2.1)% | Sales by Geography (2021 vs 2022) | Geography | 2022 ($ thousands) | 2022 % of Total | 2021 ($ thousands) | 2021 % of Total | Change ($ thousands) | Change % | |:---|:---|:---|:---|:---|:---|:---|\n| North America | 338,713 | 23.7 % | 314,984 | 21.6 % | 23,729 | 7.5 % | | Europe: Germany | 85,491 | 6.0 % | 101,738 | 7.0 % | (16,247) | (16.0)% | | Europe: Other Europe | 294,481 | 20.6 % | 289,136 | 19.8 % | 5,345 | 1.8 % | | Asia: China | 479,926 | 33.6 % | 548,348 | 37.5 % | (68,422) | (12.5)% | | Asia: Japan | 57,865 | 4.0 % | 54,077 | 3.7 % | 3,788 | 7.0 % | | Asia: Other Asia | 152,373 | 10.7 % | 139,148 | 9.5 % | 13,225 | 9.5 % | | Rest of World | 20,698 | 1.4 % | 13,429 | 0.9 % | 7,269 | 54.1 % | | Total | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | (31,313) | (2.1)% | - Cost of sales increased by $109.6 million (14.3%) to $874.1 million in 2022, leading to a gross margin decrease from 47.7% to 38.9%, primarily due to a $74.1 million inventory provision related to Russian operations[237] - Research and development expense decreased by $23.5 million (16.8%) to $116.1 million in 2022, mainly due to reduced expenses from the divested telecommunications transmission product line[239] - The company recorded a gain of $31.8 million in 2022 from the divestiture of its telecommunications transmission product lines ($21.9 million) and the sale of its corporate aircraft ($9.9 million)[242] - A non-cash long-lived asset impairment charge of $79.9 million was recorded in Q4 2022, related to Russian operations due to new EU sanctions and U.S. tariffs impacting manufacturing capacity[243] - Other restructuring charges of $9.7 million primarily relate to restructuring costs in Russia and the closure of the Lebanon office[244] - A foreign exchange loss of $4.1 million was incurred in 2022, compared to a $15.1 million gain in 2021, mainly due to the depreciation of the Chinese yuan and appreciation of the Russian ruble[245] - Provision for income taxes was $72.6 million in 2022 (effective tax rate of 39.6%) compared to $88.6 million in 2021 (24.2%), with a $35.8 million increase in valuation allowance for Russian deferred tax assets impacting the 2022 rate[247] - Net income attributable to IPG Photonics Corporation decreased by $168.5 million to $109.9 million in 2022 from $278.4 million in 2021[248] Liquidity and Capital Resources IPG maintains sufficient liquidity through cash, investments, operating cash flows, and credit lines, despite some cash being subject to capital controls - IPG believes existing cash, short-term investments, cash flows from operations, and credit lines provide sufficient financial flexibility for liquidity and capital needs[249] - As of December 31, 2022, $68.3 million in cash and equivalents and $7.1 million in short-term investments were in Russia, subject to capital controls preventing repatriation but usable for operating purposes[250] Principal Sources of Liquidity (as of December 31) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | |:---|:---|:---|\n| Cash and cash equivalents | 698,209 | 709,105 | | Short-term investments | 479,374 | 805,400 | | Unused credit lines and overdraft facilities | 125,965 | 128,772 | | Working capital (excluding cash and cash equivalents and short-term investments) | 534,045 | 519,745 | Line-of-Credit Facilities and Long-Term Notes (as of December 31, 2022) | Description | Total Facility/Note ($ millions) | Interest Rate | Maturity | Security | |:---|:---|:---|:---|:---|\n| U.S. Revolving Line of Credit | 75.0 | BSBY plus 0.8% to 1.2% | April 2025 | Unsecured | | Euro Credit Facility (Germany) | 53.5 | ESTR plus 0.8% or Euribor plus 0.65% | July 2023 | Unsecured, guaranteed | | Other Euro Facilities | 1.6 | 2.03% | March 2023 | Common pool of assets of Italian subsidiary | | Long-term Unsecured Note | 16.0 | 1.20% above LIBOR, fixed at 2.85% | May 2023 | Unsecured | - The company was in compliance with all financial covenants (interest coverage ratio and funded debt to EBITDA ratio) as of December 31, 2022[253] Material Cash Commitments (as of December 31, 2022) | Commitment Type | Total ($ thousands) | Less Than 1 Year ($ thousands) | |:---|:---|:---|\n| Operating lease obligations | 25,374 | 6,019 | | Purchase obligations | 25,070 | 24,461 | | Long-term debt obligation (including interest) | 16,218 | 16,218 | | Total | 66,662 | 46,698 | Cash Flow Activities (2021 vs 2022) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | |:---|:---|:---|\n| Cash provided by operating activities | 212,649 | 389,700 | | Cash provided by (used in) investing activities | 296,952 | (416,282) | | Cash used in financing activities | (514,549) | (125,066) | - Net cash provided by operating activities decreased by $177.1 million in 2022, primarily due to lower net income and increased cash used by working capital (inventory build-up for supply chain disruptions)[257][258] - Net cash provided by investing activities was $297.0 million in 2022, a significant shift from $416.3 million used in 2021, driven by net proceeds from short-term investments and divestitures, partially offset by capital expenditures[258][259] - Net cash used in financing activities increased to $514.5 million in 2022, mainly due to $499.5 million in treasury stock purchases[261] Recent Accounting Pronouncements No recently adopted accounting pronouncements were reported - There were no recently adopted accounting pronouncements to report[380] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK IPG faces market risks primarily from interest rate and foreign exchange rate fluctuations, with significant exposure to global currency movements - The company's primary market exposures are to interest rate risk (cash, cash equivalents, debt) and foreign exchange rate risk[263] - Investments in cash, cash equivalents, and short-term investments have limited market risk due to short maturities (less than one year)[264] - Interest obligations on long-term debt are fixed via an interest rate swap, and a 10% change in market interest rates is not expected to materially impact financial position or results[265] - Significant foreign currency exposure exists due to operations in multiple currencies (Euro, Russian ruble, Chinese yuan), leading to transactional and translational risks[266] - A 5% change in the U.S. dollar's exchange rate against the Euro or Russian ruble could result in a foreign exchange gain/loss of approximately $2.4-$2.5 million; against the Chinese yuan, it could result in a $2.0-$2.1 million loss/gain[268] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements and supplementary data are incorporated by reference from pages F-1 through F-32 of this report - Financial statements and supplementary data are incorporated by reference from pages F-1 through F-32 of this report[271] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[272] ITEM 9A. CONTROLS AND PROCEDURES Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - As of December 31, 2022, the CEO and CFO concluded that disclosure controls and procedures were effective[273] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[274] - Deloitte & Touche LLP audited and expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting[275][278][279] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[276] ITEM 9B. OTHER INFORMATION This item contains no other information - There is no other information to report under this item[285] ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable - This item is not applicable[286] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement[289] ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - Information on executive compensation is incorporated by reference from the 2023 Proxy Statement[290] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on security ownership and related stockholder matters is incorporated by reference from the 2023 Proxy Statement - Information on security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the 2023 Proxy Statement[291] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the 2023 Proxy Statement[292] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement[293] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists financial statements, schedules, and exhibits, including corporate governance documents and credit agreements - This item includes the financial statements, financial statement schedules, and a list of exhibits filed as part of the Annual Report on Form 10-K[295][296] - Exhibits include the company's Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, 2006 Incentive Compensation Plan, and various credit facility agreements[297][298] ITEM 16. FORM 10-K SUMMARY No Form 10-K Summary is provided - No Form 10-K Summary is provided[299] SIGNATURES The Annual Report on Form 10-K is duly signed by the company's principal executive, financial, and accounting officers, and the Board of Directors - The report is signed by Eugene A. Scherbakov, Chief Executive Officer, and Timothy P.V. Mammen, Senior Vice President, Chief Financial Officer, among others[303][304] - The signing date for the report is February 27, 2023[302][304] INDEX TO FINANCIAL STATEMENTS This section indexes the consolidated financial statements, including auditor's report, balance sheets, income statements, and detailed accounting notes - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Equity, and Cash Flows[306] - It also includes detailed Notes to Consolidated Financial Statements covering various accounting policies and financial disclosures[306] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on IPG Photonics' consolidated financial statements and internal control over financial reporting for 2022 - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2022[307] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[308] Critical Audit Matters Critical audit matters highlight management's significant judgments in estimating asset impairment and inventory obsolescence reserves - Critical audit