What changed in this filing

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Item 9A. Controls and Procedures

2021-02-22 compared with 2020-02-24 · 327 added, 386 removed, 980 unchanged (42% of the section changed)

16 unchanged sentences

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Due to the inherent limitations in all control systems, no

evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected.

Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

7 unchanged sentences

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Annual Report on Internal Control over Financial Reporting".

Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

21 unchanged sentences

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2019, with the exception of the information regarding securities authorized for issuance under our equity compensation plans, which is set forth in Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Information Regarding Equity Compensation Plans" and is incorporated herein by reference.

Information Regarding Equity Compensation Plans

The following table sets forth information with respect to securities authorized for issuance under our equity compensation plans as of December 31, 2020:

Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, RSUs and PSUs

Weighted-Average Exercise Price of Outstanding Options, RSUs and PSUs

Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

Equity Compensation Plans Approved by Security Holders 1

1,685,235 $ 136.17 3,145,972

Equity Compensation Plans Not Approved by Security Holders

Total 1,685,235 3,145,972

1 As of December 31, 2020, there were 2,851,428 shares available for future issuance under the 2006 Incentive Compensation Plan and 294,544 shares available for future issuance under the employee stock purchase plan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

9 unchanged sentences

Exhibit Number

3.1 Form of Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement No.

3.1 Form of Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement No.

333-136521 filed with the Securities and Exchange Commission (the "Commission") on August 11, 2006)

3.2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's current Report on Form 8-K filed with the Commission on March 7, 2019)

4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Registration Statement No.

3.2 Amended and Restated By laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's C urrent Report on Form 8-K filed with the Commission on August 24, 2020 )

4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement No.

333-136521 filed with the Commission on November 14, 2006)

4.2 Description of the Registrant's Securities Registered u nder Section 12 of the Exchange Act

4.2 Description of the Registrant's Securities Registered under Section 12 of the Exchange Act (incorpo rated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 24, 2020 )

2006 Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A filed with the Commission on February 22, 2017)

IPG Photonics Corporation Non-Employee Director Compensation Plan, as amended (incorporated by reference to Exhibit 10.

1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 2 1 , 20 20 )

IPG Photonics Corporation Non-Employee Director Compensation Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 21, 2020)

Senior Executive Annual Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K/A filed with the Commission on February 22, 2017)

1 unchanged sentence

Employment Agreement dated May 30, 2019 between the Registrant and Dr.

Gapontsev (incorporated by reference to Exhibit 10 .

5 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 24, 2020)

Service Agreement dated May 30, 2019 between IPG Laser GmbH and Dr.

Eugene Scherbakov

Eugene Scherbakov (incorporated by reference to Exhibit 10.

6 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 24, 2020)

Form of Employment Agreement dated May 30, 2019 between the Registrant and each of Timothy P.V.

Mammen, Angelo P.

Lopresti and Alexander Ovtchinnikov

Lopresti and Alexander Ovtchinnikov (incorporated by reference to Exhibit 10.

7 to the Registrant's Annual Report Form 10-K filed with the Commission on February 24, 2020)

Form of Confidentiality, Non-Competition and Confirmatory Assignment Agreement between the Registrant and each of the named executive officers and certain other executive officers, (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on October 15, 2013)

1 unchanged sentence

Form of Indemnification Agreement between the Registrant and each of its Directors and Executive Officers (incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K/A filed with the Commission on February 22, 2017)

Amended and Restated Loan Agreement between the Registrant and Bank of America, N.A., dated as of April 30, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 6, 2015)

10.12 Revolving Credit Note by the Registrant dated as of April 30, 2015 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 6, 2015)

10.13 First Amendment to the Amended and Restated Loan Agreement, between the Registrant and Bank of America, N.A.

dated as of May 19, 2016 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on May 20, 2016)

10.14 Term Note, between the Registrant and Bank of America, N.A., dated May 19, 2016 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on May 20, 2016)

10.11 Second Amended and Restated Loan Agreement, between the Registrant and Bank of America, N.A.

dated as of March 25, 2020 (incorporated by reference to Exhibit 10.

1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 26, 2020 )

10.12 Revolving Credit Note, between the Registrant and Bank of America, N.A., dated March 25, 2020 (incorporated by reference to Exhibit 10.

2 to the Registrant's Current Report on Form 8-K filed with the Commission on March 26, 2020 )

10.13 Credit Facility Agreement between IPG Laser GmbH and Deutsche Bank AG, dated July 27, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2017)

Exhibit Number

10.15 Credit Facility Agreement between IPG Laser GmbH and Deutsche Bank AG, dated July 27, 2017 (incorporated by reference to Exhibit 10.1 on Current Report on Form 8-K filed with the Commission on August 1, 2017)

10.14 Annex I to Credit Facility Agreement between IPG Laser GmbH and Deutsche Bank AG, dated July 27, 2017 (incorporated by reference to Exhibit 10.2 on Current Report on Form 8-K filed with the Commission on August 1, 2017)

10.15 Guarantee of the Registrant to Deutsche Bank dated July 27, 2017 (incorporated by reference to Exhibit 10.3 on Current Report on Form 8-K filed with the Commission on August 1, 2017)

10.16 First Amendment to Credit Facility Agreement between IPG Laser GmbH and Deutsche Bank AG, dated April 20, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on April 23, 2020)

10.17 Loan and Aircraft Security Agreement between TVPX Aircraft Solutions, as Trustee under the Trust Pledge Agreement between Registrant and Trustee dated July 27, 2017, and Banc of America Leasing & Capital, LLC dated July 27, 2017 (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 28, 2018)

34 unchanged sentences

Director February 22, 2021

/s/ Gregory P.

/s/ Jeanmarie F.

Director February 22, 2021

/s/ Gregory P.

Director February 22, 2021

3 unchanged sentences

Director February 22, 2021

/s/ Natalia Pavlova

Natalia Pavlova

Director February 22, 2021

/s/ Igor Samartsev

Igor Samartsev

Director February 22, 2021

2 unchanged sentences

Director February 22, 2021

/s/ Thomas J.

Director February 24, 2020

INDEX TO FINANCIAL STATEMENTS

29 unchanged sentences

Excess or Obsolete Inventory Reserve:

Refer to Note 1 to the Financial Statements

Refer to Notes 1 and 4 to the Financial Statements

Critical Audit Matter Description

7 unchanged sentences

• We tested the effectiveness of controls over inventory, including those over the estimation of reserves for excess quantities and obsolescence.

• We evaluated the reasonableness of the Company's excess and obsolete inventory policy, considering historical experience and the underlying assumptions.

• We evaluated the reasonableness of the Company's excess and obsolete reserve policy, considering historical experience and the underlying assumptions.

• We tested the calculation of the excess and obsolete reserve pursuant to the Company's policy, including the completeness and accuracy of the data used in the calculation.

72 unchanged sentences

Net income 160,338 180,261 404,169

net income (loss) attributable to non-controlling interests 27 142 ( 26 )

net income attributable to non-controlling interests 766 27 142

Net income attributable to IPG Photonics Corporation $ 159,572 $ 180,234 $ 404,027

14 unchanged sentences

Foreign currency translation adjustments 1,367 15,997 ( 85,590 )

Adjustment for net gain realized and included in net income ( 232 ) — —

Unrealized (loss) gain on derivatives ( 472 ) ( 17 ) 15

Effect of adopted accounting standards — — 10

Unrealized loss on available-for-sale investments — — ( 240 )

Loss on available-for-sale investments, net of tax reclassified to net income — — 538

Total other comprehensive income (loss) 663 15,980 ( 85,565 )

Comprehensive income 161,001 196,241 318,604

Comprehensive gain attributable to non-controlling interest 30 129 31

comprehensive income attributable to non-controlling interest 575 30 129

Comprehensive income attributable to IPG Photonics Corporation $ 160,426 $ 196,211 $ 318,475

16 unchanged sentences

Unrealized gain on derivatives, net of tax — — — — — — 15 — 15

Unrealized loss on available-for-sale investments, net of tax — — — — — — ( 240 ) — ( 240 )

Realized loss on available-for-sale investments, net of tax — — — — — — 538 — 538

Balance, December 31, 2018 52,941,607 5 ( 1,430,094 ) ( 224,998 ) 744,937 1,848,500 ( 162,896 ) 687 2,206,235

3 unchanged sentences

Stock-based compensation — — — — 33,363 — — — 33,363

Recently adopted accounting standards — — — — — 606 10 — 616

Purchase of non-controlling interest — — — — — — — 558 558

Net income — — — — — 180,234 — 27 180,261

6 unchanged sentences

Stock-based compensation — — — — 35,472 — — — 35,472

Recently adopted accounting standards — — — — — ( 115 ) — — ( 115 )

Net income — — — — — 159,572 — 766 160,338

1 unchanged sentence

Unrealized gain on derivatives, net of tax — — — — — — ( 472 ) — ( 472 )

Adjustment for net gain realized and included in net income — — — — — — ( 232 ) — ( 232 )

Balance, December 31, 2020 53,427,234 $ 6 ( 2,034,012 ) $ ( 303,614 ) $ 854,301 $ 2,188,191 $ ( 146,065 ) $ 1,292 $ 2,594,111

