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Item 1A. Risk Factors

2021-02-22 compared with 2020-02-24 · 274 added, 247 removed, 176 unchanged (75% of the section changed)

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In addition, new risks may emerge at any time and we cannot predict those risks or estimate the extent to which they may affect us.

Downturns in the markets we serve, particularly materials processing, could have a material adverse effect on our sales and profitability.

Our business depends substantially upon capital expenditures by manufacturers in the materials processing market, which includes general manufacturing, automotive, aerospace, other transportation, heavy industry, electronics and photovoltaic industries.

Approximately 94% of our revenues in 2019 were from customers in the materials processing market.

Although applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market.

For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession and our material processing sales declined 10% in the second half of 2018 and 11% in the 2019 fiscal year, in part due to decreased capital equipment demand stemming from adverse changes to U.S.-China relations, including rounds of tariff increases and retaliations.

For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in these industries or markets, which, in turn, depend upon the demand, as well as forecasted demand, for their products or services.

A softening of demand for our customers' products and services, whether caused by a weakening of the U.S.

or global economies or other factors, may result in decreased revenue or growth for our customers and may lead to decreased demand for our products, which would reduce our sales and margins.

We may not be able to respond by decreasing our expenses quickly enough or sufficiently, due in part, to our fixed overhead structure related to our vertically integrated operations and our commitments to continuing investment in research and development and infrastructure for long term growth.

Risks Relating to the COVID-19 Pandemic

The COVID-19 pandemic, including private and public sector responses, could materially adversely affect our business, financial condition, results of operations and/or cash flows.

As a result of the ongoing COVID-19 pandemic, governmental authorities where we produce and sell our products implemented and are continuing to implement numerous and evolving measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and guidance and business shutdowns.

We have significant manufacturing operations in the U.S., Europe and Russia, and a material portion of our sales are in China, the U.S.

Each of these countries and regions has been affected by the pandemic and has taken measures to try to contain it.

While our main production facilities currently remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers, vendors and suppliers.

There is considerable uncertainty regarding such measures and potential future measures.

In addition to reduced productivity, the constraints and limits implemented in our operations in response to COVID-19 may slow or diminish our research and development activities and qualification activities with our customers.

Restrictive governmental measures had specific expiration dates and some of those measures have been extended in response to increases in infection rates.

As a result, there is considerable uncertainty regarding the duration of such measures and potential future measures.

Restrictions on our manufacturing, support operations or workforce, or similar limitations for our vendors and suppliers could limit our ability to meet customer demand, testing, installation and acceptance of our equipment or delays for orders, deliveries and payments, and could have a material adverse effect on our financial condition, cash flows and results of operations.

In addition, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, could limit our ability to manufacture, deliver or install products and generate sales, or could result in higher costs and could have a material adverse effect on our financial condition, cash flows and results of operations.

In response to these developments, we and our suppliers and customers modified business practices, including restricting employee travel, modifying employee work locations, implementing social distancing and enhanced sanitary measures, and cancelling attendance at events and conferences.

We experienced and may experience increased absenteeism and reduced levels

of productivity and efficiency, even with the rollout of vaccination programs.

The COVID-19 pandemic has also disrupted our internal operations, including by exposing us to cyber and other data security risks associated with the increased number of our employees working remotely, as well as increased dependence on internet and telecommunications access and capabilities.

There is no certainty that measures implemented by governmental authorities or by us in our operations will be sufficient to mitigate the risks posed by the COVID-19 virus, including risk of infection of our senior management, scientific staff or a significant number of employees or the ability of the healthcare system to treat them, and our ability to perform critical functions or respond to the needs of our customers could be impeded.

The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers.

The impact of COVID-19, including changes in customer demand, pandemic fears and market downturns, and restrictions on business and individual activities has created significant economic and demand uncertainty.

We have experienced and expect to continue to experience unpredictable volatility in demand in several of our end-markets.

In addition to the economic slowdown caused by the COVID-19 pandemic, we anticipate that it could cause regional recessions and/or a global recession.

The COVID-19 pandemic also may exacerbate other risks disclosed herein, including but not limited to downturns in our markets, uncertainty and adverse changes in general economic conditions, highly competitive markets and declining average selling prices, price decreases, and international operations and customers.

