IPG Photonics(IPGP) - 2023 Q3 - Quarterly Report

Part I. Financial Information Unaudited Interim Financial Statements This section presents IPG Photonics Corporation's unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2023 Condensed Consolidated Balance Sheets Total assets slightly decreased to $2.67 billion while total liabilities significantly reduced to $288.9 million as of September 30, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,920,460 | $1,986,274 | | Cash and cash equivalents | $528,284 | $698,209 | | Short-term investments | $605,207 | $479,374 | | Inventories | $479,829 | $509,363 | | Total assets | $2,672,864 | $2,743,280 | | Total current liabilities | $219,709 | $274,646 | | Total liabilities | $288,913 | $357,920 | | Total equity | $2,383,951 | $2,385,360 | Condensed Consolidated Statements of Income Net sales and net income declined for both Q3 and the nine-month period ended September 30, 2023, compared to prior year Income Statement Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $301,401 | $349,006 | $988,546 | $1,096,008 | | Gross profit | $132,902 | $150,424 | $427,531 | $494,589 | | Operating income | $55,706 | $93,162 | $203,195 | $257,980 | | Net income attributable to IPG | $54,994 | $76,264 | $177,450 | $202,804 | | Diluted EPS | $1.16 | $1.47 | $3.73 | $3.93 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased, while investing activities shifted to a significant cash outflow due to short-term investment purchases Cash Flow Summary (Nine Months Ended, in thousands) | Activity | September 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $189,924 | $171,026 | | Net cash (used in) provided by investing activities | $(162,996) | $407,465 | | Net cash used in financing activities | $(175,991) | $(400,861) | | Net (decrease) increase in cash | $(169,925) | $160,169 | | Cash and cash equivalents - End of period | $528,284 | $869,274 | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, revenue disaggregation, inventory, Russian subsidiary restructuring, and share repurchase programs Revenue by Geography (Nine Months Ended, in thousands) | Region | 2023 | 2022 | | :--- | :--- | :--- | | North America | $225,649 | $247,495 | | Europe | $297,449 | $298,570 | | China | $284,262 | $385,080 | | Japan | $54,196 | $38,847 | | Other Asia | $111,457 | $111,500 | | Rest of World | $15,533 | $14,516 | | Total | $988,546 | $1,096,008 | Revenue by Product (Nine Months Ended, in thousands) | Product | 2023 | 2022 | | :--- | :--- | :--- | | High Power CW Lasers | $419,538 | $483,455 | | Pulsed Lasers | $150,569 | $192,000 | | Laser and Non-Laser Systems | $117,064 | $108,970 | | Other Revenue | $208,251 | $210,141 | | Total | $988,546 | $1,096,008 | - The company substantially completed its restructuring program in Russia during Q3 2023, resulting in a net recovery of $1.5 million for the quarter[36] - During the nine months ended September 30, 2023, the company repurchased 1,448,457 shares of common stock at a weighted average price of $109.21 per share[51] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 revenue decline due to softer demand, ongoing operational impacts, and strong liquidity despite capacity expansion costs Factors and Trends That Affect Our Operations and Financial Results Operational results are impacted by the Russia-Ukraine conflict, supply chain issues, cyclical demand, interest rates, and foreign exchange fluctuations - The Russia-Ukraine conflict has significantly curtailed Russian manufacturing, leading to capacity expansion elsewhere and higher operating costs impacting gross margins[57][58] - As of September 30, 2023, the Russian subsidiary's net asset value was $87.9 million, including $63.7 million in cash, with long-lived assets in Belarus at $31.3 million[62][63] - Approximately 90% of revenue is derived from materials processing applications, making the business susceptible to cyclical capital equipment spending trends[67] - Foreign exchange fluctuations, particularly from the euro, Russian ruble, and Chinese yuan, significantly impact sales, costs, and earnings[81] Results of Operations Q3 2023 net sales declined 13.6% to $301.4 million due to materials processing weakness, while nine-month sales decreased 9.8% Q3 2023 vs Q3 2022 Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $301.4 | $349.0 | (13.6)% | | Gross Profit | $132.9 | $150.4 | (11.6)% | | Gross Margin | 44.1% | 43.1% | +1.0 ppt | | Operating Income | $55.7 | $93.2 | (40.2)% | | Net Income | $55.0 | $76.3 | (27.9)% | - The decrease in Q3 materials processing sales was primarily due to lower sales of high power CW lasers for cutting and welding, especially in China and Europe, and decreased pulsed laser sales for solar cell manufacturing[86][96] Nine Months 2023 vs 2022 Performance (in thousands) | Metric | Nine Months 2023 | Nine Months 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $988.5 | $1,096.0 | (9.8)% | | Gross Profit | $427.5 | $494.6 | (13.6)% | | Gross Margin | 43.2% | 45.1% | (1.9) ppt | | Operating Income | $203.2 | $258.0 | (21.2)% | | Net Income | $177.5 | $202.8 | (12.5)% | Liquidity and Capital Resources The company maintains strong liquidity with over $1.1 billion in cash and investments, supporting capacity expansion Principal Sources of Liquidity (in thousands) | Source | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $528,284 | $698,209 | | Short-term investments | $605,207 | $479,374 | | Unused credit lines | $74,112 | $125,965 | - Cash and cash equivalents include $63.7 million in Russia and $5.1 million in Belarus, with Russian cash subject to capital controls but usable locally[116] - Expected capital expenditures for 2023 are approximately $100 million to $110 million, focused on global capacity expansion and vertical integration[123] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from foreign exchange rate fluctuations and, to a lesser extent, interest rate changes - The company's primary market risks are interest rate fluctuations on its cash and investment portfolio and foreign exchange rate changes[129] - A significant portion of net sales, cost of sales, and operating expenses are denominated in foreign currencies, principally the euro, Russian ruble, and Chinese yuan[132] - A hypothetical 5% change in USD/EUR, USD/RUB, and USD/CNY exchange rates would result in foreign exchange gains/losses of approximately $1.4-$1.5 million, $0.2 million, and $1.1 million, respectively[132][133] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[136] - No material changes in internal control over financial reporting occurred during the quarter[137] Part II. Other Information Legal Proceedings The company reports no ongoing legal proceedings expected to materially affect its financial statements - As of the filing date, the company reports no ongoing legal proceedings estimated to have a material effect on its financial statements[47][139] Risk Factors This section refers to previously disclosed risk factors in the 2022 Form 10-K and Q1 2023 Form 10-Q, with no material changes - The report directs readers to the risk factors detailed in the 2022 Form 10-K and the Q1 2023 Form 10-Q for a comprehensive understanding of potential risks[140] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 449,688 shares in Q3 2023, with $154.0 million remaining under the May 2023 authorization Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid | Publicly Announced Program Shares | Approx. Dollar Value Remaining ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | July 2023 | — | $— | — | $200,000 | | August 2023 | 210,173 | $104.07 | 209,754 | $178,173 | | September 2023 | 240,377 | $100.90 | 239,934 | $153,966 | | Total | 450,550 | $102.38 | 449,688 | $153,966 | - The share repurchases were made under the May 2023 authorization of up to $200 million[143][142]