7 unchanged sentences

Net income $ 160,338 $ 180,261 $ 404,169

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash (used) provided by operating activities:

Depreciation and amortization 94,554 96,268 80,271

25 unchanged sentences

Payments on line-of-credit facilities — ( 15 ) ( 255 )

Proceeds on long-term borrowings — — 28,000

Principal payments on long-term borrowings ( 3,740 ) ( 3,671 ) ( 3,604 )

1 unchanged sentence

Cash contributed by non-controlling interest — — 839

Purchase of non-controlling interests — — ( 197 )

Purchase of treasury stock, at cost ( 37,884 ) ( 40,732 ) ( 176,065 )

Payment of purchase price holdback from business combination ( 1,650 ) — —

Net cash used in financing activities ( 10,080 ) ( 37,067 ) ( 166,647 )

1 unchanged sentence

Net increase (decrease) in cash, cash equivalents and restricted cash 195,569 138,626 ( 365,542 )

Cash and cash equivalents — Beginning of period 544,358 909,900 623,855

Cash, cash equivalents and restricted cash — End of period (Note 1) $ 682,984 $ 544,358 $ 909,900

Cash, cash equivalents and restricted cash — Beginning of year 682,984 544,358 909,900

Cash, cash equivalents and restricted cash — End of year (Note 1) $ 878,553 $ 682,984 $ 544,358

Supplemental disclosure of cash flow information:

26 unchanged sentences

Exchange rate differences resulting from translation adjustments are accounted for directly as a component of accumulated other comprehensive loss.

Cash and Cash Equivalents and Short-Term and Long-Term Investments — Cash and cash equivalents consist primarily of highly liquid investments, such as bank deposits, mutual funds and marketable securities with maturities of three months or less at the date of purchase with insignificant interest rate risk.

Short-term and long-term investments consist primarily of similar highly liquid investments and marketable securities with insignificant interest rate risks.

Cash and Cash Equivalents and Short-Term Investments — Cash and cash equivalents consist primarily of highly liquid investments, such as bank deposits, mutual funds and marketable securities with maturities of three months or less at the date of purchase with insignificant interest rate risk.

Short-term investments consist primarily of similar highly liquid investments and marketable securities with insignificant interest rate risks.

The reconciliation of the Company's cash and cash equivalents in the consolidated balance sheets to cash, cash equivalents and restricted cash in the consolidated statement of cash flows is as follows:

Balance at Balance at

December 31, 2020 December 31, 2019

Cash and cash equivalents $ 876,231 $ 680,070

Restricted cash included in prepaid expenses and other current assets 2,322 —

Restricted cash included in other assets — 2,914

Cash, cash equivalents and restricted cash $ 878,553 $ 682,984

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable include $ 58,566 and $ 16,484 of bank acceptance drafts at December 31, 2020 and 2019, respectively.

Bank acceptance drafts are bank guarantees of payment on specified dates.

The weighted average maturity of these bank acceptance drafts is less than 76 days.

The weighted average maturity of these bank acceptance drafts is approximately 130 days.

The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected.

The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.

The allowance is based upon an estimate of expected credit losses over the life of outstanding receivables.

The estimate involves an assessment of customer creditworthiness, historical payment experience, an assumption of future expected credit losses, and the age of outstanding receivables.

Activity related to the allowance for doubtful accounts was as follows:

5 unchanged sentences

Balance at December 31 $ 2,156 $ 2,399 $ 1,731

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Inventories — Inventories are stated at the lower of cost or market on a first-in, first-out basis.

7 unchanged sentences

If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

The results of the goodwill assessment for the year ended December 31, 2019 are discussed in Note 7.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The results of the goodwill assessments for the years ended December 31, 2020 and 2019 are discussed in Note 7.

Intangible Assets — Intangible assets result from the Company's various business acquisitions.

11 unchanged sentences

When undiscounted expected future cash flows are less than the carrying value, an impairment loss is recorded equal to the amount by which the carrying value exceeds the fair value of assets.

Impairments of long-lived assets for the year ended December 31, 2019 are discussed in Note 7.

The Company incurred $ 671 and $ 2,498 of non-cash impairment charges related to long-lived assets during the years ended December 31, 2020 and 2019.

There were no impairment charges recognized during the year ended December 31, 2018.

Included in other long-term assets is certain demonstration equipment.

11 unchanged sentences

In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.

As the Company's standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

the Company's standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

The Company allocates the transaction price to each distinct product based on its relative standalone selling price.

4 unchanged sentences

As scheduled delivery dates are generally within one year , under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed.

Rights of return generally are not included in customer contracts.

Rights of return are not generally included in customer contracts.

Accordingly, upon application of steps one through five above, product revenue is recognized upon shipment and transfer of control.

Returns are infrequent and are recorded as a reduction of revenue.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

In certain subsidiaries the Company provides sales commissions to sales representatives based on sales volume.

18 unchanged sentences

Under the cost-to-cost method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation.

Customer Deposits and Deferred Revenue — When the Company receives consideration from a customer or such consideration is unconditionally due prior to transferring goods or services under the terms of a sales contract, the Company records customer deposits or deferred revenue, which represent contract liabilities.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

records customer deposits or deferred revenue, which represent contract liabilities.

The Company recognizes deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria are met.

Warranties — The Company typically provides one to five -year parts and service warranties on lasers and amplifiers.

Warranties — The Company typically provides one to five-year warranties on lasers and amplifiers.

Most of the Company's sales offices provide support to customers in their respective geographic areas.

2 unchanged sentences

Stock-Based Compensation — The Company accounts for stock-based compensation expense using the fair value of the awards granted.

The Company estimates the fair value of stock options granted using the Black-Scholes model, it values restricted stock units using the intrinsic value method, and it uses a Monte Carlo simulation model to estimate the fair value of market-based performance stock units.

The Company estimates the fair value of stock options granted using the Black-Scholes model, it values restricted stock units ("RSUs") and certain performance stock units with operating cash flow targets ("OCF PSUs") using the intrinsic value method, and it uses a Monte Carlo simulation model to estimate the fair value of certain performance stock units with total stockholder return targets ("TSR PSUs").

The Company accounts for forfeitures as they occur.

The Company amortizes the fair value of stock options and awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock options and restricted stock units generally vest annually on the anniversary of the grant date over a

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

four -year period.

Performance stock units cliff-vest on the third anniversary of the grant date based upon achievement of performance targets established at grant.

The Company amortizes the fair value of stock options and other equity awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock options and RSUs generally vest annually on the anniversary of the grant date over a four-year period.

TSR PSUs and OCF PSUs cliff-vest on March 1 st following the third anniversary of the grant date based upon achievement of performance targets established at grant.

The description of the Company's stock-based compensation plans and the assumptions it uses to calculate the fair value of stock-based compensation is more fully described in Note 15, "Stock-based Compensation."

4 unchanged sentences

Restructuring — The Company records charges associated with approved restructuring plans to reorganize operations, to remove redundant headcount and infrastructure associated with business acquisitions or to improve the efficiency of business processes.

Restructuring charges can include severance costs to eliminate a specific number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs.

Restructuring charges can include severance costs to eliminate a specific number of positions, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs.

The Company records restructuring charges when they are probable and estimable.

6 unchanged sentences

The reserves are based on a determination of whether and how much of a tax benefit taken in its tax filings or positions is more likely than not to be realized following resolution of uncertainties related to the tax benefit, assuming that the matter in question will be raised by the tax authorities.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents, short and long-term investments, auction rate securities and accounts receivable.

The Company maintains substantially all of its cash, short-term and long-term investments and marketable securities in various financial institutions, which it believes to be high-credit quality financial institutions.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable.

The Company maintains substantially all of its cash and cash equivalents, short-term investments and marketable securities in various financial institutions, which it believes to be high-credit quality financial institutions.

The Company grants credit to customers in the ordinary course of business and provides a reserve for potential credit losses.

2 unchanged sentences

The same customer accounted for 21 % and 24 % of our net accounts receivable as of December 31, 2020 and 2019, respectively.

The Company has historically depended on a few customers for a significant percentage of its annual net sales.

The Company has historically depended on a few customers for a significant percentage of its annual net

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The composition of this group can change from year to year.

6 unchanged sentences

Unrealized gain on auction rate securities — 232

Unrealized gain on derivatives, net of tax of $ 3 and $ 4 , respectively

Unrealized (loss) gain on derivatives, net of tax benefit of $ 141 and tax of $ 3 , respectively

Accumulated other comprehensive loss $ ( 146,065 ) $ ( 146,919 )

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Derivative Instruments — The Company's primary market exposures are to interest rates and foreign exchange rates.

22 unchanged sentences

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component.

Recent Accounting Pronouncements

Adopted Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet.

Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.

The Company adopted ASC 842, as of January 1, 2019, using the modified retrospective approach as of the date of adoption.

Under this approach, comparative periods have not been restated.

In addition, IPG elected the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for the carry forward of the historical lease classification.

