IPG Photonics Corp., a maker of industrial lasers, announced this week that 300 positions will be eliminated from its global workforce. The news follows the release of the company’s third-quarter earnings report.
IPG posted $329 million in revenue during the third quarter, or $1.07 per diluted share, compared to $356 million, or $1.84 per diluted share, in the same quarter in 2018.
The company began implementing a cost-reduction program in the fourth quarter of last year and expects to reduce annualized operating expenses by approximately $30 million, according to the report. The full impact is expected to be achieved by the end of the fourth quarter of 2019.
At the end of 2018, IPG announced that its board of directors had authorized a new $125 million anti-dilutive stock repurchase program following the completion of a previous $125 million repurchase program, according to the company’s fourth quarter earnings report.
IPG said it has implemented a hiring freeze and expects limited replacement of workforce attrition. More than 6000 IPG employees are stationed worldwide, with about 2200 in the U.S., most of whom work in Oxford and Marlborough, Mass.
IPG Photonics corporate office. Credit: IPG Photonics
Recent trade tariffs and threatened tariffs between the U.S. and China have adversely affected the laser market overseas, and IPG’s revenue reflected this trend in its 2018 fourth-quarter 9% drop to $330.1 million, which was still better than the 13% decline most of those following the stock were expecting, according to Dan Caplinger, director of investment planning at The Motley Fool.
While IPG has been a strong financial performer for years, its high-power continuous-wave (CW) lasers, which represents 57% of the company’s total revenue, saw a 22% drop in sales according to its first quarter report. The report notes that while sales increased for CW lasers 10 kW or greater by over 40%, sales of other high-power lasers declined year over year, citing a “weaker demand environment” in China and Europe and lower average selling prices. By region, sales decreased 24% in China, 24% in Europe, and 20% in Japan, but increased 65% in North America year over year.
“Weaker economic conditions in Europe and Asia have taken a big bite out of demand for lasers worldwide,” Caplinger said. “IPG’s business customers aren’t in as strong a position to make capital investments to integrate laser systems.” Caplinger noted that North America has generally had a healthier market compared to other parts of the world, but that “investors seem to be afraid that macroeconomic weakness could spread to the U.S. as well, and that could eat away at one of the last strongholds for IPG.”
Materials processing accounted for 93% of total revenue at IPG, but still saw an 8% drop from total sales. Numbers had been skewed favorably for IPG due to its 2018 acquisition of Genesis Systems Group, which brought revenue up 32% year over year according to the company’s recent third quarter earnings call.
After consistent growth in the past decade, IPG’s gross profit is expected to drop in 2019, according to Caplinger, who cited declining sales and rising costs of laser production as major key factors. He pointed out that the company’s operating costs have also been on the rise, primarily general overhead and spending on research and development.
“R&D arguably gets paid back through better future products,” Caplinger said. “But overhead isn’t as beneficial.” While IPG’s net income climbed in 2018, those numbers are tied to the sharp drop in income tax rates, he said.
“This year’s big drop in net income is a big part of what’s behind the stock’s drop between early 2018 and now,” Caplinger said.
As far as where the company’s finances might be headed in the future, Caplinger said he expects things to eventually turn around. “I think five to 10 years will be enough to see another upward business cycle globally,” he said, noting IPG’s tendency to capture demand when the economy is on the rise. “Right now things are weak overseas, but that won’t always be the case. We might get a year or two more of poor performance if the U.S. fails to hold up as well as it has thus far. But over time, both the U.S. and international markets should rebound.” Caplinger believes that rebound should be enough to get IPG back to how it looked during the early to middle part of the decade.
Meanwhile, IPG CEO Valentin Gapontsev said the company will look to consolidate its assets to boost its reduced earnings. “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,” he said, adding that the company would emphasize a more diverse portfolio of high-power lasers, a renewed focus on “higher margin products” as they gain market acceptance, and a reduction in manufacturing resources.