IPG PHOTONICS CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision of our Chief Executive Officer and our Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Annual Report on Form 10-K (the "Evaluation Date") utilizing the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control - Integrated Framework ("COSO") Updated Framework issued in 2013. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management's Annual Report on Internal Control Over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and its subsidiaries. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of the Evaluation Date based on criteria established in COSO utilizing the Updated Framework issued in 2013. Based on this assessment, our management concluded that, as of the Evaluation Date, our internal control over financial reporting was effective. Our independent registered public accounting firm, Deloitte & Touche LLP, has audited our internal control over financial reporting, as stated in their report below. Changes in Internal Controls There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure controls and procedures or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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. 45 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of IPG Photonics Corporation Oxford, Massachusetts Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of IPG Photonics Corporation and subsidiaries (the "Company") as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 22, 2021, expressed an unqualified opinion on those financial statements. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 22, 2021 46 Table of Contents ITEM 9B. CONTROLS AND PROCEDURES None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain of 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, 2020. Pursuant to General Instruction G(3) of Form 10-K, additional information required hereunder relating to our executive officers is contained in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION 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, 2020. ITEM 12. 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, 2020, with the exception of the information regarding securities authorized for issuance under our equity compensation plans, which is set forth below. 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 (a) Weighted-Average Exercise Price of Outstanding Options, RSUs and PSUs (b) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 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, 2020. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 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, 2020. PART IV 47 Table of Contents ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements. See Index to Financial Statements on page F-1. 2. Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto. 3. Exhibits. 48 Table of Contents Exhibit Number Description 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 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 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 ) 10.1 † 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) 10.2 † 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) 10.3 † 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) 10.4 † IPG Photonics Corporation 2008 Employee Stock Purchase Plan, as amended and restated effective December 1, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 3, 2019) 10.5 † Employment Agreement dated May 30, 2019 between the Registrant and Dr. Valentin P. 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) 10.6 † Service Agreement dated May 30, 2019 between IPG Laser GmbH and Dr. 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) 10.7 † Form of Employment Agreement dated May 30, 2019 between the Registrant and each of Timothy P.V. Mammen, Angelo P. 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) 10.8 † 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) 10.9 † Form of Letter amending Confidentiality, Non-Competition and Confirmatory Assignment Agreements 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/A filed with the Commission on February 22, 2017) 10.10 † 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) 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) 49 Table of Contents Exhibit Number Description 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) 10.18 Promissory Note between TVPX Aircraft Solutions dated July 27, 2017, 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 10.23 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 28, 2018) 10.19 Guaranty of the Registrant to Banc of America Lease & Capital, LLC, dated July 27, 2017 (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 28, 2018) 21.1 List of Subsidiaries 23.1 Consent of Deloitte & Touche LLP 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) † Identifies management contract or compensatory plans or arrangements required to be filed as an exhibit. b. Exhibits. See (a)(3) above. c. Additional Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto. ITEM 16. FORM 10-K SUMMARY None. 50 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2021. IPG P HOTONICS C ORPORATION By: /s/ Valentin P. Gapontsev Valentin P. Gapontsev Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title /s/ Valentin P. Gapontsev Valentin P. Gapontsev Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) February 22, 2021 /s/ Timothy P.V. Mammen Timothy P.V. Mammen Senior Vice President, Chief Financial Officer (Principal Financial Officer) February 22, 2021 /s/ Thomas J. Burgomaster Thomas J. Burgomaster Vice President, Corporate Controller (Principal Accounting Officer) February 22, 2021 /s/ Michael C. Child Michael C. Child Director February 22, 2021 /s/ Jeanmarie F. Desmond Jeanmarie F. Desmond Director February 22, 2021 /s/ Gregory P. Dougherty Gregory P. Dougherty Director February 22, 2021 /s/ Catherine P. Lego Catherine P. Lego Director February 22, 2021 /s/ Eric Meurice Eric Meurice Director February 22, 2021 /s/ Natalia Pavlova Natalia Pavlova Director February 22, 2021 /s/ John R. Peeler John Peeler Director February 22, 2021 /s/ Eugene A. Scherbakov Eugene Scherbakov Director February 22, 2021 51 Table of Contents INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F- 4 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018 F- 6 Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019, and 2018 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of IPG Photonics Corporation Oxford, Massachusetts Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of IPG Photonics Corporation and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Excess or Obsolete Inventory Reserve: Refer to Notes 1 and 4 to the Financial Statements Critical Audit Matter Description The Company evaluates inventory each reporting period for excess quantities and obsolescence, establishing reserves when necessary based upon historic usage, estimated future usage and age. Once recorded, these reserves are considered permanent adjustments to the carrying value of inventory. As of December 31, 2020, the Company has inventories of $365.0 million, net of excess quantities and obsolescence reserves. We identified the reserve for excess quantities and obsolete inventory as a critical audit matter because of the significant estimates and assumptions management makes to quantify and to record the reserve, including the determination of expected demand, especially when considering the vertically integrated nature of the Company as well as parts subject to technological obsolescence. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of assumptions including expected demand. F-2 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s judgments underlying the calculation of excess or obsolete inventory reserve, included the following, among others: • 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 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. • We evaluated management's ability to accurately estimate future demand by comparing actual inventory usage, on a sample basis, to estimates made in prior years. • We considered the existence of contradictory evidence based on consideration of internal communication to management and the board of directors, Company press releases, and analysts' reports, as well as any changes within the business. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 22, 2021 We have served as the Company's auditor since 1999. F-3 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2020 2019 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 876,231 $ 680,070 Short-term investments 514,835 502,546 Accounts receivable, net 264,321 238,479 Inventories 364,993 380,790 Prepaid income taxes 69,893 38,873 Prepaid expenses and other current assets 57,804 55,876 Total current assets 2,148,077 1,896,634 Deferred income taxes, net 43,197 31,395 Goodwill 41,366 82,092 Intangible assets, net 62,114 74,271 Property, plant and equipment, net 597,527 600,852 Other assets 43,419 45,192 Total assets $ 2,935,700 $ 2,730,436 LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt $ 3,810 $ 3,740 Accounts payable 25,748 27,329 Accrued expenses and other liabilities 176,740 149,782 Income taxes payable 8,280 11,053 Total current liabilities 214,578 191,904 Deferred income taxes and other long-term liabilities 92,854 98,121 Long-term debt, net of current portion 34,157 37,968 Total liabilities 341,589 327,993 Commitments and contingencies (Note 14) IPG Photonics Corporation equity: Common stock, $ 0.0001 par value, 175,000,000 shares authorized; 55,461,246 and 53,427,234 shares issued and outstanding, respectively, at December 31, 2020; 54,743,227 and 53,010,875 shares issued and outstanding, respectively, at December 31, 2019. 6 5 Treasury stock, at cost, 2,034,012 and 1,732,352 shares held at December 31, 2020 and December 31, 2019, respectively. ( 303,614 ) ( 265,730 ) Additional paid-in capital 854,301 785,636 Retained earnings 2,188,191 2,028,734 Accumulated other comprehensive loss ( 146,065 ) ( 146,919 ) Total IPG Photonics Corporation stockholders' equity 2,592,819 2,401,726 Non-controlling interests 1,292 717 Total equity 2,594,111 2,402,443 Total liabilities and equity $ 2,935,700 $ 2,730,436 See notes to consolidated financial statements. F-4 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2020 2019 2018 (In thousands, except per share data) Net sales $ 1,200,724 $ 1,314,581 $ 1,459,874 Cost of sales 661,728 708,372 659,606 Gross profit 538,996 606,209 800,268 Operating expenses: Sales and marketing 70,583 77,745 57,815 Research and development 126,898 129,997 122,769 General and administrative 110,005 107,597 102,429 Goodwill impairment 44,589 37,120 — Impairment of long-lived assets and other restructuring charges 1,177 7,130 — Loss (gain) on foreign exchange ( 12,915 ) 12,827 ( 6,150 ) Total operating expenses 340,337 372,416 276,863 Operating income 198,659 233,793 523,405 Other income, net: Interest income, net 6,270 14,238 9,057 Other income, net 763 345 1,933 Total other income 7,033 14,583 10,990 Income before provision for income taxes 205,692 248,376 534,395 Provision for income taxes 45,354 68,115 130,226 Net income 160,338 180,261 404,169 Less: net income attributable to non-controlling interests 766 27 142 Net income attributable to IPG Photonics Corporation $ 159,572 $ 180,234 $ 404,027 Net income attributable to IPG Photonics Corporation per share: Basic $ 3.00 $ 3.40 $ 7.55 Diluted $ 2.97 $ 3.35 $ 7.38 Weighted average shares outstanding: Basic 53,186 53,061 53,522 Diluted 53,785 53,839 54,726 See notes to consolidated financial statements. F-5 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2020 2019 2018 (In thousands) Net income $ 160,338 $ 180,261 $ 404,169 Other comprehensive income (loss), net of tax: 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 Total other comprehensive income (loss) 663 15,980 ( 85,565 ) Comprehensive income 161,001 196,241 318,604 Less: comprehensive income attributable to non-controlling interest 575 30 129 Comprehensive income attributable to IPG Photonics Corporation $ 160,426 $ 196,211 $ 318,475 See notes to consolidated financial statements. F-6 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF EQUITY Year Ended December 31, Common Stock Treasury Stock Additional Paid In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Non- controlling Interest Total Stockholders' Equity (In thousands, except share data) Shares Amount Shares Amount Balance, January 1, 2018 53,629,439 $ 5 ( 378,269 ) $ ( 48,933 ) $ 704,727 $ 1,443,867 $ ( 77,344 ) $ — $ 2,022,322 Exercise of stock options and vesting of RSU's and PSU's 351,795 — — — 9,895 — — — 9,895 Common stock issued under employee stock purchase plan 12,198 — — — 2,288 — — — 2,288 Purchased common stock ( 1,051,825 ) — ( 1,051,825 ) ( 176,065 ) — — — — ( 176,065 ) Stock-based compensation — — — — 28,027 — — — 28,027 Recently adopted accounting standards — — — — — 606 10 — 616 Purchase of non-controlling interest — — — — — — — 558 558 Net income — — — — — 404,027 — 142 404,169 Foreign currency translation adjustments — — — — — — ( 85,577 ) ( 13 ) ( 85,590 ) Unrealized gain on derivatives, net of tax — — — — — — 15 — 15 Balance, December 31, 2018 52,941,607 5 ( 1,430,094 ) ( 224,998 ) 744,937 1,848,500 ( 162,896 ) 687 2,206,235 Exercise of stock options and vesting of RSU's and PSU's 319,211 — — — 805 — — — 805 Common stock issued under employee stock purchase plan 52,315 — — — 6,531 — — — 6,531 Purchased common stock ( 302,258 ) — ( 302,258 ) ( 40,732 ) — — — — ( 40,732 ) Stock-based compensation — — — — 33,363 — — — 33,363 Net income — — — — — 180,234 — 27 180,261 Foreign currency translation adjustments — — — — — — 15,994 3 15,997 Unrealized loss on derivatives, net of tax — — — — — — ( 17 ) — ( 17 ) Balance, December 31, 2019 53,010,875 5 ( 1,732,352 ) ( 265,730 ) 785,636 2,028,734 ( 146,919 ) 717 2,402,443 Exercise of stock options and vesting of RSU's and PSU's 677,076 1 — — 27,934 — — — 27,935 Common stock issued under employee stock purchase plan 40,943 — — — 5,259 — — — 5,259 Purchased common stock ( 301,660 ) — ( 301,660 ) ( 37,884 ) — — — — ( 37,884 ) Stock-based compensation — — — — 35,472 — — — 35,472 Recently adopted accounting standards — — — — — ( 115 ) — — ( 115 ) Net income — — — — — 159,572 — 766 160,338 Foreign currency translation adjustments — — — — — — 1,558 ( 191 ) 1,367 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 See notes to consolidated financial statements. F-7 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2020 2019 2018 (In thousands) Cash flows from operating activities: Net income $ 160,338 $ 180,261 $ 404,169 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 94,554 96,268 80,271 Deferred income taxes ( 12,813 ) ( 15,489 ) ( 4,576 ) Stock-based compensation 35,472 33,363 28,027 Goodwill impairment 44,589 37,120 — Impairment of long-lived assets 671 5,350 — Unrealized losses (gains) on foreign currency transactions ( 19,935 ) 11,004 ( 2,670 ) Other 8,642 3,320 ( 3,586 ) Provisions for inventory, warranty and bad debt 70,572 63,752 38,862 Changes in assets and liabilities that (used) provided cash, net of acquisitions: Accounts receivable ( 13,022 ) 9,776 ( 18,814 ) Inventories ( 39,900 ) ( 28,105 ) ( 135,440 ) Prepaid expenses and other current assets ( 3,802 ) 18,405 ( 7,062 ) Accounts payable ( 1,942 ) ( 10,257 ) ( 1,426 ) Accrued expenses and other liabilities ( 14,752 ) ( 37,310 ) ( 19,666 ) Income and other taxes payable ( 23,337 ) ( 43,937 ) 35,212 Net cash provided by operating activities 285,335 323,521 393,301 Cash flows from investing activities: Purchases of property, plant and equipment ( 87,696 ) ( 133,536 ) ( 160,343 ) Proceeds from sales of property, plant and equipment 889 661 1,026 Proceeds from short-term investments 1,099,224 768,078 470,328 Purchases of short and long-term investments ( 1,111,555 ) ( 760,300 ) ( 765,310 ) Acquisitions of businesses, net of cash acquired ( 429 ) ( 15,115 ) ( 109,115 ) Other ( 7 ) 237 415 Net cash used in investing activities ( 99,574 ) ( 139,975 ) ( 562,999 ) Cash flows from financing activities: Proceeds from line-of-credit facilities — 15 255 Payments on line-of-credit facilities — ( 15 ) ( 255 ) Principal payments on long-term borrowings ( 3,740 ) ( 3,671 ) ( 3,604 ) Proceeds from issuance of common stock under employee stock option and purchase plans less payments for taxes related to net share settlement of equity awards 33,194 7,336 12,183 Cash contributed by non-controlling interest — — 839 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 ) Effect of changes in exchange rates on cash, cash equivalents and restricted cash 19,888 ( 7,853 ) ( 29,197 ) Net increase (decrease) in cash, cash equivalents and restricted cash 195,569 138,626 ( 365,542 ) 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: Cash paid for interest $ 2,234 $ 2,683 $ 3,052 Cash paid for income taxes $ 85,861 $ 116,951 $ 112,762 Non-cash transactions: Demonstration units transferred from inventory to other assets $ 8,117 $ 10,367 $ 6,270 Property, plant and equipment transferred from inventory $ 4,243 $ 7,659 $ 2,535 Changes in accounts payable related to property, plant and equipment $ ( 75 ) $ 1,304 $ ( 2,852 ) Leased assets obtained in exchange for new operating lease liabilities $ 4,035 $ 14,670 $ — See notes to consolidated financial statements. F-8 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business — IPG Photonics Corporation (the "Company" or "IPG") develops, manufactures and sells high-performance fiber lasers, fiber amplifiers, diode lasers, laser systems, communications systems and optical accessories that are used for diverse applications, primarily in materials processing. The Company was incorporated as a Delaware corporation in December 1998. Its world headquarters are located in Oxford, Massachusetts. It also has facilities and sales offices elsewhere in North and South America, Europe and Asia. Principles of Consolidation — The accompanying financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Foreign Currency — The financial information for entities outside the United States is measured using local currencies as the functional currency. Assets and liabilities are translated into U.S. dollars at the exchange rate in effect on the respective balance sheet dates. Income and expenses are translated into U.S. dollars based on the average rate of exchange for the corresponding period. 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 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 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 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: 2020 2019 2018 Balance at January 1 $ 2,547 $ 1,731 $ 2,198 Provision for bad debts, net of recoveries ( 156 ) 677 14 Uncollectable accounts written off ( 114 ) ( 111 ) ( 198 ) Foreign currency translation ( 121 ) 102 ( 283 ) Balance at December 31 $ 2,156 $ 2,399 $ 1,731 F-9 Table of Contents 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. Inventories include parts and components that may be specialized in nature and subject to rapid obsolescence. The Company periodically reviews the quantities and carrying values of inventories to assess whether the inventories are recoverable. The costs associated with provisions for excess quantities, technological obsolescence, or component rejections are charged to cost of sales as incurred. Goodwill — Goodwill is the amount by which the cost of the acquired net assets in a business acquisition exceeded the fair values of the net identifiable assets on the date of purchase. Goodwill is assessed for impairment at least annually, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. 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 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. Intangible assets are reported at cost, net of accumulated amortization, and are amortized on a straight-line basis either over their estimated useful lives of one year to thirteen years or over the period the economic benefits of the intangible asset are consumed. Property, Plant and Equipment — Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is determined using the straight-line method based on the estimated useful lives of the related assets. In the case of leasehold improvements, the estimated useful lives of the related assets do not exceed the remaining terms of the corresponding leases. The following table presents the assigned economic useful lives of property, plant and equipment: Category Economic Useful Life Buildings 20 - 30 years Machinery and equipment 5 - 7 years Office furniture and fixtures 5 - 7 years Expenditures for maintenance and repairs are charged to operating expense. Long-Lived Assets — Long-lived assets, which consist primarily of property, plant and equipment and identifiable intangible assets, are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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. 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. The demonstration equipment is amortized over the respective estimated economic lives, generally 3 years. The carrying value of the demonstration equipment totaled $ 6,506 and $ 7,591 at December 31, 2020 and 2019, respectively. Amortization expense of demonstration equipment for the years ended December 31, 2020, 2019 and 2018, was $ 4,166 , $ 4,364 and $ 3,870 , respectively. Authorized Capital — The Company has authorized capital stock consisting of 175,000,000 shares of common stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share. There are no shares of preferred stock outstanding as of December 31, 2020. Revenue Recognition — Revenue is recognized when transfer of control to the customer occurs in an amount reflecting the consideration that the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer's ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct as the identified performance obligations. 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 F-10 Table of Contents 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. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment but which can occur over time for certain of the Company's systems contracts. The Company often receives orders with multiple delivery dates that may extend across several reporting periods. The Company allocates the transaction price of the contract to each delivery based on the product standalone selling price. The Company invoices for each scheduled delivery upon shipment and recognizes revenues for such delivery at that point, assuming transfer of control has occurred. 