The cumulative effect of the changes made to the Company's consolidated January 1, 2019 balance sheet for the adoption of ASC 842 related to operating leases was as follows:

Balance at Adoption of Balance at

December 31, 2018 ASC 842 January 1, 2019

Balance Sheet

Prepaid expenses and other current assets $ 57,764 $ ( 324 ) $ 57,440

Other assets 18,932 19,463 38,395

Accrued expenses and other current liabilities 154,640 5,292 159,932

Deferred income taxes and other long-term liabilities 80,734 13,847 94,581

IPG PHOTONICS CORPORATION

1 unchanged sentence

(In thousands, except share and per share data)

On January 1, 2018, the Company adopted FASB ASU No.

2016-18, "Statement of Cash Flows (Topic 230):

Restricted Cash" ("ASU 2016-18"), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosure about restricted cash balances.

The Company considers cash to be restricted when withdrawal or general use is legally restricted.

The Company records restricted cash in other assets on the consolidated balance sheets and determines classification as current or long-term based on the expected duration of the restriction.

Balance at Balance at

December 31, 2019 December 31, 2018

Cash and cash equivalents $ 680,070 $ 544,358

Restricted cash included in other assets 2,914 —

Cash, cash equivalents and restricted cash $ 682,984 $ 544,358

Also on January 1, 2018, the Company adopted ASC 606 "Revenue from Contracts with Customers," ("ASC 606" or the "new revenue standard") and all related amendments using the modified retrospective method for contracts that were not completed as of the date of initial application.

The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

A majority of revenue continues to be recognized at a point in time when control transfers based on the terms of underlying contact.

Under the new revenue standard, the Company changed from deferring revenue for installation services in an amount equal to the greater of the cash received related to installation or the fair value to deferring the standalone selling price for these services.

In February 2018, the FASB issued ASU No.

2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02").

ASU 2018-02 allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("the Act").

The Company adopted this standard during the first quarter of 2018, which resulted in the reclassification of $ 10 related to the tax effect of unrealized gains on derivatives.

In October 2016, the FASB issued ASU No.

2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets other than Inventory" ("ASU 2016-16").

ASU 2016-16 eliminated the exception that prohibited the recognition of current and deferred income tax consequences for intra-entity asset transfers (other than inventory) until the asset has been sold to an outside party.

The amendments have been applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings.

The Company adopted this standard during the first quarter of 2018, which resulted in the reclassification of prepaid income taxes, deferred income taxes and retained earnings.

In January 2017, the FASB issued ASU No.

2017-04, "Intangibles—Goodwill and Other (Topic 350)" ("ASU 2017-04").

ASU 2017-04 simplified the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test.

The Company early adopted this standard, which was applied prospectively, during the first quarter of 2018.

The Company performs its annual goodwill impairment assessment on October 1 of each year.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption of ASC 606, ASU 2018-02 and ASU 2016-16 was as follows:

12/31/2017 ASC 606

Balance Sheet

Prepaid income taxes

$ 44,944 $ — $ — $ ( 1,203 ) $ 43,741

Deferred income tax assets 26,976 ( 55 ) — 1,229 28,150

Customer deposits and deferred revenue (short-term) 47,324 ( 816 ) — — 46,508

Income taxes payable 15,773 37 — — 15,810

Deferred income tax liabilities 21,362 134 — — 21,496

Retained earnings 1,443,867 590 ( 10 ) 26 1,444,473

Accumulated other comprehensive loss ( 77,344 ) — 10 — ( 77,334 )

In March 2016, the FASB issued ASU No.

2016-09, "Compensation - Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09").

ASU 2016-09 was intended to simplify several areas of accounting for share-based compensation arrangements, including income tax impact and classification on the consolidated statement of cash flows.

ASU 2016-09 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and the Company adopted this statement effective January 1, 2017.

Under ASU 2016-09, excess tax benefits and deficiencies as a result of stock option exercises and restricted stock unit vesting are being recognized as discrete items within income tax expense or benefit in the consolidated statements of comprehensive income in the reporting period in which they occur.

The adoption of ASU 2016-09 also required the cumulative effect of initially applying the standard to be recorded as an adjustment to the opening balance of retained earnings of the annual reporting period that included the date of initial application.

This resulted in a cumulative effect increase of $ 3,464 to retained earnings and deferred tax assets.

Also, as a result of the adoption of ASU 2016-09, the Company made an accounting policy election to record forfeitures as they occur rather than by estimating expected forfeitures.

The calculated cumulative effect was a decrease in retained earnings of $ 1,319 and an increase in deferred tax assets and additional paid-in capital of $ 759 and $ 2,078 , respectively, as of January 1, 2017.

Other Pronouncements Currently Under Evaluation — In June 2016, the FASB issued ASU No.

Recent Accounting Pronouncements

Adopted Pronouncements — In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which adds an impairment model (known as the current expected credit loss ("CECL") model) that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

Under the new guidance, an entity recognizes as an allowance for its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

The ASU is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments.

ASU 2016-03, along with its subsequent clarifications, is effective for fiscal years beginning after December 15, 2019.

The Company does not expect this standard will have a material impact to net income.

The Company adopted ASU 2016-03, along with its subsequent clarifications, as of January 1, 2020.

The cumulative effect of the changes made to the Company's consolidated January 1, 2020 balance sheet for the adoption of ASU 2016-13 was as follows:

Balance at Adoption of Balance at

December 31, 2019 ASU 2016-13 January 1, 2020

Balance Sheet

Accounts receivable, net $ 238,479 $ ( 148 ) $ 238,331

Deferred income taxes, net 31,395 33 31,428

Retained earnings 2,028,734 ( 115 ) 2,028,619

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet.

Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.

The Company adopted ASC 842, as of January 1, 2019, using the modified retrospective approach as of the date of adoption.

Under this approach, comparative periods have not been restated.

Subsequent Events — The Company has considered the impact of subsequent events through the filing date of these financial statements.

There were no events through the filing date of these financial statements required to be disclosed.

REVENUE FROM CONTRACTS WITH CUSTOMERS

Sales are derived from products for different applications:

fiber lasers, diode lasers, diodes and systems for materials processing, fiber lasers and amplifiers for advanced applications, fiber amplifiers for communications applications, and fiber lasers for medical applications.

fiber lasers, diode lasers, systems and accessories for materials processing, fiber lasers, amplifiers an diodes for advanced applications, fiber amplifiers and transceivers for communications applications, and fiber lasers, systems and fibers for medical applications.

The following tables represent a disaggregation of revenue from contracts with customers for the years ended December 31, 2020, 2019 and 2018:

Twelve Months Ended December 31,

Year Ended December 31,

2020 2019 2018

Sales by Application

5 unchanged sentences

(In thousands, except share and per share data)

Twelve Months Ended December 31,

Year Ended December 31,

2020 2019 2018

Sales by Product

High Power Continuous Wave ("CW") Lasers $ 646,062 $ 734,745 $ 909,726

Medium and Low Power CW Lasers 56,625 95,764

Medium Power CW Lasers 50,796 56,625 95,764

Pulsed Lasers 158,448 137,675 162,048

32 unchanged sentences

The following table reflects the changes in the Company's contract assets and liabilities for the years ended December 31, 2020 and 2019:

December 31, December 31, December 31, January 1,

December 31, January 1, December 31, January 1,

2020 2020 Change 2019 2019 Change

8 unchanged sentences

Remaining Performance Obligations

2020 2021 2022 2023 2024 2025 Total

2021 2022 2023 2024 2025 Thereafter Total

Revenue expected to be recognized for extended warranty agreements $ 3,795 $ 996 $ 675 $ 381 $ 113 $ 11 $ 5,971

2 unchanged sentences

FAIR VALUE MEASUREMENTS

The Company's financial instruments consist of cash equivalents, short-term investments, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, interest rate swaps and contingent purchase consideration.

The Company's financial instruments consist of cash equivalents, short-term and long-term investments, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, interest rate swaps and contingent purchase consideration.

The valuation techniques used to measure fair value are based upon observable and unobservable inputs.

4 unchanged sentences

and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company classifies its financial instruments according to the prescribed criteria.

The carrying amounts of money market fund deposits, term deposits, accounts receivable, accounts payable and drawings on revolving lines of credit are considered reasonable estimates of their fair market value due to the short maturity of most of these instruments or as a result of the competitive market interest rates, which have been negotiated.

The Company's bond securities are reported at fair value based upon quoted prices for instruments with identical terms in active markets.

The fair value of the Company's bond securities is based upon quoted prices for instruments with identical terms in active markets.

The Company's commercial paper securities reported at fair value are based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2.

At December 31, 2019, the Company's long-term notes consisted of a variable rate note and a fixed rate note, and the book value is considered a reasonable estimate of fair market value.