matters include the significant judgments made by management in estimating the long-lived asset impairment charge and the reserve for excess or obsolete inventory[311][313][317] - Auditors performed procedures to evaluate the reasonableness of management's estimates and assumptions for future revenues, cash flows, and expected demand[314][318] Consolidated Balance Sheets Consolidated balance sheets show a decrease in total assets, liabilities, and equity in 2022, driven by reduced investments and treasury stock repurchases Consolidated Balance Sheets (as of December 31) | ASSETS | 2022 ($ thousands) | 2021 ($ thousands) | |:---|:---|:---|\n| Cash and cash equivalents | 698,209 | 709,105 | | Short-term investments | 479,374 | 805,400 | | Accounts receivable, net | 211,347 | 262,121 | | Inventories | 509,363 | 460,747 | | Prepaid income taxes | 40,934 | 36,990 | | Prepaid expenses and other current assets | 47,047 | 73,320 | | Total current assets | 1,986,274 | 2,347,683 | | Deferred income taxes, net | 75,152 | 47,761 | | Goodwill | 38,325 | 38,609 | | Intangible assets, net | 34,120 | 52,678 | | Property, plant and equipment, net | 580,561 | 635,302 | | Other assets | 28,848 | 48,507 | | Total assets | 2,743,280 | 3,170,540 | | LIABILITIES AND EQUITY | | | | Current portion of long-term debt | 16,031 | 18,126 | | Accounts payable | 46,233 | 55,839 | | Accrued expenses and other liabilities | 202,764 | 230,826 | | Income taxes payable | 9,618 | 8,642 | | Total current liabilities | 274,646 | 313,433 | | Other long-term liabilities and deferred income taxes | 83,274 | 93,855 | | Long-term debt, net of current portion | — | 16,031 | | Total liabilities | 357,920 | 423,319 | | Total IPG Photonics Corporation stockholders' equity | 2,385,360 | 2,746,582 | | Non-controlling interests | — | 639 | | Total equity | 2,385,360 | 2,747,221 | | Total liabilities and equity | 2,743,280 | 3,170,540 | Consolidated Statements of Income Consolidated income statements reveal decreased net sales, gross profit, and net income in 2022, primarily due to asset impairments and restructuring charges Consolidated Statements of Income (2020-2022) | Metric | 2022 ($ thousands) | 2022 % of Net Sales | 2021 ($ thousands) | 2021 % of Net Sales | 2020 ($ thousands) | 2020 % of Net Sales | |:---|:---|:---|:---|:---|:---|:---|\n| Net sales | 1,429,547 | 100.0 % | 1,460,860 | 100.0 % | 1,200,724 | 100.0 % | | Cost of sales | 874,134 | 61.1 % | 764,462 | 52.3 % | 661,728 | 55.1 % | | Gross profit | 555,413 | 38.9 % | 696,398 | 47.7 % | 538,996 | 44.9 % | | Sales and marketing | 76,643 | 5.3 % | 78,180 | 5.4 % | 70,583 | 5.9 % | | Research and development | 116,114 | 8.1 % | 139,573 | 9.6 % | 126,898 | 10.6 % | | General and administrative | 131,253 | 9.2 % | 125,882 | 8.6 % | 110,005 | 9.2 % | | Goodwill impairment | — | — | — | — | 44,589 | 3.7 % | | Gain on divestiture and sale of asset | (31,846) | (2.2) % | — | — | — | — | | Impairment of long-lived assets | 79,949 | 5.6 % | — | — | 671 | 0.1 % | | Other restructuring charges | 9,697 | 0.7 % | — | — | 506 | — | | Loss (gain) on foreign exchange | 4,103 | 0.3 % | (15,120) | (1.0) % | (12,915) | (1.1) % | | Total operating expenses | 385,913 | 27.0 % | 328,515 | 22.6 % | 340,337 | 28.4 % | | Operating income | 169,500 | 11.8 % | 367,883 | 25.2 % | 198,659 | 16.5 % | | Interest income (expense), net | 12,620 | 0.9 % | (1,839) | (0.1) % | 6,270 | 0.5 % | | Other income, net | 1,231 | 0.1 % | 437 | — | 763 | 0.1 % | | Income before provision for income taxes | 183,351 | 12.8 % | 366,481 | 25.1 % | 205,692 | 17.1 % | | Provision for income taxes | 72,589 | 5.1 % | 88,615 | 6.1 % | 45,354 | 3.8 % | | Net income | 110,762 | 7.7 % | 277,866 | 19.0 % | 160,338 | 13.3 % | | Net income attributable to IPG Photonics Corporation common stockholders | 109,909 | 7.6 % | 278,416 | 19.0 % | 159,572 | 13.2 % | | Basic EPS | 2.17 | | 5.21 | | 3.00 | | | Diluted EPS | 2.16 | | 5.16 | | 2.97 | | Consolidated Statements of Comprehensive Income Consolidated comprehensive income statements show a decline in net income and total comprehensive income in 2022, influenced by foreign currency translation adjustments Consolidated Statements of Comprehensive Income (2020-2022) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | 2020 ($ thousands) | |:---|:---|:---|:---|\n| Net income | 110,762 | 277,866 | 160,338 | | Other comprehensive (loss) income, net of tax: | | | | | Foreign currency translation adjustments and other | (14,838) | (44,267) | 1,367 | | Adjustment for net gain realized and included in net income | — | — | (232) | | Unrealized gain (loss) on derivatives | 336 | 278 | (472) | | Total other comprehensive (loss) income | (14,502) | (43,989) | 663 | | Comprehensive income | 96,260 | 233,877 | 161,001 | | Less: comprehensive income (loss) attributable to non-controlling interest | 924 | (653) | 575 | | Comprehensive income attributable to IPG Photonics Corporation | 95,336 | 234,530 | 160,426 | [Consolidated Statements o