The degree to which COVID-19 impacts our financial condition, cash flows and results of operations depends upon future developments, which are highly uncertain and cannot be predicted, including but not limited to the duration, location and spread of the outbreak, its severity, governmental and business measures to contain the virus and address its impact, and how quickly and to what extent normal economic and operating conditions can resume.

We cannot at this time predict the many potential impacts of the COVID-19 pandemic, but it could have a material adverse effect on our business, prospects, financial condition, cash flows and results of operations.

Furthermore, the COVID-19 pandemic makes it more difficult for us to forecast demand and provide guidance for 2021.

Accordingly, while IPG provided and may provide quarterly guidance during the COVID-19 pandemic, any such guidance we provide is subject to greater risks and uncertainty than in the past and actual results may be more likely to ultimately vary a greater degree from actual results than guidance we provided in the past.

In light of the foregoing, investors are urged to put the guidance we provide and may provide in context and not to place undue reliance on it.

Risks Relating to the Macroeconomic Environment

Uncertainty and adverse changes in the general economic conditions of markets in which we participate negatively affect our business.

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As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole.

It is even more difficult to estimate growth or contraction in

various parts, sectors and regions of the economy, including the materials processing, telecommunications, advanced and medical markets and applications in which we participate.

It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including the materials processing, telecommunications, advanced and medical markets and applications in which we participate.

Because all components of our budgeting and forecasting are dependent upon estimates of growth or contraction in the markets and applications we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures very difficult to make.

A significant portion of our sales are to customers in China, which accounted for 42%, 37% and 43% in 2020, 2019 and 2018, respectively.

A slowing of economic growth or recession, tariff-trade wars or other adverse economic developments or uncertainty in any of our key markets, including in China, may result in a decrease in our sales.

Slowing economic growth or recession, tariff-trade wars or other adverse economic developments or uncertainty in any of our key markets, including in China, may result in a decrease in our sales.

Adverse changes have occurred and may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, declines in stock markets, contraction of credit availability, declines in real estate values, or other factors affecting economic conditions generally.

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An economic downturn could have a material adverse effect on our business, financial condition and results of operations.

Downturns in the markets we serve, particularly materials processing, could have a material adverse effect on our sales and profitability.

Approximately 90% of our revenues in 2020 were from customers in the materials processing market.

applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market.

For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession, our material processing sales declined 10% in the second half of 2018 and 11% in the 2019 fiscal year, in part due to decreased capital equipment demand stemming from adverse changes to U.S.-China relations, including rounds of tariff increases and retaliations and 12% in the 2020 fiscal year, in part due to decreased capital equipment demand attributed to the COVID-19 pandemic.

A softening of demand for our customers' products and services, whether caused by a weakening of the U.S.

or global economies or other factors, may result in decreased revenue or growth for our customers and may lead to decreased demand for our products, which would reduce our sales and margins.

Risks Relating to Industry Dynamics and Competition

The markets for our products are highly competitive and increased competition could result in reduced sales, reduced gross margins or the loss of market share.

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We compete with makers of fiber lasers, solid-state lasers, direct diode lasers, high power CO 2, YAG and disc lasers.

These include public and private companies such as Coherent, Inc., Laserline GmbH, Lumentum Holdings Inc., Maxphotonics Co., Ltd., nLight, Inc., Raycus Fiber Laser Technologies Co.

Ltd., and Trumpf GmbH + Co.

KG, as well as other smaller competitors.

Many of our fiber laser competitors are increasing the output powers and improving quality of their fiber lasers and decreasing prices to compete with our products.

These include public and private companies such as Coherent, Inc., Laserline GmbH, Lumentum Holdings Inc., Maxphotonics Co., Ltd., nLight, Inc., Trumpf GmbH + Co.

KG, and Wuhan Raycus Fiber Laser Technologies Co.

Ltd., as well as other smaller competitors.

Several of these are larger and have substantially greater financial, managerial and technical resources, more extensive distribution and service networks, greater sales and marketing capacity, and larger installed customer bases than we do.

Also, we compete with widely used non-laser production methods, such as water-jet cutting and resistance welding.

Many of our fiber laser competitors are increasing the output powers, improving the quality of their fiber lasers and decreasing prices to compete with our products.

Our current or potential customers may determine to develop and produce products for their own use which are competitive to our products.