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 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. In certain subsidiaries the Company provides sales commissions to sales representatives based on sales volume. The Company has determined that the incentive portion of its sales commissions qualify as contract costs. The Company has elected the practical expedient in ASC 340-40-25-4 to expense sales commissions when incurred as the amortization period of the asset that would otherwise have been recognized is one year or less. Revenue Recognition at a Point in Time — Revenues recognized at a point in time consist primarily of product, installation and service sales. The Company sells products to original equipment manufacturers ("OEMs") that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. The Company also sells products to end users that use IPG products directly to build their own systems, which incorporate or use IPG products as an energy or light source. The Company recognizes revenue for laser and spare part sales following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Installation revenue is recognized upon completion of the installation service, which typically occurs within 90 days of delivery. For laser systems that carry customer specific processing requirements, revenue is recognized at the latter of customer acceptance date or shipment date if the customer acceptance is made prior to shipment. When sales contracts contain multiple performance obligations, such as the shipment or delivery of products and installation, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. Revenue Recognition over Time — Warranties are limited and provide that the product meets specifications and is free from defects in materials and workmanship. The Company also offers extended warranty agreements, which extend the standard warranty periods. Extended warranties are sold separately from products and represent a distinct performance obligation. Revenue related to the performance obligation for extended warranties is recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company. The customer receives the assurance that the product will operate in accordance with agreed-upon specifications evenly during the extended warranty period regardless of whether they make a claim during that period, and therefore, revenue at time of sale is deferred and recognized over the time period of the extended warranty period. With the acquisition of Genesis Systems Group, LLC in December 2018, the Company enters into contracts to sell customized robotic systems, for which revenue is generally recognized over time, depending on the terms of the contract. Recognizing revenue over time for these contracts is based on the Company’s judgment that the customized robotic system does not have an alternative use and the Company has an enforceable right to payment for performance completed to date. The determination of the revenue to be recognized in a given period for performance obligations over time is based on the input method. The Company generally uses the total cost-to-cost input method of progress because it best depicts the transfer of control to the customer that occurs as costs are incurred. 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 F-11 Table of Contents 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 warranties on lasers and amplifiers. Most of the Company's sales offices provide support to customers in their respective geographic areas. The Company estimates the warranty accrual considering past claims experience, the number of units still covered by warranty and the average life of the remaining warranty period. The warranty accrual has generally been sufficient to cover product warranty repair and replacement costs. 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 ("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 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." Advertising Expense — The cost of advertising is expensed as incurred. The Company conducts substantially all of its sales and marketing efforts through trade shows, professional and technical conferences, direct sales and the Company's website. The Company's advertising costs were not material for the periods presented. Research and Development — Research and development costs are expensed as incurred. 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 positions, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges when they are probable and estimable. The Company accrues for severance and other employee separation costs under these plans when the employees accept the offer and the amount can be reasonably estimated. Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted rates in effect when those differences are expected to reverse. Valuation allowances are provided against deferred tax assets that are not deemed to be recoverable. The Company recognizes tax positions that are more likely than not to be sustained upon examination by relevant tax authorities. The tax positions are measured at the greatest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement. The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. 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-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. Such losses historically have been within management's expectations. One customer comprised 8 %, 9 % and 12 % of net sales during the years ended December 31, 2020, 2019 and 2018 respectively. 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 F-12 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) sales. The composition of this group can change from year to year. Net sales derived from the Company's five largest customers as a percentage of its annual net sales were 24 %, 21 % and 26 % in 2020, 2019 and 2018, respectively. Comprehensive Income — Comprehensive income includes charges and credits to equity that are not the result of transactions with stockholders. Included within comprehensive income is the cumulative foreign currency translation adjustment, change in carrying value of auction rate securities, unrealized gains or losses on derivatives and unrealized gains or losses on available-for-sale investments. These adjustments are accumulated within the consolidated statements of comprehensive income. Total components of accumulated other comprehensive loss were as follows: December 31, 2020 2019 Foreign currency translation adjustments $ ( 145,603 ) $ ( 147,161 ) Unrealized gain on auction rate securities — 232 Unrealized (loss) gain on derivatives, net of tax benefit of $ 141 and tax of $ 3 , respectively ( 462 ) 10 Accumulated other comprehensive loss $ ( 146,065 ) $ ( 146,919 ) Derivative Instruments — The Company's primary market exposures are to interest rates and foreign exchange rates. The Company from time to time may use certain derivative financial instruments to help manage these exposures. The Company executes these instruments with financial institutions it judges to be credit-worthy. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. Business Segment Information — The Company operates in one segment which involves the design, development, production and distribution of fiber lasers, laser and non-laser systems, fiber amplifiers, and related optical components. The Company has a single, company-wide management team that administers all properties as a whole rather than as discrete operating segments. The chief operating decision maker, who is the Company's chief executive officer, measures financial performance as a single enterprise, and not on geography, legal entity, or end market basis. Throughout the year, the chief operating decision maker allocates capital resources on a project-by-project basis across the Company's entire asset base to maximize profitability without regard to geography, legal entity, or end market basis. The Company operates in a number of countries throughout the world in a variety of product lines. Information regarding product lines and geographic financial information is provided in Note 2, "Revenue from Contracts with Customers" and Note 8, "Property, Plant and Equipment." Earnings Per Share — Basic net income per share is computed by dividing net income attributable to shareholders of the Company by the weighted-average number of common shares outstanding during the reporting period. Diluted net income per share is computed similarly to basic net income per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Information about potentially dilutive and antidilutive shares for the reporting period is provided in Note 18, "Net Income Attributable to IPG Photonics Corporation Per Share." Leases — The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets, other current liabilities, and other long-term liabilities on the Company's consolidated balance sheets. Right of use ("ROU") assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, IPG uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The ROU assets also include any lease payments made and initial direct costs incurred and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. F-13 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 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 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. 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. 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. 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. 2. REVENUE FROM CONTRACTS WITH CUSTOMERS Sales are derived from products for different 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: Year Ended December 31, 2020 2019 2018 Sales by Application Materials processing $ 1,082,478 $ 1,229,211 $ 1,374,448 Other applications 118,246 85,370 85,426 Total $ 1,200,724 $ 1,314,581 $ 1,459,874 F-14 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Sales by Product High Power Continuous Wave ("CW") Lasers $ 646,062 $ 734,745 $ 909,726 Medium Power CW Lasers 50,796 56,625 95,764 Pulsed Lasers 158,448 137,675 162,048 Quasi-Continuous Wave ("QCW") Lasers 50,333 56,440 66,700 Laser and Non-Laser Systems 93,727 141,647 59,330 Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue 201,358 187,449 166,306 Total $ 1,200,724 $ 1,314,581 $ 1,459,874 Sales by Geography North America $ 246,189 $ 280,886 $ 202,743 Europe: Germany 65,646 81,365 111,259 Other including Eastern Europe/CIS 219,540 249,871 296,917 Asia and Australia: China 502,278 491,890 629,079 Japan 53,180 71,757 87,619 Other 103,785 121,586 127,251 Rest of World 10,106 17,226 5,006 Total $ 1,200,724 $ 1,314,581 $ 1,459,874 Timing of Revenue Recognition Goods and services transferred at a point in time $ 1,144,237 $ 1,233,065 $ 1,447,343 Goods and services transferred over time 56,487 81,516 12,531 Total $ 1,200,724 $ 1,314,581 $ 1,459,874 The Company enters into contracts to sell lasers and spare parts, for which revenue is generally recognized upon shipment or delivery, depending on the terms of the contract. The Company also provides installation services and extended warranties. The Company frequently receives consideration from a customer prior to transferring goods to the customer under the terms of a sales contract. The Company records customer deposits related to these prepayments, which represent a contract liability. The Company also records deferred revenue related to installation services when consideration is received before the services have been performed. The standalone selling price for installation services is determined based on the estimated number of days of service technician time required for installation at standard service rates. The Company recognizes customer deposits and deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria is met. The Company bills customers for extended warranties upon entering into the agreement with the customer, resulting in deferred revenue. The timing of customer payments on contracts for the sale of customized robotic systems generally differs from the timing of revenue recognized, resulting in contract assets and liabilities. Contract assets are included within prepaid expense and other current assets on the consolidated balance sheets. Contract liabilities are included within accrued expenses and other current liabilities on the consolidated balance sheets. F-15 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 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, January 1, December 31, January 1, 2020 2020 Change 2019 2019 Change Contract assets Contract assets $ 8,999 $ 9,645 $ ( 646 ) $ 9,645 $ 10,102 $ ( 457 ) Contract liabilities Contract liabilities - current 71,246 59,531 11,715 59,531 52,606 6,925 Contract liabilities - long-term 2,189 1,820 369 1,820 1,413 407 During the year ended December 31, 2020 and 2019, the Company recognized revenue of $ 48,738 and $ 45,223 , respectively, that was included in the contract liabilities at the beginning of the period. The Company has elected the practical expedient in ASC 606-10-50-14, whereby the performance obligations for contracts with an original expected duration of one year or less are not disclosed. The following table represents the Company's remaining performance obligations from contracts that are recognized over time as of December 31, 2020: Remaining Performance Obligations 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 Revenue to be earned over time from contracts to sell robotic systems 17,513 1,336 — — — — 18,849 Total $ 21,308 $ 2,332 $ 675 $ 381 $ 113 $ 11 $ 24,820 3. FAIR VALUE MEASUREMENTS 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. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; 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 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. F-16 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The following table presents fair value information related to the Company's assets and liabilities measured at amortized cost on the consolidated balance sheets with the exception of the interest rate swap, which is measured at fair value: Fair Value Measurements at December 31, 2020 Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market fund deposits and term deposits $ 218,984 $ 218,984 $ — $ — U.S. Treasury and agency obligations 6,999 — 6,999 — Commercial paper 162,749 — 162,749 — Corporate bonds 29,010 — 29,010 — Short-term investments: U.S. 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 — Total assets $ 932,571 $ 218,984 $ 713,587 $ — Liabilities Long-term notes $ 38,402 $ — $ 38,402 $ — Contingent purchase consideration 1,963 — — 1,963 Interest rate swap 603 — 603 — Total liabilities $ 40,968 $ — $ 39,005 $ 1,963 Fair Value Measurements at December 31, 2019 Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market fund deposits and term deposits $ 155,080 $ 155,080 $ — $ — Commercial paper 54,712 — 54,712 — Short-term investments: Corporate bonds 259,422 259,422 — — Commercial paper 236,752 — 236,752 — Certificate of deposit 6,501 6,501 — — Long-term investments and other assets: Auction rate securities 592 — — 592 Interest rate swap 13 — 13 — Total assets $ 713,072 $ 421,003 $ 291,477 $ 592 Liabilities Long-term notes $ 42,004 $ — $ 42,004 $ — Contingent purchase consideration 273 — — 273 Total liabilities $ 42,277 $ — $ 42,004 $ 273 Short-term investments consist of liquid investments including U.S. 