IPG PHOTONICS CORPORATION

6 unchanged sentences

Money market fund deposits and term deposits $ 218,984 $ 218,984 $ — $ —

Treasury and agency obligations 6,999 — 6,999 —

Commercial paper 162,749 — 162,749 —

Corporate bonds 29,010 — 29,010 —

Short-term investments:

Treasury and agency obligations 49,996 — 49,996 —

Municipal bonds 7,997 — 7,997 —

Corporate bonds 88,171 — 88,171 —

Commercial paper 368,665 — 368,665 —

Certificate of deposit 6,501 6,501 — —

Long-term investments and other assets:

Auction rate securities 592 — — 592

Interest rate swap 12 — 12 —

Total assets $ 932,571 $ 218,984 $ 713,587 $ —

1 unchanged sentence

Contingent purchase consideration 1,963 — — 1,963

Interest rate swap 603 — 603 —

Total liabilities $ 40,968 $ — $ 39,005 $ 1,963

4 unchanged sentences

$ 155,080 $ 155,080 $ — $ —

Treasury and agency obligations

6,495 6,495 — —

Commercial paper

1 unchanged sentence

Short-term investments:

Treasury and agency obligations

116,800 116,800 — —

Corporate bonds

2 unchanged sentences

236,752 — 236,752 —

Certificate of deposit 6,501 6,501 — —

Long-term investments and other assets:

Corporate bonds

3,859 3,859 — —

Auction rate securities

8 unchanged sentences

government and government agency notes, corporate bonds, commercial paper and certificates of deposit with original maturities of greater than three months but less than one year and are recorded at amortized cost.

The fair value of the short-term investments considered held-to-maturity as of December 31, 2019 and December 31, 2018 was $ 502,675 and $ 500,130 , respectively, which represents an unrealized gain of $ 129 and unrealized loss of $ 302 , respectively, as compared to the book value recorded on the consolidated balance sheets for the same

There were no impairments for the investments considered held-to-maturity at December 31, 2020 and December 31, 2019.

IPG PHOTONICS CORPORATION

1 unchanged sentence

(In thousands, except share and per share data)

There were no long-term investments considered held-to-maturity as of December 31, 2019.

The fair value of the long-term investments considered held-to-maturity as of December 31, 2018 was $ 3,859 , which represents the book value recorded on the consolidated balance sheets for the same period.

There were no impairments for the investments considered held-to-maturity at December 31, 2019 and December 31, 2018.

The Company entered into an interest rate swap that is designated as a cash flow hedge associated with a new long-term note issued during the second quarter of 2016 that will terminate with the long-term note in May 2023.

The following table presents the effective maturity dates of debt investments, which are held-to-maturity:

December 31, 2020 December 31, 2019

Book Value Fair Value Book Value Fair Value

Investment maturity

Less than 1 year $ 514,835 $ 514,829 $ 502,546 $ 502,675

The Company entered into an interest rate swap that is designated as a cash flow hedge associated with a long-term note issued during the second quarter of 2016 that will terminate with the long-term note in May 2023.

The fair value at December 31, 2020 for the interest rate swap considered pricing models whose inputs are observable for the securities held by the Company.

Auction rate securities and contingent consideration are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

The fair value of the auction rate securities was determined using prices observed in inactive markets with limited observable data for the securities held by the Company.

The auction rate securities are considered available-for-sale securities.

They had a cost basis of $ 592 and $ 847 at December 31, 2019 and December 31, 2018, respectively.

There were no impairments for the available-for-sale securities at December 31, 2019 and December 31, 2018.

At December 31, 2020 and December 31, 2019, the Company's long-term notes consisted of a variable rate note and a fixed rate note, and are reported at amortized cost on the consolidated balance sheets.

For disclosure purposes, the fair value of the long-term notes was estimated using a discounted cash flow model using observable market interest rates and are classified as a level 2.

Based on the discounted cash flow model, the fair values of the long-term notes at December 31, 2020 and 2019 were $ 38,402 and $ 42,004 , respectively, as compared to the book value of $ 37,967 and $ 41,708 , respectively.

The fair value of contingent consideration was determined using an income approach at the respective business combination date and at the reporting date.

4 unchanged sentences

Balance, January 1 $ 592 $ 847 $ 1,016

Period transactions ( 264 ) ( 207 ) —

Redemptions ( 596 ) ( 264 ) ( 207 )

Change in fair value 4 9 38

7 unchanged sentences

Balance, December 31 $ 1,963 $ 273 $ 898

The following table presents the effective maturity dates of debt investments as of December 31, 2019 and December 31, 2018:

December 31, 2019 December 31, 2018

Book Value Fair Value Book Value Fair Value

Investment maturity

Held-to-maturity

Less than 1 year $ 502,546 $ 502,675 $ 585,875 $ 585,573

1 through 5 years — — 3,859 3,859

Total $ 502,546 $ 502,675 $ 589,734 $ 589,432

Available-for-sale

Greater than 5 years $ 592 $ 592 $ 847 $ 847

The auction rate securities were called during the year ended December 31, 2020.

The net gain previously included in accumulated other comprehensive income was released and included in net income, in the amount of $ 232 .

IPG PHOTONICS CORPORATION

10 unchanged sentences

BUSINESS COMBINATIONS

During the first quarter of 2019, the Company acquired a provider of submarine networking technology and services based in Brazil ("SND") for $ 19,560 , which represents the fair value on that date.

Of the purchase price, $ 1,956 ($ 1,861 at December 31, 2019) was held back for potential post-closing adjustments related to government approval of licenses.

This balance is included within accrued expenses and other liabilities on the consolidated balance sheets.

In addition, $ 2,934 ($ 2,914 at December 31, 2019) was held back in a restricted bank account for potential post-closing adjustments related to seller indemnities.

This restricted cash balance is included within other assets, and the liability related to the amount due to the sellers if the indemnities are satisfied is included within deferred income taxes and other long-term liabilities on the consolidated balance sheets.

During the fourth quarter of 2019, the Company finalized the purchase price allocations related to the acquisition, which resulted in adjusting the amounts that were provisionally reported as intangible assets for production know-how and customer relationships to goodwill.

This adjustment reduced intangible assets by $ 9,650 and increased goodwill by the same amount.

Additionally, the change in the provisional amounts resulted in a decrease in amortization expense and accumulated amortization of $ 848 , which relates to the previous quarters.

After completion of the purchase price allocations, the $ 19,076 excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed was recorded to goodwill.

During the fourth quarter of 2020, the Company acquired Pi-Tecnologia S.A.

("PiTec"), which is located in Brazil, to support development in advanced photonics.

The acquisition price was $ 2,717 , of which $ 906 was paid at closing and the remainder of which may be earned over three years based on reaching certain financial targets.

Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 3,211 .

The goodwill arising from this acquisition will not be deductible for tax purposes.

The purchase price allocations related to the PiTec acquisition included in the Company's consolidated financial statements are not complete.

They represent the preliminary fair value estimates as of December 31, 2020 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in changes to the amounts and allocations recorded.

During the first quarter of 2019, the Company acquired the submarine networks division (SND) of Padtec SA, a communications equipment company based in Brazil.

SND is a provider of submarine networking technology and systems.

The Company paid $ 19,560 to acquire SND, which represents the fair value on that date.

Of the purchase price, $ 2,322 at December 31, 2020 ($ 2,914 at December 31, 2019) was held back in a restricted bank account for potential post-closing adjustments related to indemnities provided by the seller.

The restricted cash balance is recorded in the consolidated balance sheets as presented in Note 1.

The liability related to the amount due to the seller if the indemnities are satisfied is included within accrued expenses and other current liabilities as of December 31, 2020 on the consolidated balance sheets.

Any excess of the purchase price was allocated to goodwill.

During the fourth quarter of 2018, the Company acquired 100 % of the membership units of Genesis System Group, LLC (“Genesis Systems”).

3 unchanged sentences

The purchase price includes $ 448 , which was paid for the working capital adjustment finalized in the first quarter of 2019.

Of the purchase price, $ 1,350 remains in escrow for indemnities provided by the seller.

As a result of the acquisition, the Company recorded intangible assets of $ 32,350 related to customer relationships with a weighted-average estimated useful life of 11 years and $ 11,350 related to technology, trademark and tradename with a weighted-average estimated useful life of 6 years.

22 unchanged sentences

$ 107,987 $ 4,453 $ 112,440

The operating results of Genesis Systems are included in the consolidated results of operations from the date of acquisition.

The impact of earnings from Genesis Systems from January 1, 2017 to the date of acquisition were not material to the Company.

The following table presents consolidated pro forma information as if the acquisition had occurred on January 1, 2017:

Pro forma (Unaudited)

Years ended December 31,

Net sales $ 1,551,373 $ 1,511,051

During the fourth quarter of 2017, the Company acquired 100 % of the shares of Laser Depth Dynamics Inc.

LDD, located in Kingston, Ontario, Canada, provides in-process quality monitoring and control solutions for laser-based welding applications.

The purchase price was $ 9,992 , which represents the fair value on that date.

As a result of the acquisition, the Company recorded intangible assets of $ 1,006 related to customer relationships with a weighted-average estimated useful life of 6 years and $ 2,608 related to technology, trademark and tradename with a weighted-average estimated useful life of 6 years.

Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 5,276 .

The goodwill arising from this acquisition will be deductible for tax purposes.

During the third quarter of 2017, the Company acquired 100 % of the membership units of Innovative Laser Technologies, LLC ("ILT") located in Minneapolis, Minnesota.

ILT produces high precision laser-based systems for the medical device industry and other end user markets.

The Company paid $ 40,256 to acquire ILT, which represents the fair value on that date.

As a result of the acquisition, the Company recorded intangible assets of $ 11,660 related to customer relationships with an estimated useful life of 13 years and $ 7,480 related to technology, trademark and tradename with a weighted-average estimated useful life of 8 years.

Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 19,467 .

The majority of goodwill arising from this acquisition will not be deductible for tax purposes.

During the second quarter of 2017, the Company acquired 100 % of the shares of OptiGrate Corporation ("OptiGrate") located in Oviedo, Florida.

OptiGrate is a developer and manufacturer of volume Bragg gratings used in the production of lasers and laser diodes.

The Company paid $ 16,870 to acquire OptiGrate, which represents the fair value on that date.

As a result of the acquisition, the Company recorded intangible assets of $ 1,010 related to customer relationships with an estimated useful life of 4 years and $ 4,650 related to technology, trademark and tradename with a weighted-average estimated useful life of 9 years.

Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 8,900 .

The goodwill arising from this acquisition will not be deductible for tax purposes.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The following table summarizes the allocation of the assets acquired and liabilities assumed at the acquisition dates for the year ended December 31, 2017:

LDD ILT OptiGrate

Cash and cash equivalents $ 1,002 $ 969 $ 3,714 $ 5,685

Assets acquired excluding cash and cash equivalents and deferred tax assets 1,346 14,353 1,351 17,050

Liabilities assumed excluding deferred tax liabilities ( 708 ) ( 11,669 ) ( 687 ) ( 13,064 )

Deferred tax liabilities, net ( 538 ) ( 2,004 ) ( 2,068 ) ( 4,610 )

Intangible assets 3,614 19,140 5,660 28,414

Total identifiable net assets

4,716 20,789 7,970 33,475

Goodwill 5,276 19,467 8,900 33,643

Total purchase price

$ 9,992 $ 40,256 $ 16,870 $ 67,118

Results of operations for the businesses acquired above have been included in the Company's consolidated financial statements after the date of such acquisitions.

Also, pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisitions were not material to the Company's prior period consolidated financial results.

The operating results of Genesis Systems and RC are included in the consolidated results of operations from the date of acquisition.

The impact of earnings from Genesis Systems and RC from January 1, 2018 to the date of acquisition were not material to the Company.

If the Genesis Systems acquisition had occurred on January 1, 2018, the unaudited consolidated pro forma net sales would have been $ 1,551,373 for the year ended December 31, 2018.

RESTRUCTURING

In the second half of 2019, the Company undertook a strategic analysis of investments in new markets and solutions, including the additional investment required to enter and obtain significant market share in the submarine telecommunications industry.

As a result of this analysis, in the fourth quarter of 2019, the Company decided to cease further investment in SND and is pursuing strategic alternatives for this business.

As of December 31, 2019, the Company incurred cumulative pre-tax charges of $ 21,163 , which includes a non-cash goodwill impairment loss of $ 17,795 and non-cash asset-related costs of $ 2,852 .

In addition, $ 202 of severance and employee benefit costs were incurred and $ 314 related to contract cancellations.

In addition to the SND plan discussed above, the Company also implemented other restructuring programs globally, which were primarily focused on workforce reduction and facility consolidation.

These programs resulted in expenses of $ 3,762 , including $ 1,264 of severance and employee benefit costs and $ 2,498 of non-cash asset-related costs.

The following table summarizes the Company's restructuring accrual at December 31, 2019 and changes during the year ended December 31, 2019:

In the second half of 2019, the Company implemented restructuring programs globally, which were primarily focused on workforce reduction, facility consolidation and ceasing investment in the submarine telecommunications industry.

Activity related to the restructuring accrual was as follows:

Severance and Employee Benefit Costs Contract Cancellations Total

3 unchanged sentences

Balance at December 31, 2019 149 39 188

Charges 417 89 506

Cash payments ( 560 ) ( 128 ) ( 688 )

Foreign exchange adjustment ( 6 ) — ( 6 )

Balance at December 31, 2020 $ — $ — $ —

GOODWILL AND INTANGIBLE ASSETS

9 unchanged sentences

(In thousands, except share and per share data)

The Company tests its reporting units for impairment annually as of the first day of the fourth quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The Company performed the 2019 annual impairment test as of October 1, 2019.

The Company tests its reporting units for goodwill impairment annually as of the first day of the fourth quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

For certain reporting units, the Company performed a quantitative assessment using the discounted cash flow method under the income approach to estimate the fair value.

During the third quarter of 2020, the Company concluded that declines in revenue and order flow for the Genesis custom systems business caused by pandemic-related decreases in capital spending in the aerospace and transportation industries were a triggering event requiring a goodwill impairment evaluation.

The Company performed a quantitative assessment using the discounted cash flow method under the income approach as well as the guideline public company analysis and guideline transaction analysis under the market approach to estimate the fair value of the custom systems business.

As a result, the Company recognized a non-cash impairment loss of $ 44,589 , which was equal to the carrying amount of goodwill prior to its impairment.

The analysis considered internal forecasts of sales, profitability and capital expenditures, as well as valuation multiples of comparable public companies and valuation multiples of transactions of comparable companies.

The Company performed the 2020 annual impairment test as of October 1, 2020, and no additional impairments were recorded as a result of this test.

The carrying balance of goodwill at December 31, 2020 was net of accumulated impairments of $ 81,709 .

As a result of the 2019 annual impairment test for the transceivers reporting unit, the Company recognized a non-cash impairment loss of $ 19,325 , which was equal to the goodwill carrying amount prior to its impairment.

The analysis considered lower than forecasted sales and profitability, as well as the impact of delays in new product launches.

As part of the restructuring of the submarine telecommunications reporting unit discussed in Note 6, the Company recognized a non-cash impairment loss of $ 17,795 , which decreases the net assets to the estimated net realizable value as of December 31, 2019.

Additionally, in 2019 the Company decided that it would not make further investments required to obtain the necessary market share in the submarine telecommunications industry and commenced efforts to sell the submarine networks reporting unit.

As a result that decision, the Company recognized a non-cash impairment loss of $ 17,795 , which decreased the net assets to the estimated net realizable value as of December 31, 2019.

The Company sold the submarine networks reporting unit in the third quarter of 2020.

The carrying balance of goodwill at December 31, 2019 was net of accumulated impairments of $ 37,120 .

18 unchanged sentences

$ 11,591 $ 10,761 $ 9,861 $ 7,522 $ 6,311 $ 16,068 $ 62,114

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

PROPERTY, PLANT AND EQUIPMENT

9 unchanged sentences

The Company recorded depreciation expense of $ 78,414 , $ 78,959 and $ 68,231 for the years ended December 31, 2020, 2019 and 2018, respectively.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Long-lived assets include property, plant and equipment, related deposits on such assets and demonstration equipment.

3 unchanged sentences

Russia 66,924 84,471

Belarus 38,304 28,361

China 8,175 8,933

3 unchanged sentences

Accrued expenses and other liabilities consist of the following:

Accrued compensation $ 48,881 $ 60,107

Contract liabilities $ 71,246 $ 59,531

Accrued compensation 62,785 48,881

Current portion of accrued warranty 24,345 23,114

1 unchanged sentence

Other 12,586 12,956

$ 149,782 $ 154,640

Total $ 176,740 $ 149,782

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

PRODUCT WARRANTIES

7 unchanged sentences

Accrued warranty reported in the accompanying consolidated financial statements as of December 31, 2020 and December 31, 2019 consists of $ 24,345 and $ 23,114 in accrued expenses and other liabilities and $ 21,324 and $ 25,752 in other long-term liabilities, respectively.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

FINANCING ARRANGEMENTS

The Company's borrowings under existing financing arrangements consist of the following:

Long-term notes $ 41,708 $ 45,378

Total notes payable $ 37,967 $ 41,708

current portion ( 3,810 ) ( 3,740 )

10 unchanged sentences

Revolving Line of Credit Facilities:

Line of Credit — The Company maintains an unsecured revolving line of credit with available principal of up to $ 50,000 , expiring in April 2020.

Line of Credit — The Company maintains an unsecured revolving line of credit with a principal amount of $ 75,000 , expiring in April 2025.

The line of credit bears interest at a variable rate of LIBOR plus 0.80 % to 1.20 % depending on the Company's financial performance.

Part of this credit facility is available to the Company's foreign subsidiaries including those in India, China, Japan and South Korea based on management discretion.

Part of this credit facility is available to the Company's foreign subsidiaries including those in India, China, Japan and Brazil based on management discretion.

At December 31, 2020, there were no outstanding drawings, however, there were $ 3,300 of guarantees issued against the line which reduced the total availability.

1 unchanged sentence

The Company is required to meet certain financial covenants associated with its U.S.

line of credit and collateralized long-term note.

These covenants, tested quarterly, include a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

The debt service coverage covenant requires the Company to maintain a trailing twelve month ratio of cash flow to debt service that is greater than 1.5 :1.

Debt service in the calculation is decreased by cash held in the U.S.

revolving line of credit and long-term debt facility.

These covenants, tested quarterly, include an interest coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.

The interest coverage covenant requires that the Company maintains a trailing twelve-month ratio of EBITDA to interest on all obligations that is at least 3.0 :1.0.

The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than three

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

times its trailing twelve months EBITDA.

Funded debt is decreased by its cash and available marketable securities not classified as long-term investments in the U.S.

in excess of $ 50,000 up to a maximum of $ 500,000 .