Such vertical integration could reduce the market opportunity for our products.

We also compete in the materials processing, advanced and medical applications markets with end users that produce their own solid-state and gas lasers as well as with manufacturers of non-laser methods and tools, such as traditional non-laser welding and cutting dies in the materials processing market and scalpels in the medical market.

We also compete in the materials processing, advanced and medical applications markets with end users that produce their own solid-state and gas lasers as well as with manufacturers of non-laser methods and tools, such as traditional non-laser welding, cutting dies mechanical cutters and plasma cutters in the materials processing market and scalpels in the medical market.

We may not be able to successfully differentiate our current and proposed products from our competitors' products and current or prospective customers may not consider our products to be superior to competitors' products.

To maintain our competitive position, we believe that we will be required to continue a high level of investment in research and development, application development, manufacturing facilities and customer service and support, and to react to market pricing conditions.

As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins, loss of sales and loss of market share.

As a result of the foregoing factors, competitive pressures have resulted in price reductions, reduced margins, loss of sales and loss of market share.

The laser and amplifier industries are experiencing declining average selling prices, which could cause our gross margins to decline and harm our operating results.

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Because of these factors, we have experienced and we may experience in the future material adverse fluctuations in our operating results on a quarterly or annual basis if the ASPs of our products continue to decline.

Our level of sales depends upon our ability to penetrate new applications and end markets for fiber lasers and increase our market share in existing applications.

Our ability to maintain or increase sales depends upon our ability to develop new products, penetrate new applications and end markets for fiber lasers and maintain or increase our market share in existing applications.

Our level of sales will depend on our ability to generate sales of fiber lasers in new and developing markets and applications for lasers where they have not been used previously and in applications in which other lasers, such as CO 2 and YAG lasers, have been used.

To date, a significant portion of our revenue growth has been derived from sales of fiber lasers primarily for applications where CO 2 and YAG lasers historically have been used.

We have made significant sales into the

cutting, welding and marking and engraving applications, large applications where the use of other laser technologies was well established.

As fiber lasers reach higher levels of penetration in core materials processing applications, the development of new applications, end markets and products outside our core applications becomes more important to our ability to generate sales.

To date, a significant portion of our revenue growth has been derived from sales of fiber lasers

primarily for applications where CO 2 and YAG lasers historically have been used.

We have made significant sales into the cutting, welding and marking and engraving applications, large applications where the use of other laser technologies was well established.

As fiber lasers reach higher levels of penetration in core materials processing applications and there is higher levels of competition in these core material processing application, the development of new applications, end markets and products outside our core applications becomes more important to our ability to generate sales.

In order to maintain or increase market demand for our products, we will need to devote substantial resources to:

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In addition, any newly developed or enhanced products may not achieve market acceptance or may be rendered obsolete or less competitive by the introduction of new products by other companies.

We depend on our OEM customers and system integrators to incorporate our products into their systems.

Our sales depend in part on our ability to maintain existing and secure new OEM customers.

Our revenues also depend in part upon the ability of our current and potential OEM customers and system integrators to incorporate our laser and amplifier products.

The commercial success of these systems depends to a substantial degree on the efforts of these OEM customers and system integrators to develop and market products that incorporate our technologies.

Relationships and experience with traditional laser makers, limited marketing resources, reluctance to invest in research and development and other factors affecting these OEM customers and third-party system integrators could have a substantial impact upon our financial results.

If OEM customers or integrators are not able to adapt existing tools or develop new systems to take advantage of the features and benefits of fiber lasers or if they perceive us to be an actual or potential competitor, then the opportunities to increase our revenues and profitability may be severely limited or delayed.

In addition, some of our OEM customers are developing their own fiber laser sources.

If they are successful, this may reduce our sales to these customers.

Furthermore, if our OEM customers or third-party system integrators experience financial or other difficulties that adversely affect their operations, our financial condition or results of operations may also be adversely affected.

Risks Relating to Our Operations

Our vertically integrated business results in high levels of fixed costs and inventory levels that may adversely impact our gross profits and our operating results in the event that demand for our products declines or we maintain excess inventory levels.

We have a high fixed cost base due to our vertically integrated business model, including the fact that approximately 75% of our approximately 5,960 employees as of December 31, 2019 were employed in our manufacturing operations.

We have a high fixed cost base due to our vertically integrated business model.