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. There were no impairments for the investments considered held-to-maturity at December 31, 2020 and December 31, 2019. F-17 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 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. 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. That approach is based on significant inputs that are not observable in the market and include key assumptions such as assessing the probability of meeting certain milestones required to earn the contingent consideration. The following table presents information about the Company's movement in Level 3 assets and liabilities measured at fair value: 2020 2019 2018 Auction rate securities Balance, January 1 $ 592 $ 847 $ 1,016 Redemptions ( 596 ) ( 264 ) ( 207 ) Change in fair value 4 9 38 Balance, December 31 $ — $ 592 $ 847 Contingent purchase consideration Balance, January 1 $ 273 $ 898 $ 902 Period transactions 1,963 — — Cash payments ( 272 ) ( 632 ) — Change in fair value — ( 29 ) 48 Foreign exchange adjustment ( 1 ) 36 ( 52 ) Balance, December 31 $ 1,963 $ 273 $ 898 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 . F-18 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 4. INVENTORIES Inventories consist of the following: December 31, 2020 2019 Components and raw materials $ 190,775 $ 200,390 Work-in-process 47,251 49,620 Finished goods 126,967 130,780 Total $ 364,993 $ 380,790 The Company recorded inventory provisions totaling $ 45,375 , $ 38,902 and $ 12,981 for the years ended December 31, 2020, 2019 and 2018, respectively. These provisions relate to the recoverability of the value of inventories due to technological changes and excess quantities. These provisions are reported as a reduction to components and raw materials and finished goods. 5. BUSINESS COMBINATIONS 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”). Genesis Systems is based in Davenport, Iowa, and has production facilities in the United States, Mexico, and Japan. Genesis Systems develops innovative robotic system solutions for applications that include welding, non-destructive inspection, machine vision, materials handling, removal and dispensing. The Company paid $ 107,987 to acquire Genesis Systems, which represents the fair value on that date. The purchase price includes $ 448 , which was paid for the working capital adjustment finalized in the first quarter of 2019. 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. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 45,684 , most of which will be deductible for tax purposes. During the second quarter of 2018, the Company acquired 100 % of the shares of robot concept GmbH (“RC”). RC is located near Munich, Germany, designs and manufactures customized laser systems. The purchase price was $ 4,453 , which represents the fair value on that date. As a result of the acquisition, the Company recorded intangible assets of $ 111 related to customer relationships with a weighted-average estimated useful life of 1 year and $ 594 related to technology, trademark and tradename with a weighted-average estimated useful life of 10 years. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $ 4,072 . The goodwill arising from this acquisition will not be deductible for tax purposes. F-19 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The fair values of net tangible assets and intangible assets acquired were based upon the Company's estimates and assumptions at the acquisition dates. The following table summarizes the allocation of the assets acquired and liabilities assumed at the acquisition dates for the year ended December 31, 2018: Genesis Systems RC Total Cash and cash equivalents $ 2,847 $ 30 $ 2,877 Assets acquired excluding cash and cash equivalents and deferred tax assets 39,262 2,151 41,413 Liabilities assumed excluding deferred tax liabilities ( 23,506 ) ( 1,932 ) ( 25,438 ) Deferred tax liabilities, net — ( 573 ) ( 573 ) Intangible assets 43,700 705 44,405 Total identifiable net assets 62,303 381 62,684 Goodwill 45,684 4,072 49,756 Total purchase price $ 107,987 $ 4,453 $ 112,440 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. 6. RESTRUCTURING 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 Balance at January 1, 2019 $ — $ — $ — Charges 1,466 314 1,780 Cash payments ( 1,317 ) ( 275 ) ( 1,592 ) 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 $ — $ — $ — 7. GOODWILL AND INTANGIBLE ASSETS The following table sets forth the changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019: 2020 2019 Balance at January 1 $ 82,092 $ 100,722 Adjustments to goodwill during the measurement period — 448 Goodwill arising from business combinations 3,211 19,076 Impairment losses ( 44,589 ) ( 37,120 ) Foreign exchange adjustment 652 ( 1,034 ) Balance at December 31 $ 41,366 $ 82,092 F-20 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 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. 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 . Intangible assets, subject to amortization, consisted of the following: December 31, 2020 December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted- Average Lives Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted- Average Lives Customer relationships $ 58,041 $ ( 17,674 ) $ 40,367 11 years $ 57,866 $ ( 11,993 ) $ 45,873 11 years Technology, trademark and trade name 40,518 ( 20,949 ) 19,569 7 years 41,297 ( 16,128 ) 25,169 7 years Production know-how 9,325 ( 8,167 ) 1,158 7 years 9,180 ( 7,415 ) 1,765 7 years Patents 8,036 ( 7,016 ) 1,020 8 years 8,036 ( 6,572 ) 1,464 8 years Total $ 115,920 $ ( 53,806 ) $ 62,114 $ 116,379 $ ( 42,108 ) $ 74,271 Amortization expense for the years ended December 31, 2020, 2019 and 2018 was $ 11,974 , $ 12,945 and $ 8,170 , respectively. The estimated future amortization expense for intangibles as of December 31, 2020 is as follows: 2021 2022 2023 2024 2025 Thereafter Total $ 11,591 $ 10,761 $ 9,861 $ 7,522 $ 6,311 $ 16,068 $ 62,114 F-21 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, 2020 2019 Land $ 51,454 $ 45,676 Buildings 412,725 400,617 Machinery and equipment 473,420 449,783 Office furniture and fixtures 77,196 70,001 Construction-in-progress 70,341 44,201 Total property, plant and equipment 1,085,136 1,010,278 Accumulated depreciation ( 487,609 ) ( 409,426 ) Total property, plant and equipment — net $ 597,527 $ 600,852 The Company recorded depreciation expense of $ 78,414 , $ 78,959 and $ 68,231 for the years ended December 31, 2020, 2019 and 2018, respectively. Long-lived assets include property, plant and equipment, related deposits on such assets and demonstration equipment. The geographic locations of the Company's long-lived assets, net, based on physical location of the assets, as of December 31, 2020 and 2019 are as follows: December 31, 2020 2019 United States $ 362,395 $ 366,059 Germany 86,980 86,881 Russia 66,924 84,471 Belarus 38,304 28,361 China 8,175 8,933 Other 49,170 43,255 Total $ 611,948 $ 617,960 9. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: December 31, 2020 2019 Contract liabilities $ 71,246 $ 59,531 Accrued compensation 62,785 48,881 Current portion of accrued warranty 24,345 23,114 Short-term lease liabilities 5,778 5,300 Other 12,586 12,956 Total $ 176,740 $ 149,782 F-22 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 10. PRODUCT WARRANTIES Activity related to the warranty accrual was as follows: 2020 2019 2018 Balance at January 1 $ 48,866 $ 51,422 $ 47,517 Provision for warranty accrual 24,555 22,613 24,948 Warranty claims ( 30,002 ) ( 24,826 ) ( 18,922 ) Foreign currency translation and other 2,250 ( 343 ) ( 2,121 ) Balance at December 31 $ 45,669 $ 48,866 $ 51,422 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. 