Cash flow is defined as EBITDA less unfunded capital expenditures.

The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than three times the Company's trailing twelve months EBITDA.

Euro Line of Credit — The Company maintains an unsecured revolving line of credit with a principal amount of Euro 50,000 ($ 56,074 at December 31, 2019), expiring in July 2020.

Euro Line of Credit — The Company maintains an unsecured revolving line of credit with a principal amount of € 50,000 ($ 61,319 at December 31, 2020), expiring in July 2023.

The line of credit bears interest at various rates based upon the type of loan.

2 unchanged sentences

At December 31, 2020, the remaining availability under this line was $ 57,895 .

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Other European Facilities — The Company maintains two Euro credit lines in Italy with aggregate available principal of Euro 2,000 ($ 2,243 as of December 31, 2019), with no expiration date, which bear interest at market rates that reset at the beginning of each quarter.

Other European Facilities — The Company maintains two Euro credit lines in Italy with aggregate available principal of € 2,000 ($ 2,453 as of December 31, 2020), with no expiration date, which bear interest at market rates that reset at the beginning of each quarter.

At December 31, 2020, there were no outstanding drawings and the aggregate remaining availability under these lines was $ 2,453 .

4 unchanged sentences

Notional amounts (1)

December 31, December 31,

$ 18,406 $ 19,594

$ 19,594 $ 20,781 $ 13 $ 31

Other assets — 13

Deferred income taxes and other long-term liabilities 603 —

(1) Notional amounts represent the gross contract/notional amount of the derivative outstanding.

4 unchanged sentences

Interest rate swap $ ( 616 ) $ ( 18 ) $ 15

During the year ended December 31, 2018, the Company also entered into foreign currency forward contracts to hedge the value of intercompany dividends declared and paid in Euros by the Company's German subsidiary.

These contracts were not designated as hedging instruments for accounting purposes and were fully settled during 2018.

Losses associated with derivative instruments not designated as hedging instruments were as follows:

Year Ended December 31,

Classification 2019 2018 2017

Losses recognized in income Gain (loss) on foreign exchange $ — $ ( 19 ) $ —

The Company leases certain warehouses, office spaces, land, vehicles and equipment under operating lease agreements.

1 unchanged sentence

The operating lease expense for the years ended December 31, 2020, 2019 and 2018, totaled $ 7,797 , $ 8,800 and $ 6,175 , respectively.

The cash paid for amounts included in the measurement of lease liabilities included in the operating cash flows from operating leases was $ 6,802 for the year ended December 31, 2019.

The cash paid for amounts included in the measurement of lease liabilities included in the operating cash flows from operating leases was $ 6,634 and $ 6,802 for the years ended December 31, 2020 and 2019, respectively.

The Company does not have any finance lease arrangements.

The Company's operating lease assets and lease liabilities consist of the following as of December 31, 2019:

Account Classification Amount

The Company's operating lease assets and lease liabilities consist of the following as of December 31, 2020 and 2019:

Year Ended December 31,

Account Classification 2020 2019

Right-of-use assets Other assets $ 21,720 $ 23,028

5 unchanged sentences

(In thousands, except share and per share data)

The table below presents the future minimum lease payments to be made under non-cancelable operating leases as of December 31, 2018:

Years ending December 31,

Thereafter 11,340

Total $ 30,289

The table below presents the maturities of operating lease liabilities as of December 31, 2020:

3 unchanged sentences

Present value of lease liabilities $ 24,226

Other information relevant to the Company's operating leases consist of the following as of December 31, 2019:

Weighted-average remaining lease term 9 years

Other information relevant to the Company's operating leases consist of the following as of December 31, 2020 and 2019:

Year Ended December 31,

Weighted-average remaining lease term 9 years 9 years

Weighted-average discount rate 3.46 % 3.58 %

8 unchanged sentences

As of December 31, 2020 and through the date of the Company's subsequent review period of February 22, 2021, the Company has no legal proceedings ongoing that management estimates could have a material effect on the Company's Consolidated Financial Statements.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

STOCK-BASED COMPENSATION

9 unchanged sentences

Net stock-based compensation $ 28,160 $ 28,464 $ 21,395

Incentive Plans — In February 2006, the Company's board of directors adopted the 2006 Incentive Compensation Plan (the "2006 Plan"), which provides for the issuance of stock options, restricted stock units, performance stock units, other equity-based awards and cash awards to the Company's directors, employees, consultants and advisors.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

Incentive Plans — In February 2006, the Company's board of directors adopted the 2006 Incentive Compensation Plan (the "2006 Plan"), which provides for the issuance of stock options, performance stock units ("PSUs"), restricted stock units ("RSUs"), other equity-based awards and cash awards to the Company's directors, employees, consultants and advisors.

In June 2006, the Company's board of directors adopted the Non-Employee Directors Stock Plan (the "Directors Plan") for non-employee directors, which was subsequently merged into the 2006 Plan.

2 unchanged sentences

The Company may grant stock options only at an exercise price equal to or greater than the fair market value of its common stock on the date of grant.

Equity awards generally become exercisable over periods of one to four years and generally expire ten years after the date of the grant.

Equity awards generally vest over periods of one to four years and generally expire ten years after the date of the grant.

The vesting of awards under the 2006 Plan accelerate following the occurrence of certain change of control events, if the participant's employment is terminated within two years without cause or if the successor entity does not agree to assume existing awards or replace with equivalent value awards.

1 unchanged sentence

All shares issued under the 2006 Plan and Directors Plan are registered shares, newly issued by the Company.

The Company grants performance stock units to executive officers.

The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of the Company's common stock to be issued after the applicable award vesting period.

The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon the Company's total shareholder return over the performance period compared to the Russell 3000 Index for those awards granted prior to 2019 or compared to the S&P 1500 Composite / Electronic Equipment Instruments & Components Index for awards granted in 2019 and could range from between 0 % and 200 % of the amount of awarded units.

The assumptions used in the Black-Scholes model for the calculation of compensation were as follows for the years ended December 31:

2019 2018 2017

The Company granted certain PSUs to executive officers and other senior managers.

PSUs are based on relative total stockholder return ("TSR") and, starting in 2020, operating cash flow metrics ("OCF").

PSU agreements provide for the award of PSUs with each unit representing the right to receive one share of the Company's common stock to be issued after the applicable award vesting period.

The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon (i) in the case of TSR PSUs granted in 2020, the Company's total shareholder return over the performance period compared to the S&P 1500 Composite / Electronic Equipment Instruments & Components Index, and (ii) in the case of OCF PSUs, the ratios of the Company's operating cash flow to adjusted net income during three years in the performance period.

The final number of units awarded under each of the TSR PSUs and OCF PSUs could range from between 0 % and 200 % of the amount of the target award.

During the year ended December 31, 2020, the Company did not grant stock options to employees, replacing them with a grant of RSUs.

The assumptions used in the Black-Scholes model for the calculation of the options were as follows for the years ended December 31:

Expected term 4.3 - 5.1 years

4.1 - 4.9 years

3.8 - 5.0 years

Volatility 37 % - 38 %

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2.54 % - 3.01 %

1.57 % - 1.97 %

Dividend yield 0.25 % 0.25 %

Forfeiture rate — % — %

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The following table summarizes the option activity for the years ended December 31:

Number of Options

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Life

Aggregate Intrinsic Value

(In years) (In thousands)

8 unchanged sentences

Outstanding — December 31, 2019 1,842,442 112.03 5.73 $ 85,110

Granted 334,740 153.78

Exercised ( 533,716 ) 70.17

3 unchanged sentences

Exercisable — December 31, 2020 889,894 $ 108.71 4.57 $ 104,164

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The intrinsic value of the options exercised during the years ended December 31, 2020, 2019 and 2018, was $ 52,868 , $ 17,891 and $ 51,266 , respectively.

The weighted-average grant fair value per share for options granted during the years ended December 31, 2019, 2018 and 2017, was $ 53.52 , $ 71.06 and $ 38.01 , respectively.

The total compensation cost related to non-vested awards not yet recorded at December 31, 2019 was $ 25,517 which is expected to be recognized over a weighted-average of 2.6 years.

The following table summarizes the restricted stock units ("RSU's") activity for the years ended December 31:

Weighted-Average Grant-Date Fair Value Weighted-

There were no options granted for the year ended December 31, 2020.

The total compensation cost related to non-vested option awards not yet recorded at December 31, 2020 was $ 13,522 which is expected to be recognized over a weighted-average of 1.9 years.

The following table summarizes the RSUs activity for the years ended December 31:

Number of Shares

Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Life

Aggregate Intrinsic Value

(In years) (In thousands)

12 unchanged sentences

Outstanding — December 31, 2020 320,686 $ 154.29 1.33 $ 71,766

The intrinsic value of the RSU's that vested during the years ended December 31, 2019, 2018 and 2017, was $ 22,638 , $ 22,978 and $ 11,684 , respectively.

The weighted-average grant fair value per share for RSU's granted during the years ended December 31, 2019, 2018 and 2017, was $ 151.94 , $ 227.45 and $ 127.29 , respectively.

The total compensation cost related to non-vested awards not yet recorded at December 31, 2019 was $ 26,231 which is expected to be recognized over a weighted-average of 2.6 years.