Approximately 75% of our approximately 6,060 employees as of December 31, 2020 were employed in our manufacturing operations.

We may not adjust these fixed costs quickly enough or sufficiently to adapt to rapidly changing market conditions.

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If our capacity and production levels are not properly sized in relation to expected demand, we may need to record write-downs for excess or obsolete inventory.

Because we are vertically integrated, the rate at which we turn inventory has historically been low when compared to our cost of sales.

Because we are vertically integrated,

the rate at which we turn inventory has historically been low when compared to our cost of sales.

We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales.

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To maintain our competitive position and to meet anticipated demand for our products, we invest significantly in the expansion of our manufacturing and operations throughout the world and may do so in the future.

We had capital expenditures

of $134 million and $160 million in 2019 and 2018, respectively, and we expect to incur approximately $115 million to $125 million in capital expenditures, excluding acquisitions, in 2020.

We had capital expenditures of $88 million and $134 million in 2020 and 2019, respectively, and we expect to incur approximately $150 million to $160 million in capital expenditures, excluding acquisitions, in 2021.

In connection with these projects, we may incur cost overruns, construction delays, project cancellations, labor difficulties or regulatory issues which could cause our capital expenditures to be higher than what we currently anticipate, possibly by a material amount, which would in turn adversely impact our operating results.

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Our largest customer is located in China and accounted for 8%, 9% and 12% of sales in 2020, 2019 and 2018, respectively.

A few of our larger customers are making fiber lasers or announced plans to develop fiber lasers.

A few of our larger customers, including our largest customer, are making fiber lasers or announced plans to develop fiber lasers.

We generally do not enter into agreements with our customers obligating them to purchase our fiber lasers or amplifiers.

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If any of our principal customers discontinues its relationship with us, replaces us as a vendor for certain products or suffers downturns in its business, our business and results of operations could be adversely affected.

Foreign currency risk may negatively affect our net sales, cost of sales and operating margins and could result in exchange losses.

We conduct our business and incur costs in the local currency of most countries in which we operate.

In 2019 our net sales outside the United States represented a substantial majority of our total sales.

We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it operates or holds assets or liabilities in currencies different than their functional currency.

Changes in exchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S.

We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.

Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or increase the manufacturing cost of our products, which may have an adverse effect on our financial condition, cash flows and profitability.

Our inability to manage risks associated with our international customers and operations could adversely affect our business.

We have significant facilities in and our products are sold in numerous countries.

Our principal markets include China, the United States, Germany, Switzerland, Japan, Italy, Korea, Turkey and Russia.

A substantial majority of our revenues are derived from customers outside the United States.

In addition, we have substantial tangible assets outside of the United States.

We anticipate that foreign sales will continue to account for a significant portion of our revenues in the foreseeable future.

Our operations and sales in these markets are subject to risks inherent in international business activities, including the following and others mentioned in the Risk Factors:

• fluctuations in the values of foreign currencies;

• changes, including recession, and other general economic uncertainties affecting the macroeconomic and local economic communities in which we and our customers operate or serve;

• longer accounts receivable collection periods and less developed credit assessment and collection procedures;

• compliance with domestic and foreign laws and regulations, unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, tariffs, quotas, export controls, export licenses, trade sanctions and other trade barriers, and any corresponding retaliatory actions by affected countries, including China and Russia;

• certification requirements;

• less effective protection of intellectual property rights in some countries;

• potentially adverse tax consequences;

• different capital expenditure and budget cycles for our customers, which affect the timing of their spending;

• political, legal and economic instability, foreign conflicts, labor unrest and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers, manufacturers and subcontractors are located;

• preference for locally produced products;

• difficulties and costs of staffing and managing international operations across different geographic areas and cultures;

• seasonal reductions in business activities;

• fluctuations in freight rates and transportation disruptions;

• investment restrictions or requirements;

• repatriation restrictions or requirements;

• export and import restrictions;

• limitations on the ability of our employees to travel without restriction to certain countries in which we operate.

Political, economic and monetary instability and changes in governmental regulations or policies, including trade tariffs and protectionism, could adversely affect both our ability to effectively operate our foreign sales offices and the ability of our foreign suppliers to supply us with required materials or services.

Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We are subject to risks of doing business in Russia through our subsidiary, NTO IRE-Polus, which provides components and test equipment to us and sells finished fiber devices to customers in Russia and neighboring countries as well as finished lasers to China.

Further, approximately 37% of our sales in 2019 were to customers in China.

We are also investing in manufacturing facilities in Belarus.

The results of our operations, business prospects and facilities in these three countries are subject to the economic and political environment in Russia, China and Belarus.

In recent years, these countries have undergone substantial political, economic and social change.

As is typical of an emerging economy, none of these three countries possess a well-developed business, financial, legal and regulatory infrastructure that would generally exist in a more mature free market economy.

In addition, tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently.

The future economic direction of these emerging market countries remains largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory and political developments.

Our failure to manage the risks associated with our operations in Russia, China and Belarus and our other existing and potential future international business operations could have a material adverse effect upon our results of operations.

We must comply with and could be impacted by various export controls and trade and economic sanctions laws and regulations that are fluid and may change due to diplomatic and political considerations outside of our control.

Our business activities are subject to various export controls and trade and economic sanctions laws and regulations, including, without limitation, the U.S.

Commerce Department’s Export Administration Regulations, the U.S.

Treasury Department’s Office of Foreign Assets Control’s trade and economic sanctions programs, the U.S.

Department of State’s Nonproliferation Sanctions, as well as those of the European Community and Germany, which we collectively refer to as Trade Controls.

We have a large manufacturing facility and research and development operations in Russia which supplies components to our U.S.

and German manufacturing facilities and finished lasers to our subsidiary in China.

In addition, we supply components from our U.S.

and German manufacturing facilities to our Russian facility.

Should there be any disruption of our supplies from or to our Russian operations, or should the United States, the European Union or Russia implement new or broad-based Trade Controls, our production and/or deliveries as well as results of operations would be affected.

Although we have implemented compliance measures designed to prevent transactions prohibited by current or future Trade Controls, our failure to successfully comply with applicable Trade Controls may expose us to negative legal and business consequences, including civil or criminal penalties, government investigations, and reputational harm.

In addition, Trade Controls and their implementation are fluid and may change due to diplomatic and political considerations outside of our control.

Such changes, including the potential expansion of sanctions and sanctions designations, as well as public statements by government officials, could be significant, require us to take certain actions to be in compliance, adversely affect prevailing market prices of our common stock, have a reputational impact, or otherwise have a material adverse impact on us, our business, and our ability to raise capital.

We have experienced, and expect to experience in the future, fluctuations in our quarterly operating results.

These fluctuations may increase the volatility of our stock price and may be difficult to predict.

We have experienced, and expect to continue to experience, fluctuations in our quarterly operating results.

We believe that fluctuations in quarterly results may cause the market price of our common stock to fluctuate, perhaps substantially.

Factors which may have an influence on our operating results in a particular quarter include those below and others included in the Risk Factors:

• general economic conditions and uncertainties in the macroeconomic and local economies in which we or our customers operate and serve;

• the increase, decrease, cancellation or rescheduling of significant customer orders;

• the timing of revenue recognition based on the installation or acceptance of certain products shipped to our customers;

• the timing of customer qualification of our products and commencement of volume sales of systems that include our products;

• the gain or loss of a key customer;

• product or customer mix;

• competitive pricing pressures and new market entrants;

• our ability to design, manufacture and introduce new products on a cost-effective and timely basis;

• our ability to manage our inventory levels and any provisions for excess or obsolete inventory;

• our ability to collect outstanding accounts receivable balances;

• incurring expenses to develop and improve application and support capabilities, the benefits of which may not be realized until future periods, if at all;

• incurring expenses related to impairment of values for goodwill, intangibles and other long-lived assets;

• different capital expenditure and budget cycles for our customers, which affect the timing of their spending;

• expenses associated with acquisition-related activities;

• foreign currency fluctuations;

• health pandemic;

• our ability to control expenses.

These factors make it difficult for us to accurately predict our operating results.

In addition, our ability to accurately predict our operating results is complicated by the fact that many of our products have long sales cycles, some lasting as long as twelve months or more.

Once a sale is made, our delivery schedule typically ranges from four weeks to four months, and therefore our sales will often reflect orders shipped in the same quarter that they are received and will not enhance our ability to predict our results for future quarters.

In addition, long sales cycles may cause us to incur significant expenses without offsetting revenues since customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them.

Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments.

Accordingly, our results of operations are subject to significant fluctuations from quarter to quarter, and we may not be able to accurately predict when these fluctuations will occur.

Because we lack long-term purchase commitments from our customers, our sales can be difficult to predict, which could lead to excess or obsolete inventory and adversely affect our operating results.

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In this regard, we recorded provisions for slow-moving, obsolete or excess inventory totaling $45.4 million, $38.9 million and $13.0 million in 2020, 2019 and 2018, respectively.

If our OEM customers, end users or distributors fail to accurately forecast the demand for our products, fail to accurately forecast the timing

of such demand, or are unable to consistently negotiate acceptable purchase order terms with customers, our results of operations may be adversely affected.

If our OEM customers, end users or distributors fail to accurately forecast the demand for our products, fail to accurately forecast the timing of such demand, or are unable to consistently negotiate acceptable purchase order terms with customers, our results of operations may be adversely affected.

We depend upon internal production and on outside single or limited-source suppliers for many of our key components and raw materials, including cutting-edge optics and materials.

Any interruption in the supply or availability of these key components and raw materials could adversely affect our results of operations.

We rely exclusively on our own production capabilities to manufacture certain of our key components, such as semiconductor diodes, specialty optical fibers and optical components.

We do not have redundant production lines for some of our components, such as our diodes and some other components, which are made at a single manufacturing facility.

These are not readily available from other sources at our current costs and may not be available at all.

If our manufacturing activities were obstructed or hampered significantly, it could take a considerable length of time, or it could increase our costs, to resume manufacturing or find alternative sources of supply.

Many of the tools and equipment we use are custom-designed, and it could take a significant period of time to repair or replace them.

Our four major manufacturing facilities are located in Massachusetts, Germany, Russia and Belarus.

Despite our efforts to mitigate the impact of any flood, fire, natural disaster, political unrest, act of terrorism, war, outbreak of disease or other similar event, our business could be adversely affected to the extent that we do not have redundant production capabilities if any of our major manufacturing facilities or equipment should become inoperable, inaccessible, damaged or destroyed.

Also, we purchase certain raw materials used to manufacture our products and other components, such as semiconductor wafer substrates, diode packages, modulators, micro-optics, bulk optics and high power beam delivery products, from single or limited-source suppliers.

We typically purchase our components and materials through purchase orders or agreed-upon terms and conditions and we do not have guaranteed supply arrangements with many of these suppliers.

These suppliers are relatively small private companies that may discontinue their operations at any time and may be particularly susceptible to prevailing economic conditions.

Some of our suppliers are also our competitors.

Some of our suppliers may not be able to meet demand from our growing business or because of global demand for their components.

As a result, we experienced and may in the future experience longer lead times or delays in fulfillment of our orders.

Furthermore, other than our current suppliers, there are a limited number of entities from whom we could obtain these supplies.

We do not anticipate that we would be able to purchase these components or raw materials that we require in a short period of time or at the same cost from other sources in commercial quantities or that have our required performance specifications.

Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, could adversely affect our business.

If our suppliers face financial or other difficulties, if our suppliers do not maintain sufficient inventory on hand or if there are significant changes in demand for the components and materials we obtain from them, they could limit the availability of these components and materials to us, which in turn could adversely affect our business.

We may experience lower than expected manufacturing yields, which would adversely affect our gross margins.

The manufacture of semiconductor diodes and the packaging of them is a highly complex process.

Manufacturers often encounter difficulties in achieving acceptable product yields from diode and packaging operations.

We have from time to time experienced lower than anticipated manufacturing yields for our diodes and packaged diodes.

This occurs during the production of new designs and the installation and start-up of new process technologies and new equipment.

If we do not achieve planned yields, our product costs could increase resulting in lower gross margins, and key component availability would decrease.

We are highly dependent on the significant experience and specialized expertise of our CEO, COO and other senior management and scientific staff.

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Competition for qualified personnel in our industry is intense, particularly for physicists, software engineers and other technical staff.

If we fail to attract, integrate and retain the necessary personnel, it could delay the development or introduction of new products, negatively impact our ability to market, sell or support our products, and significantly harm our business.

We pursue acquisitions and investments in new businesses, products, patents or technologies.

These involve risks which could disrupt our business and may harm our financial results and condition.