11. FINANCING ARRANGEMENTS The Company's borrowings under existing financing arrangements consist of the following: December 31, 2020 2019 Total notes payable $ 37,967 $ 41,708 Less: current portion ( 3,810 ) ( 3,740 ) Total long-term debt $ 34,157 $ 37,968 Term Debt: Long-Term Notes — At December 31, 2020, the outstanding principal balance on the long-term notes was $ 37,967 of which $ 3,810 is the current portion. The Company has an unsecured long-term note of $ 18,406 of which $ 1,187 is the current portion. The interest on this unsecured long-term note is variable at 1.20 % above LIBOR and is fixed using an interest rate swap at 2.85 % per annum. The unsecured long-term note matures in May 2023, at which time the outstanding principal balance will be $ 15,438 . The Company has another note that is secured by the corporate aircraft with an outstanding principal balance of $ 19,561 of which $ 2,623 is the current portion. The interest on this collateralized long-term note is fixed at 2.74 % per annum. The collateralized long-term note matures in July 2022, at which time the outstanding principal balance will be $ 15,375 . The future principal payments for the Company’s notes as of December 31, 2020 are as follows: 2021 $ 3,810 2022 18,126 2023 16,031 Total $ 37,967 Revolving Line of Credit Facilities: U.S. 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 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. At December 31, 2020, the remaining availability under this line was $ 71,700 . The Company is required to meet certain financial covenants associated with its 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 F-23 Table of Contents 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 . 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. This credit facility is available to the Company's foreign subsidiaries including those in Germany, Russia, China and Italy based on management discretion. At December 31, 2020, there were no drawings, however, there were $ 3,424 of guarantees issued against the line which reduced the total availability. At December 31, 2020, the remaining availability under this line was $ 57,895 . 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 . These facilities are collateralized by a common pool of the assets of the Company's Italian subsidiary. 12. DERIVATIVE INSTRUMENTS The Company's only outstanding derivative financial instrument is an interest rate swap that is classified as a cash flow hedge of its variable rate debt. The fair value amounts in the consolidated balance sheets were: December 31, 2020 2019 Notional amounts (1) $ 18,406 $ 19,594 Fair values: 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. The derivative gains and losses in the consolidated financial statements for the years ended December 31, 2020, 2019 and 2018, related to the Company's current and previous interest rate swap contracts were as follows: Year Ended December 31, 2020 2019 2018 Effective portion recognized in other comprehensive income (loss), pretax: Interest rate swap $ ( 616 ) $ ( 18 ) $ 15 13. LEASES The Company leases certain warehouses, office spaces, land, vehicles and equipment under operating lease agreements. The remaining terms of these leases range from less than 1 year to 44 years. 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 $ 6,634 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, 2020 and 2019: Year Ended December 31, Account Classification 2020 2019 Right-of-use assets Other assets $ 21,720 $ 23,028 Short-term lease liabilities Accrued expenses and other liabilities 5,778 5,300 Long-term lease liabilities Deferred income taxes and other long-term liabilities 18,448 20,410 Total lease liabilities $ 24,226 $ 25,710 F-24 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The table below presents the maturities of operating lease liabilities as of December 31, 2020: 2021 $ 6,452 2022 4,854 2023 3,573 2024 2,251 2025 2,076 Thereafter 8,311 Total future minimum lease payments 27,517 Less: imputed interest ( 3,291 ) Present value of lease liabilities $ 24,226 Other information relevant to the Company's operating leases consist of the following as of December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Weighted-average remaining lease term 9 years 9 years Weighted-average discount rate 3.46 % 3.58 % 14. COMMITMENTS AND CONTINGENCIES Employment Agreements — The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to three years and include non-competition, non-solicitation and nondisclosure provisions, as well as provisions for defined severance for terminations of employment under certain conditions and a change of control of the Company. The Company also maintains a severance plan for certain of its senior management providing for defined severance for terminations of employment under certain conditions and a change of control of the Company. Contractual Obligations — The Company has entered into various purchase obligations that include agreements for construction of buildings, raw materials and equipment. Obligations under these agreements were $ 51,730 and $ 53,922 as of December 31, 2020 and 2019, respectively. Legal proceedings — From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business. These proceedings may include allegations of infringement of intellectual property, commercial disputes and employment matters. 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. 15. STOCK-BASED COMPENSATION Stock-based compensation is included in the following financial statement captions: Year Ended December 31, 2020 2019 2018 Cost of sales $ 10,392 $ 9,249 $ 6,535 Sales and marketing 4,395 3,815 2,550 Research and development 9,122 7,690 6,410 General and administrative 11,749 12,824 12,532 Total stock-based compensation 35,658 33,578 28,027 Tax benefit recognized ( 7,498 ) ( 5,114 ) ( 6,632 ) Net stock-based compensation $ 28,160 $ 28,464 $ 21,395 F-25 Table of Contents 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. A total of 10,363,465 shares are reserved under the 2006 Plan. At December 31, 2020, 2,851,428 shares of the Company's stock were available for future grant under the 2006 Plan. 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 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. Awards granted to non-employee directors automatically become exercisable upon a change of control. All shares issued under the 2006 Plan and Directors Plan are registered shares, newly issued by the Company. 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: 2019 2018 Expected term 4.3 - 5.1 years 4.1 - 4.9 years Volatility 37 % - 38 % 31 % - 36 % Risk-free rate of return 1.66 % - 2.55 % 2.54 % - 3.01 % Dividend yield 0.25 % 0.25 % Forfeiture rate — % — % 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) Outstanding — January 1, 2018 1,797,493 $ 73.95 Granted 257,111 232.26 Exercised ( 282,720 ) 58.94 Forfeited ( 24,810 ) 131.36 Outstanding — December 31, 2018 1,747,074 98.93 5.80 $ 58,084 Granted 334,740 153.78 Exercised ( 192,533 ) 56.58 Forfeited ( 46,839 ) 149.64 Outstanding — December 31, 2019 1,842,442 112.03 5.73 $ 85,110 Granted — Exercised ( 533,716 ) 70.17 Forfeited ( 36,103 ) 179.85 Outstanding — December 31, 2020 1,272,623 $ 127.74 5.47 $ 125,550 Unvested — December 31, 2020 382,729 $ 171.98 7.57 $ 21,386 Exercisable — December 31, 2020 889,894 $ 108.71 4.57 $ 104,164 F-26 Table of Contents 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. 