The intrinsic value of the RSUs that vested during the years ended December 31, 2020, 2019 and 2018, was $ 22,252 , $ 22,638 and $ 22,978 , respectively.

The total compensation cost related to non-vested RSU awards not yet recorded at December 31, 2020 was $ 35,060 which is expected to be recognized over a weighted-average of 2.7 years.

The aggregate fair value of awards vested during the year ended December 31, 2020 was $ 19,535 .

2 unchanged sentences

(In thousands, except share and per share data)

The weighted-average fair value of the performance units was determined using the Monte Carlo simulation model incorporating the following weighted-average assumptions:

The weighted-average fair value of TSR PSUs was determined using the Monte Carlo simulation model incorporating the following weighted-average assumptions:

2020 2019 2018

4 unchanged sentences

Weighted-average fair value per share $ 169.28 $ 192.46 $ 284.78

The following table summarizes the performance stock units ("PSU's") activity for the years ended December 31:

Weighted-Average Grant-Date Fair Value Weighted-

The following table summarizes TSR PSUs activity for the years ended December 31:

Number of Shares

Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Life

Aggregate Intrinsic Value

(In years) (In thousands)

3 unchanged sentences

Granted 34,989 190.83

Vested ( 43,594 ) 128.54

Canceled ( 1,208 ) 228.68

Outstanding — December 31, 2019 99,842 162.34 1.84 $ 14,469

3 unchanged sentences

Outstanding — December 31, 2020 67,825 $ 206.21 1.28 $ 15,179

PSU's are included at 100 % of target goal.

The intrinsic value of the PSU's vested during the year ended December 31, 2019 was $ 6,830 .

TSR PSUs are included at 100 % of target goal.

The intrinsic value of the TSR PSUs vested during the year ended December 31, 2020 was $ 6,211 .

The total compensation cost related to nonvested awards not yet recorded at December 31, 2020 was $ 5,190 which is expected to be recognized over a weighted average of 1.8 years.

The aggregate fair value of awards vested during the year ended December 31, 2020 was $ 5,159 .

The weighted-average fair value of the OCF PSUs was determined using the Black-Scholes model incorporating the following assumptions:

Performance term 3.0 years

Volatility — %

Risk-free rate of return 1.39 %

Dividend yield 0.10 %

Weighted-average fair value per share $ 143.51

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The following table summarizes OCF PSUs activity for the year ended December 31:

Number of Shares

Weighted-Average Grant-Date Fair Value Weighted-Average Remaining Contractual Life

Aggregate Intrinsic Value

(In years) (In thousands)

Outstanding — January 1, 2020 $ —

Granted 24,817 $ 143.51

Canceled ( 716 ) 143.51

Outstanding — December 31, 2020 24,101 $ 143.51 2.16 $ 5,394

OCF PSUs are included at 100 % of target goal.

The total compensation cost related to nonvested awards not yet recorded at December 31, 2020 was $ 2,495 which is expected to be recognized over a weighted average of 2.3 years.

EMPLOYEE BENEFIT PLANS

13 unchanged sentences

Total $ 205,692 $ 248,376 $ 534,395

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The Company's provision for income taxes for the years ended December 31 consisted of the following:

9 unchanged sentences

Provision for income taxes $ 45,354 $ 68,115 $ 130,226

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

A reconciliation of income tax expense at the U.S.

14 unchanged sentences

Federal and state tax credits ( 6,762 ) ( 12,173 ) ( 11,024 )

Russia investment tax credit ( 3,228 ) — —

Change in reserves, including interest and penalties 3,878 779 2,290

3 unchanged sentences

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, were as follows:

Property, plant and equipment $ ( 18,607 ) $ ( 22,443 )

Inventory provisions $ 29,657 $ 23,611

Allowances and accrued liabilities 12,719 10,502

Withholding tax on intercompany dividend ( 3,597 ) ( 2,225 )

Other tax credits 15,001 12,996

Deferred compensation 3,256 9,428

Other tax credits 15,571 15,001

Net operating loss carryforwards 11,594 5,748

Property, plant and equipment ( 7,401 ) ( 18,607 )

Withholding tax on intercompany dividend ( 2,774 ) ( 3,597 )

Valuation allowance ( 22,617 ) ( 14,384 )

Net deferred tax assets $ 40,005 $ 27,702

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").

The Tax Act makes broad and complex changes to the U.S.

tax code including, but not limited to, (1) reducing the U.S.

federal corporate tax rate from 35% to 21%, (2) requiring a one-time transition tax on certain undistributed earnings of foreign subsidiaries that is payable over eight years, (3) generally eliminating U.S.

federal income

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

taxes on dividends from foreign subsidiaries, (4) providing an incentive benefit for U.S.

income from intangibles (Foreign Derived Intangible Income);

(5) increasing U.S.

taxable income to include all income earned by foreign subsidiaries in excess of ten percent of the fixed assets in those entities (Global Intangible Low-taxed Income) and (6) providing for bonus depreciation that will allow for full expensing of qualified property.

The Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act.

SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.

In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The final calculation for Deemed Repatriation Transition Tax on the 2017 tax return was $ 43,379 .

As of December 31, 2017, the Company had recorded a provisional expense for the Transition Tax of $ 48,126 .

The decrease of $ 4,747 was recorded as a reduction in tax expense in the third quarter of 2018.

As the Transition Tax is payable over 8 years, $ 30,263 of this amount is included within other long-term liabilities on the consolidated balance sheets at both December 31, 2019 and 2018.

In addition, the Company has calculated a $ 1,422 reduction in the valuation of net deferred tax assets related to the decrease in the U.S.

federal tax rate.

As of December 31, 2017, the Company had recorded a provisional decrease of $ 1,281 .

The increase of $ 141 was recorded as an increase to tax expense in the third quarter of 2018.

The impact of other provisions in the Tax Act that were effective January 1, 2018, including the tax impact of the FDII and GILTI sections, are included in the effective tax rate calculation for 2019 and 2018.

The Company has recorded $ 3,597 and $ 2,225 as a deferred tax liability on December 31, 2019 and 2018, respectively, for certain withholding and dividend taxes related to possible future distributions from its Russian subsidiary to their non-U.S.

The Company has paid dividends from its German subsidiary and continues to plan for future dividends to the extent the entity’s cash exceeds its operational and investment needs.

Since there is no federal or withholding tax on such distributions, the Company has accrued only a state tax of $ 130 on a planned dividend of € 150,000 .

The Company has recorded $ 2,774 and $ 3,597 as a deferred tax liability on December 31, 2020 and 2019, respectively, for certain withholding and dividend taxes related to possible future distributions from subsidiaries to their respective parent companies.

The Company paid a dividend from its German subsidiary in 2020 of $ 166,055 and continues to plan for future dividends to the extent the entity’s cash exceeds its operational and investment needs.

Since there is no federal or withholding tax on such distributions from Germany to the U.S., the Company has accrued only a state tax on future dividends from Germany.

Also, t he Company’s subsidiary in Russia paid a dividend of $ 50,000 to its parent company in Germany in 2019 and paid a 5 % withholding tax on that dividend.

In addition, the Company accrues taxes to the extent that foreign subsidiaries have cash in excess of their operational needs.

The withholding tax liabilities at both December 31, 2020 and 2019 are primarily related to dividends out of the Company’s Russian subsidiary.

With regard to future repatriation of undistributed earnings of other non-U.S.

subsidiaries, the Company continues to consider these earnings to be indefinitely reinvested and, accordingly, has not recorded any deferred income taxes for the potential withholding or other taxes that would be assessed on such a repatriation to the U.S.

subsidiaries, the Company continues to consider these earnings to be indefinitely reinvested to the extent the cash balance in each subsidiary is less than current needs for operations and expansion.

At December 31, 2020 and 2019 , the cumulative undistributed earnings in non-U.S.

subsidiaries were approximately $ 1,051,893 and $ 1,078,879 , respectively.

In determining the Company’s 2019 and 2018 tax provisions under ASC 740, the Company calculated the deferred tax assets and liabilities for each separate tax entity.

The Company then considered a number of factors including the positive and negative evidence regarding the realization of our deferred tax assets to determine whether a valuation allowance should be recognized with respect to our deferred tax assets.

As of December 31, 2019 and 2018, the Company had state tax credit carry-forwards of $ 15,003 and $ 11,801 , respectively.

The state tax credit carry-forwards begin expiring in 2020.

In determining the Company’s 2020 and 2019 tax provisions, the Company calculated the deferred tax assets and liabilities for each separate tax entity.

The Company then considered a number of factors including the positive and negative

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

evidence regarding the realization of deferred tax assets to determine whether a valuation allowance should be recognized with respect to the deferred tax assets.

As of December 31, 2020 and 2019, the Company had state tax credit carryforwards (net of federal tax benefit) of $ 15,571 and $ 15,003 , respectively.

The state tax credit carryforwards begin expiring in 2021.

The Company has determined that it is not more likely than not that some of the state credits will be used before the expiration date and has accrued a valuation allowance of $ 12,414 and $ 10,632 as of December 31, 2020 and 2019, respectively.

The Company has tax loss carryforwards in foreign jurisdictions totaling $ 36,318 and $ 13,218 as of December 31, 2020 and 2019, respectively.