We make acquisitions of and investments in new businesses, products, patents and technologies and expand into new geographic areas, or we may acquire operations, products or technologies that expand our current capabilities.

Although we have pursued acquisitions small in size in the past, we may pursue larger transactions in the future.

Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs, reduce consolidated margins, cause us to incur impairment charges and reduce the value of the acquired company, asset or technology to us.

We may not be able to effectively integrate acquired businesses, business cultures, products, patents or technologies into our existing business and products, or retain key employees.

As a result of the rapid pace of technological change in our industry, we may misjudge the long-term potential of an acquired business, product, patent or technology, or the acquisition may not be complementary to our existing business.

Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management's attention, require considerable cash outlays at the expense of our existing operations, incur unanticipated costs or liabilities, including the costs associated with improving the internal controls of the acquired company.

In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability and result in dilution to our existing and future stockholders.

We may incur impairments to goodwill or long-lived assets, which would negatively affect our results of operations.

We review our goodwill for impairment annually and other long-lived assets, including intangible assets identified in business combinations whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

Negative industry or economic trends, including reduced estimates of future cash flows, disruptions to our business, slower growth rates, lack of growth in our relevant business units or differences in the estimated product acceptance rates could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets.

For example, we recorded a non-cash impairment charge of $37.1 million in 2019.

Our valuation methodology for assessing impairment requires management to make significant judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance at many points during the analysis.

Also, the process of evaluating the potential impairment of goodwill is subjective.

We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results.

Additionally, if our analysis indicates potential impairment to goodwill in one or more of our business units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

If we fail to attract, integrate and retain the necessary personnel, it could

delay the development or introduction of new products, negatively impact our ability to market, sell or support our products, and significantly harm our business.

Risks Relating to Intellectual Property, Litigation, Information Systems and Regulations

In the past, we were subject to litigation alleging that we infringed third-party intellectual property rights.

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From time to time, we have been notified of allegations and claims that we may be infringing patents or intellectual property rights owned by third parties.

We have defended against several patent infringement litigations in the past and we engage in patent office opposition proceedings internationally for patents owned by others.

We have defended against several patent infringement claims in the past and we engage in patent office opposition proceedings internationally for patents owned by others.

There can be no assurance that we will be able to dispose without a material effect any claims or other allegations made or asserted in the future.

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Costly and time-consuming litigation could be necessary to determine the scope of our confidential information and trade secret protection.

However, there can be no assurance that confidentiality agreements we enter into with consultants, suppliers, employees and others will not be breached, that we will be able to effectively enforce them or that we will have adequate remedies for any breach.

However, there can be no assurance that confidentiality agreements we enter into with consultants, suppliers, employees and

others will not be breached, that we will be able to effectively enforce them or that we will have adequate remedies for any breach.

Given our reliance on trade secret laws, others may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we have made.

Therefore, our intellectual property efforts may be insufficient to maintain our competitive advantage or to stop other parties from commercializing similar products or technologies.

Many countries outside of the United States afford little or no protection to trade secrets and other intellectual

property rights.

Many countries outside of the United States afford little or no protection to trade secrets and other intellectual property rights.

Intellectual property litigation can be time-consuming and expensive, and there is no guarantee that we will have the resources to fully enforce our rights.

If we are unable to prevent misappropriation or infringement of our intellectual property rights, or the independent development or design of similar technologies, our competitive position and operating results could suffer.

We depend upon internal production and on outside single or limited-source suppliers for many of our key components and raw materials, including cutting-edge optics and materials.

Any interruption in the supply of these key components and raw materials could adversely affect our results of operations.

We rely exclusively on our own production capabilities to manufacture certain of our key components, such as semiconductor diodes, specialty optical fibers and optical components.

We do not have redundant production lines for some of our components, such as our diodes, specialty optical fibers and some other components, which are made at a single manufacturing facility.

These are not readily available from other sources at our current costs any may not be available at all.

If our manufacturing activities were obstructed or hampered significantly, it could take a considerable length of time, or it could increase our costs, for us to resume manufacturing or find alternative sources of supply.

Many of the tools and equipment we use are custom-designed, and it could take a significant period of time to repair or replace them.

Our three major manufacturing facilities are located in Massachusetts, Germany and Russia.

We are building additional manufacturing in Belarus.