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) Outstanding — January 1, 2018 378,261 $ 96.23 Granted 80,254 227.45 Vested ( 97,997 ) 91.62 Canceled ( 9,497 ) 121.37 Outstanding — December 31, 2018 351,021 126.93 2.62 $ 39,767 Granted 120,090 151.94 Vested ( 147,606 ) 120.58 Canceled ( 16,667 ) 139.73 Outstanding — December 31, 2019 306,838 139.09 2.57 $ 44,467 Granted 198,606 145.10 Vested ( 168,733 ) 115.77 Canceled ( 16,025 ) 157.36 Outstanding — December 31, 2020 320,686 $ 154.29 1.33 $ 71,766 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 . F-27 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) 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 Performance term 3.0 years 3.0 years 3.0 years Volatility 19 % - 44 % 18 % - 40 % 13 % - 32 % Risk-free rate of return 1.39 % 2.48 % 2.41 % Dividend yield — % — % — % Weighted-average fair value per share $ 169.28 $ 192.46 $ 284.78 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) Outstanding — January 1, 2018 75,949 $ 119.45 Granted 33,706 238.12 Vested — Canceled — Outstanding — December 31, 2018 109,655 146.96 1.77 $ 12,423 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 Granted 18,411 170.42 Vested ( 48,659 ) 106.03 Canceled ( 1,769 ) 204.01 Outstanding — December 31, 2020 67,825 $ 206.21 1.28 $ 15,179 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: 2020 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 F-28 Table of Contents 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 Vested — 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. 16. EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution retirement plan offered to all of its U.S. employees, as well as plans at certain foreign and domestic subsidiaries. The Company makes matching contributions to each plan, which amounted to approximately $ 6,253 , $ 6,005 and $ 4,261 , respectively for years ended December 31, 2020, 2019 and 2018. The Company has an employee stock purchase plan offered to its U.S. and German employees. The plan allows employees who participate to purchase shares of common stock through payroll deductions at a 15 % discount to the lower of the stock price on the first day or the last day of the six-month purchase period. Payroll deductions may not exceed 10 % of the employee's compensation and are subject to other limitations. Compensation expense related to the employee stock purchase plan was $ 2,033 , $ 2,254 and $ 925 for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, there were 294,544 shares available for issuance under the employee stock purchase plan. 17. INCOME TAXES Income before the impact of income taxes for the years ended December 31 consisted of the following: 2020 2019 2018 U.S. $ 5,490 $ 59,790 $ 146,855 Foreign 200,202 188,586 387,540 Total $ 205,692 $ 248,376 $ 534,395 The Company's provision for income taxes for the years ended December 31 consisted of the following: 2020 2019 2018 Current: Federal $ 3,871 $ 7,127 $ 7,274 State 688 2,405 2,097 Foreign 53,608 74,072 125,431 Total current 58,167 83,604 134,802 Deferred: Federal ( 10,300 ) ( 4,896 ) 2,497 State ( 1,594 ) ( 1,658 ) 8,449 Foreign ( 919 ) ( 8,935 ) ( 15,522 ) Total deferred ( 12,813 ) ( 15,489 ) ( 4,576 ) Provision for income taxes $ 45,354 $ 68,115 $ 130,226 F-29 Table of Contents 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. federal statutory income tax rate to the recorded tax provision for the years ended December 31, were as follows: 2020 2019 2018 Tax at statutory rate $ 43,201 $ 52,159 $ 112,223 Non-U.S. rate differential — net 10,968 14,958 26,985 State income taxes — net 697 2,362 3,367 Stock-based compensation - tax benefit ( 9,664 ) ( 5,114 ) ( 13,298 ) Foreign derived intangible income benefit ("FDII") — ( 4,763 ) ( 7,930 ) Global intangible low-taxed income taxed in the U.S. ("GILTI") — 4,648 5,955 Goodwill impairment — 10,009 — Effect of 2017 U.S. Tax Cuts and Jobs Act — — ( 4,747 ) Withholding tax on intercompany dividend 2,193 3,122 — Effect of changes in enacted tax rates on deferred tax assets and liabilities ( 23 ) ( 639 ) 8,007 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 Change in valuation allowance 2,019 4,515 7,421 Other — net 2,075 ( 1,748 ) 977 Provision for income taxes $ 45,354 $ 68,115 $ 130,226 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: 2020 2019 Inventory provisions $ 29,657 $ 23,611 Allowances and accrued liabilities 12,719 10,502 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 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 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 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 F-30 Table of Contents 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. 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 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 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: 2020 2019 Balance at January 1 $ 11,416 $ 11,206 Change in prior period positions ( 427 ) ( 1,776 ) Settlement of prior period position — ( 230 ) Additions for tax positions in current period 4,000 2,000 Foreign exchange adjustments ( 283 ) 216 Balance at December 31 $ 14,706 $ 11,416 Substantially all of the liability for uncertain tax benefits related to various federal, state and foreign income tax matters, would benefit the Company's effective tax rate, if recognized. Estimated penalties and interest related to the underpayment of income taxes were $ 305 , $ 543 and $ 631 for the years ended December 31, 2020, 2019 and 2018, respectively, and are included within the provision for income taxes. Total accrued penalties and interest related to the underpayment of income taxes were $ 1,977 and $ 1,672 at December 31, 2020 and 2019, respectively. The Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The Company is currently under a tax audit in the U.S. for the years 2017 to 2018. Open tax years by major jurisdictions are: United States 2017 - 2020 Germany 2017 - 2020 Russia 2016 - 2020 F-31 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) 18. NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE The following table sets forth the computation of diluted net income attributable to IPG Photonics Corporation per share: Year Ended December 31, 2020 2019 2018 Net income attributable to IPG Photonics Corporation $ 159,572 $ 180,234 $ 404,027 Net income attributable to common stockholders 159,572 180,234 404,027 Basic weighted average shares 53,186 53,061 53,522 Dilutive effect of common stock equivalents 599 778 1,204 Diluted weighted average common shares 53,785 53,839 54,726 Basic net income attributable to IPG Photonics Corporation per share $ 3.00 $ 3.40 $ 7.55 Basic net income attributable to common stockholders $ 3.00 $ 3.40 $ 7.55 Diluted net income attributable to IPG Photonics Corporation per share $ 2.97 $ 3.35 $ 7.38 Diluted net income attributable to common stockholders $ 2.97 $ 3.35 $ 7.38 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. 19. RELATED-PARTY TRANSACTIONS 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 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. F-32 Table of Contents 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 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. 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 249,242 $ 296,411 $ 318,441 $ 336,630 Gross profit 102,876 136,449 152,792 146,879 Net income attributable to IPG Photonics Corporation 36,403 38,226 35,604 49,339 Net income per share, basic 0.69 0.72 0.67 0.92 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. 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