Some of these loss carryforwards start to expire in 2023 and some have an indefinite life but are limited in the amount that can be used in any year.

The Company does not believe it is more likely than not that any of the loss carryforwards can be used and has provided a valuation allowance against the tax benefit of the losses in foreign jurisdictions of $ 10,210 and $ 3,753 at December 31, 2020 and 2019, respectively.

The Company's acquisition of Menara Networks, Inc.

("Menara") in 2016 included net operating loss carry-forwards of $ 22,242 .

As of December 31, 2019 and 2018, the Company had $ 8,953 and $ 12,577 of these net operating loss carry-forwards remaining, respectively.

No valuation allowance has been provided for these carry-forwards as the Company expects to be able to fully utilize them to offset future income.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

("Menara") in 2016 included net operating loss carryforwards of $ 22,242 .

As of December 31, 2020 and 2019, the Company had $ 5,121 and $ 8,953 of these net operating loss carryforwards remaining, respectively.

No valuation allowance has been provided for these carryforwards as the Company expects to be able to fully utilize them to offset future income.

The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues.

Reserves recorded are based on a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is "more likely than not" to be realized following resolution of any potential contingencies present related to the tax benefit, assuming that the matter in question will be raised by the tax authorities.

Reserves recorded are based on a determination of whether and how much of a tax benefit taken by the Company in the Company's tax filings or positions is "more likely than not" to be realized following resolution of any potential contingencies present related to the tax benefit, assuming that the matter in question will be raised by the tax authorities.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

9 unchanged sentences

The Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities.

If these uncertain tax positions were realized, they would benefit the Company’s effective tax rate.

The Company is currently under a tax audit in the U.S.

4 unchanged sentences

Russia 2016 - 2020

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE

4 unchanged sentences

Net income attributable to common stockholders 159,572 180,234 404,027

Weighted average shares 53,061 53,522 53,495

Basic weighted average shares 53,186 53,061 53,522

Dilutive effect of common stock equivalents 599 778 1,204

4 unchanged sentences

Diluted net income attributable to common stockholders $ 2.97 $ 3.35 $ 7.38

For the years ended December 31, 2019, 2018 and 2017, respectively, the computation of diluted weighted average common shares excludes common stock equivalents of 670,600 shares, 279,700 shares and 182,900 shares which includes RSU's of 58,700 , 60,500 and 11,900 , PSU's of 40,900 , 14,900 and nil, and non-qualified stock options of 571,000 , 204,300 , and 171,000 , respectively, because the effect would be anti-dilutive.

On February 12, 2019, the Company announced that its board of directors authorized an anti-dilutive stock repurchase program (the "2019 Program").

Under the 2019 Program, IPG is authorized to repurchase shares of common stock in an amount

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

not to exceed the lesser of (a) the number of shares issued to employees and directors under the Company's various employee and director equity compensation and employee stock purchase plans from January 1, 2019 through December 31, 2020 and (b) $ 125,000 , exclusive of any fees, commissions or other expenses.

Share repurchases will be made periodically in open market transactions using the Company's working capital, and are subject to market conditions, legal requirements and other factors.

The 2019 Program authorization does not obligate the Company to repurchase any dollar amount or number of its shares, and repurchases may be commenced or suspended from time to time without prior notice.

For the years ended December 31, 2019, 2018 and 2017, respectively, the Company repurchased 301,262 shares, 1,051,825 shares, and 275,495 shares of its common stock with an average price of $ 135.21 , $ 167.39 and $ 145.15 per share in the open market.

As of December 31, 2019 the remaining amount authorized under the 2019 Program is up to $ 84,268 , but may be less depending upon the equity compensation and employee stock purchase plan dilution during the 2019 Program.

The computation of diluted weighted average common shares excludes certain common stock equivalents, including non-qualified stock options, PSUs, RSUs and the employee stock purchase plan because the effect of including them would be anti-dilutive.

The weighted average anti-dilutive shares outstanding for the years ended December 31, 2020, 2019 and 2018, respectively, were as follows:

Year Ended December 31,

2020 2019 2018

Non-qualified stock options 536,500 571,000 204,300

Restricted stock units 29,100 58,700 60,500

Performance stock units — 40,900 14,900

Total weighed average anti-dilutive shares outstanding 565,600 670,600 279,700

On May 5, 2020, the Company announced that its Board of Directors authorized the purchase of up to $ 200,000 of IPG common stock.

This new authorization is separate from, and in addition to, the Company's $ 125,000 stock repurchase program authorized in February 2019.

Under the two share purchase authorizations, IPG may repurchase shares of common stock (a) in an amount not to exceed the lesser of the number of shares issued to employees and directors under the Company's various employee and director equity compensation and employee stock purchase plans in 2019 and 2020 or $ 125,000 plus (b) $ 200,000 , in both cases exclusive of any fees, commissions or other expenses.

Share repurchases may be made periodically in open-market transactions using the Company's working capital and are subject to market conditions, legal requirements and other factors.

The share purchase program authorization does not obligate the Company to repurchase any dollar amount or number of its shares, and repurchases may be commenced or suspended from time to time without prior notice.

For the years ended December 31, 2020, 2019 and 2018, respectively, the Company repurchased 301,660 shares, 301,262 shares, and 1,051,825 shares of its common stock with an average price of $ 125.58 , $ 135.21 and $ 167.39 per share in the open market, respectively.

As of December 31, 2020 the remaining amount authorized under the programs is up to $ 246,000 , but may be less depending upon the equity compensation and employee stock purchase plan dilution during the programs.

The impact on the reduction of weighted average shares for years ended December 31, 2020, 2019 and 2018 was 201,953 shares, 97,054 shares and 363,936 shares, respectively.

RELATED-PARTY TRANSACTIONS

The Company's Chief Executive Officer ("CEO") leases the annual right to use 25 % of the Company's corporate aircraft under an October 2014 lease, which was superseded by a new lease signed in July 2017 in connection with the purchase of a different aircraft.

The Company's Chief Executive Officer ("CEO") leases the annual right to use 25 % of the Company's corporate aircraft under a lease signed in July 2017.

The lease expires July 2022.

The annual lease rate under the 2017 lease was $ 925 and future rent payments are adjusted annually.

The annual lease rate under the 2014 lease was $ 651 .

The CEO paid the Company $ 924 , $ 925 , and $ 753 in 2019, 2018, and 2017, respectively, under the aircraft leases.

There were no amounts due to the Company at December 31, 2019 or at December 31, 2018.

The annual lease rate is $ 925 and future rent payments are adjusted annually.

The Company invoiced the CEO $ 937 , $ 924 and $ 925 in 2020, 2019, and 2018, respectively, under the aircraft leases.

There was $ 154 due to the Company at December 31, 2020, and there were no amounts due at December 31, 2019.

The CEO directly pays an unrelated flight management firm for the operating costs of his private use including pilot fees, fuel and other costs.

In 2019, 2018 and 2017, the Company purchased various equipment, parts and services from a company for which one of the Company's independent directors is chairman of its board of directors.

IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

In 2020, 2019 and 2018, the Company purchased various equipment, parts and services from a company for which one of the Company's independent directors was chairman of its board of directors.

The payments for 2020, 2019 and 2018 totaled $ 760 , $ 51 and $ 947 , respectively.

There were no amounts due to this company at December 31, 2019 or at December 31, 2018.

There was $ 566 due to this company at December 31, 2020, and there were no amounts due at December 31, 2019.

The Company sold various equipment and parts to a different company for which one of the Company's independent directors is also an independent director.

The sales totaled $ 675 for 2020, and there were no sales for 2019 and 2018.

There was $ 334 due to the Company at December 31, 2020, and there were no amounts due at December 31, 2019.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Net sales $ 315,047 $ 363,769 $ 329,138 $ 306,627

Gross profit 148,911 180,237 152,858 124,203

Net income (loss) attributable to IPG Photonics Corporation 55,159 72,272 57,253 ( 4,450 )

Net income (loss) per share, basic 1.04 1.36 1.08 ( 0.08 )

Net income (loss) per share, diluted 1.02 1.34 1.07 ( 0.08 )

2020 First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Net sales $ 249,242 $ 296,411 $ 318,441 $ 336,630

3 unchanged sentences

Net income per share, diluted 0.68 0.71 0.66 0.92

Net income attributable to IPG Photonics Corporation as well as the basic and diluted income per share in the third quarter of the year ended December 31, 2020 were impacted by goodwill impairment discussed in Note 7.

2019 First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Net sales $ 315,047 $ 363,769 $ 329,138 $ 306,627

Gross profit 148,911 180,237 152,858 124,203

Net income (loss) attributable to IPG Photonics Corporation 55,159 72,272 57,253 ( 4,450 )

Net income (loss) per share, basic 1.04 1.36 1.08 ( 0.08 )

Net income (loss) per share, diluted 1.02 1.34 1.07 ( 0.08 )

Net income attributable to IPG Photonics Corporation as well as the basic and diluted loss per share in the fourth quarter of the year ended December 31, 2019 were impacted by goodwill impairment, impairment of long-lived assets and other restructuring charges discussed in Notes 6 and 7.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures