What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-22 · 203 added, 117 removed, 306 unchanged (51% of the section changed)

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We market our products internationally, primarily through our direct sales force.

Our major manufacturing facilities are located in the United States, Germany, Russia and Belarus.

We have sales service offices and applications laboratories worldwide.

We are vertically integrated such that we design and manufacture most of the key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers, amplifiers and complementary products.

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We sell our products to OEMs that supply materials processing laser systems, communications systems, medical laser systems and other laser systems to end users.

With the sale of our telecommunications transmission product lines to Lumentum Holdings Inc.

in August 2022, we no longer intend to target communications as a principal market.

We also sell our laser products and laser and non-laser based systems to end users.

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Sales of our products are generally recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured.

Sales of customized robotic systems are recognized over time.

Sales of customized large scale material processing systems are recognized over time.

Our sales typically are made on a purchase order basis rather than through long-term purchase commitments.

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In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.

COVID-19 Update.

Russia-Ukraine Conflict.

The Russia-Ukraine conflict and the sanctions imposed in response to this crisis have increased the levels of uncertainty and risks facing the Company due to our manufacturing operations in Russia and Belarus.

Sales to third-parties in Russia were approximately 3% of our revenue in 2022 and our Russian subsidiary supplies finished goods for our China market.

The total value of product shipped to the Chinese market from Russia was approximately $62 million for the year ended December 31, 2022 of which $8 million was shipped in the fourth quarter.

In addition, our Russia facility manufactures certain components that are used in our other manufacturing facilities.

Since the start of the conflict, we have navigated complex and evolving regulations, including sanctions and faced increased costs from operating in Russia and Belarus as a result of shipping limitations, logistics challenges and changes in tariffs.

increased tariffs on Russian and Belarus goods in the second quarter of 2022, impacting the results of operations for the remainder of the 2022.

In response to the risks from the Russia-Ukraine conflict, we have been executing on plans to reduce our reliance on our Russia and Belarus operations by adding capacity in other countries, increasing inventories worldwide, and qualifying third-party suppliers.

In 2022, we began hiring and training additional employees, expanding capacity for increased production, and running additional shifts in the U.S.

and Germany and adding additional manufacturing capacity in Italy and Poland.

In October 2022, the European Union introduced new sanctions that restrict our ability to ship and receive components from our factory in Russia to the E.U.

beginning in January 2023.

We believe the contingency measures outlined above that we have already put in place mitigate substantially all the effects of the recent sanctions on our ability to supply finished products to customers.

If we have not fully mitigated the effect of these and other trade restrictions, or if new sanctions are adopted, our ability to supply finished products to customers could be impacted.

Although we believe our contingency plans mitigate the risk of our ability to supply customers with finished product, these plans require additional investments in facilities outside of Russia and Belarus in the near term as well as additional ongoing operating costs, primarily associated with the higher cost of labor outside of Russia and Belarus.

While we have sufficient financial resources to make these investments and expenditures, our gross margins and financial results have been and will be adversely impacted by increased operating costs associated with these transitions.

Over time, we intend to mitigate some of these increases by producing components in countries with lower labor costs than the United States and Germany, with ongoing product expense reduction initiatives, higher productivity from automation, improved yields and product specifications.

We are also continuing to review our operations in Russia and Belarus.

Given the sanctions introduced by the European Union in October 2022, which imposed further restrictions on our Russian operations, we evaluated the recoverability of certain assets located in Russia during the fourth quarter of 2022.

As a result, we recorded $74.1 million of inventory provision and related charges which are included in cost of sales, a $79.0 million charge for the impairment of long-lived assets and a $35.5 million valuation allowance for deferred tax assets which is included in provision for income taxes.

We also recorded charges of $8.5 million for restructuring-related costs.

The remaining total asset value in Russia is $129.5 million, of which $75.4 million is cash and short term investments.

We have $22.2 million of total liabilities.

In addition, the net value of assets in Russia has been reduced by $116.9 million due to the cumulative translation affect of the Russian ruble compared to the U.S.

dollar, which is included in the accumulated comprehensive loss component of stockholders' equity.

Depending upon the outcome of our review of our Russian operations, the cumulative translation affect of foreign exchange fluctuations that is currently included in accumulated comprehensive loss on our consolidated balance sheets may be charged to our consolidated statements of income.

We continue to manufacture laser cabinets and other mechanical components in Belarus.

Trade sanctions to date have not significantly affected our ability to supply these items from Belarus to other manufacturing locations.

The value of the long-lived assets in Belarus was $39.4 million at December 31, 2022, and we had working capital excluding cash and short-term investments of $4.7 million in Belarus of which $4.9 million is inventory.

In addition, we had $4.7 million cash and short-term investments in Belarus.

If additional sanctions are imposed on Belarus or Belarus places restrictions on our operations there, it could trigger an asset impairment evaluation and may result in additional impairment charges in the future.

Our Board of Directors has been monitoring and continues to assess and monitor risks to our business associated with the Russia-Ukraine conflict and our Russian and Belarus operations.

Our Directors request and receive management reports from management regarding our Russian and Belarus operations, contingency planning and execution, and impacts on our business at its quarterly and special meetings.

Global demand trends have been impacted by the ongoing COVID-19 pandemic and therefore remain uncertain at this time .

While business conditions generally improved from the severe contraction experienced in 2020, it is difficult to predict whether conditions could change if there are additional restrictions imposed as a result of a resurgence in COVID-19 infections.

COVID-19 infections.

To date, we have been able to accommodate these challenges to our business operations and continue to meet customer demand.

If guidelines or mandates from relevant authorities becomes more restrictive due to a resurgence of COVID-19 in a particular region, the effect on our operations could be more significant.

This uncertainty continues to make forecasting our business challenging in the near to medium-term.

Currently, our four major production facilities in United States, Germany, Russia and Belarus are operating normally with enhanced employee safety and sanitization protocols that have not significantly impacted productivity and efficiency.

We have vertically integrated manufacturing, and many of the components one facility supplies to another facility are single sourced

internally and not available from third party suppliers, for example our semiconductor diodes manufactured in Oxford, Massachusetts.

While we have attempted to build safety stock of critical components at our various locations, if government restrictions to address COVID-19 become more severe or if absenteeism becomes significant as a result of COVID-19 in the places where we operate, it could impact our internal supply chain.

We and our customers are experiencing increased lead times for certain components purchased from third party suppliers;

Supply Chain .

We and our customers are experiencing increased lead times and costs for certain components purchased from third party suppliers;

particularly electronic components.

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Supply chain and logistics constraints are expected to continue for the foreseeable future and could impact our ability to supply products and our customers' demand for our product or readiness to accept deliveries.

Supply chain constraints have not significantly affected our business but they have moderately increased our freight costs, caused us to carry higher levels of safety stock for certain inventory items, increased the cost of certain electronic components and caused delays in recognizing revenue for certain custom processing systems in our Genesis business due to delays in receiving robots.

Notwithstanding these effects, we believe we have the ability to meet the near-term demand for our products, but the situation is fluid and subject to change if there is a resurgence in COVID-19 or if governments implement new restrictions.

Supply chain constraints have not significantly affected our business but they have moderately increased our freight costs, caused us to carry higher levels of safety stock for certain inventory items, increased the cost of certain electronic components, pushed out customer deliveries and caused delays in recognizing revenue for certain custom processing systems in our Genesis business due to delays in receiving robots.

Notwithstanding these effects, we believe we have the ability to meet the near-term demand for our products, but the situation is fluid and subject to change.

Our annual revenue growth rates have varied from year to year.

Net sales increased by 22% in 2021 and decreased by 9% and 10% in 2020 and 2019, respectively.

Net sales decreased by 2% in 2022, increased by 22% in 2021 and decreased 9% in 2020.

Our growth rates are subject to several factors, many of which are not in our control.

These include:

• Macroeconomic conditions including changes in foreign exchange rates compared to the U.S.

• Competition;

• Our ability to develop new products and new applications for existing or new products;

• Geopolitical conditions in our end markets;

• Pandemic, plagues, wars, conflicts, natural disasters or other shocks affecting global trade.

In 2022, the decrease in net sales was driven by a weakening macroeconomic environment and increased competition in the Chinese cutting market partially offset by increased sales of new products, such as Adjustable Mode Beam ("AMB") lasers, LightWELD, high power pulsed lasers and green pulsed lasers, and sales of existing products into growing applications, such as welding applications and foil cutting for battery and electric vehicle manufacturing.

In 2021, the increase in net sales was driven by improvement in the macroeconomic environment driven by recoveries from the COVID-19 pandemic.

In 2020, the decline in net sales was driven by decreased demand for our products related to the COVID-19 pandemic that extended and deepened the weak macroeconomic environment prevailing at the end of 2019.

In 2019, the decline in net sales was driven by decreased demand for our products related to the trade war between the U.S.

and China that weakened macroeconomic conditions in the second half of 2019.

In addition to these factors, sales in 2021 were positively affected by growth of new or recently introduced products, including high power pulsed lasers, green pulsed lasers, ultra-fast pulsed lasers, handheld welding systems, optical heads and other accessories and the development of new applications for our products some of which displace non-laser technologies.

The increases in sales were partially offset by decreased demand for high power CW lasers used for cutting due to softer market demand and increased competition in China.

Our business depends substantially upon capital expenditures by end users, particularly by manufacturers using our products for materials processing, which includes general manufacturing, automotive including electric vehicles (EV), other transportation, aerospace, heavy industry, consumer, semiconductor and electronics.

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For the foreseeable future, our operations will continue to depend upon capital expenditures by end users of materials processing equipment and will be subject to the broader fluctuations of capital equipment spending.

In 2022, inflationary pressures are likely to result in global central banks adopting less accommodating monetary policy that would result in an increase in interest rates.

An increase in interest rates could impact global growth and could lead to a recession that may reduce the demand for our products.

In response to inflation, some global central banks are adopting less accommodating monetary policy and have increased benchmark interest rates in several major global economies with further increases in interest rates expected in 2023.

The increase in interest rates is intended to dampen demand that could lead to regional or global recession that may reduce demand for our products.

In addition, an increase in interest rates would increase the cost of equipment financed with leases or debt.

In recent years, our net sales and margins have been negatively impacted by tariffs and trade policy.

New tariffs and other changes in U.S.

trade policy could trigger retaliatory actions by affected countries, and certain foreign governments.

We are also susceptible to global or regional disruptions such as political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, natural disasters, macroeconomic concerns and the impact of the COVID-19 outbreak that affect the level of capital expenditures or global commerce.

With respect to the COVID-19 outbreak specifically, while our financial results for 2021 improved compared to 2020, the possible affect over the longer term remains uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19 or new variants, the extent and effectiveness of containment actions taken, the approval, effectiveness, timing and widespread vaccination of the global population, and the impact of these and other factors on our customer base and general commercial activity.

With respect to the COVID-19 outbreak specifically, the possible affect over the longer term remains uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19 or new variants, the extent and effectiveness of containment actions taken, the approval, effectiveness, timing and widespread vaccination of the global population, and the impact of these and other factors on our customer base and general commercial activity.

The average selling prices of our products generally decrease as the products mature.

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The secular shift to fiber laser technology in large materials processing applications, such as cutting applications, had a positive effect on our sales trends in the past such that our sales trends were often better than other capital equipment manufacturers in both positive and negative economic cycles.

As the secular shift to fiber laser technology matures in such applications, our sales trends are more susceptible to economic cycles which affect other capital equipment manufacturers broadly and the machine tool and industrial laser industries more specifically.

As the secular shift to fiber laser technology matures in such applications, our sales trends are more susceptible to economic cycles, which can broadly affect the demand for capital equipment including machine tools and industrial lasers, and competition from other fiber laser manufacturers.

Gross margin.

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In general, lower selling prices to high unit volume customers reduce gross margin although this may be partially offset by improved absorption of fixed overhead costs associated with larger product volumes, which drive economies of scale;

• Gross margin on systems and communication components can be lower than gross margin for our laser and amplifier sources, depending on the configuration, volume and competitive forces, among other factors, and finally,

• Gross margin on systems can be lower than gross margin for our laser and amplifier sources, depending on configuration, volume and competitive forces, among other factors;

• Persistent inflation leading to increases in average manufacturing salaries as well as an increase in the purchase price of components including, but not limited to, electronic components and metal parts could negatively impact gross margin if we are not able to pass those increases on to customers by increasing the selling price of our products;

• Changes in relative exchange rates between currencies we receive when selling our products and currencies we use to pay our manufacturing expenses.

We expect that some new technologies, products and systems will have returns above our cost of capital but may have gross margins below our corporate average.

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Gross margins generally improve when the opposite occurs.

If both sales and inventory decrease in the same period, the decline in gross margin may be greater if we cannot reduce fixed costs or choose not to reduce fixed costs to match the decrease in the level of production.

If both sales and inventory decrease in the same period, the decline in gross margin may be greater if we cannot reduce fixed costs or choose not to reduce fixed costs to match the

decrease in the level of production.

If we experience a decline in sales that reduces absorption of our fixed costs, or if we have production issues, our gross margins will be negatively affected.

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Any provision for such slow-moving, obsolete or excess inventory affects our gross margins.

For example, we recorded provisions for slow-moving, obsolete or excess inventory totaling $34.3 million, $45.4 million and $38.9 million in 2021, 2020 and 2019, respectively.

For example, we recorded provisions for slow-moving, obsolete or excess inventory and other inventory related charges totaling $128.0 million, $34.3 million and $45.4 million in 2022, 2021 and 2020, respectively.

Inventory provision and related charges of $74.1 million in 2022 are attributable to Russian operations.

Selling and general and administrative expenses.

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Accordingly, our future management of and investments in selling and general and administrative expenses will also be influenced by these trends, although we may still invest in selling or general and administrative functions to support certain initiatives even in economic down cycles.

Certain general and administrative expenses are not related to the level of sales and may vary quarter to quarter based primarily upon the level of acquisitions and litigation.

Certain general and administrative expenses are not related to the level of sales and may vary quarter to quarter due to acquisitions, litigation and project related consulting expenses.

Research and development expenses.

We plan to continue to invest in research and development to improve our existing components and products and develop new components, products, systems and applications technology.

In 2022 our research and development expenses decreased primarily due to a reduction of expenses associated with our telecommunications transceiver business, which was sold in August 2022.

Going forward, we plan to continue to invest in research and development to improve our existing components and products and develop new components, products, systems and applications technology.

We believe that these investments will sustain our position as a leader in the fiber laser industry and will support development of new products that can address new markets and growth opportunities.

The amount of research and development expense we incur may vary from period to period.

As part of the telecommunications transmission product line divestiture mentioned above, we will no longer be incurring research and development expenses attributed to the development of telecommunications transmission products.

Goodwill and long-lived assets impairments .

We review our intangible assets and property, plant and equipment for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Goodwill is required to be tested for impairment at least annually.

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

We are evaluating the sale of certain U.S.-based assets, including land and buildings.

If the estimated sales value of any of these assets is below carrying value, then we may need to record an asset impairment charge when they are classified as held-for-sale.

We have long-lived assets in Belarus with a carrying value of $39.4 million.

If sanctions increase or if the geopolitical situation changes such that we can no longer use Belarus as a source of supply for our laser cabinets and other mechanical components, we may need to evaluate those assets for impairment, which may result in impairment charges.

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

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

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

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

Foreign exchange.

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Differences in the relative exchange rates between where we sell our products and where we incur manufacturing and other operating costs (primarily in the U.S., Germany, Russia, and Belarus) also affects our costs and earnings.

Certain currencies experiencing significant exchange rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen and Chinese Yuan have had and could have an additional significant impact on our sales, costs and earnings.

Certain currencies experiencing significant exchange rate fluctuations like the euro, the Russian ruble, Chinese yuan and the Japanese yen have had and could have an additional significant impact on our sales, costs and earnings.

Our ability to adjust the foreign currency selling prices of products in response to changes in exchange rates is limited and may not offset the impact of the changes in exchange rates on the translated value of sales or costs.

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Net sales derived from our five largest customers as a percentage of our annual net sales were 15%, 19% and 24% in 2022, 2021 and 2020, respectively.

Our largest customer accounted for 22% and 21% of our net accounts receivable as of December 31, 2021 and 2020, respectively.

One of our customers accounted for 14% and 22% of our net accounts receivable as of December 31, 2022 and 2021, respectively.

We seek to add new customers and to expand our relationships with existing customers.

We anticipate that the composition of our significant customers will continue to change.

We anticipate that the composition of our significant customers will continue

We generally do not enter into agreements with our customers obligating them to purchase a fixed number or large volume of our fiber lasers or amplifiers.

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Revenue is recognized when transfer of control to the customer occurs (i.e., when our performance obligation is satisfied) in an amount reflecting the consideration that we expect to be entitled.

For the majority of our revenue, this typically occurs at a point in time such as shipment or delivery date, but can occur over time for certain of our customized robotic systems contracts.

For the majority of our revenue, this typically occurs at a point in time such as shipment or delivery date, but can occur over time for certain of our customized large scale materials processing systems contracts.

We also recognize revenue over time for sales of extended warranties.

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We invoice for each scheduled delivery upon shipment and recognize revenue for such delivery when transfer of control has occurred.

Recognizing revenue over time for customized robotic systems contracts is based on our judgment that these systems do not have an alternative use and we have an enforceable right to payment for performance completed to date.

Recognizing revenue over time for customized large scale materials processing systems contracts is based on our judgment that these systems do not have an alternative use and we have an enforceable right to payment for performance completed to date.

Recognizing revenue over time also requires estimation of the progress towards completion based on the projected costs of the contract.

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The reserve is based upon a review of inventory materials on hand, which we compare with historic usage, estimated future usage and age.

In addition, we review the inventory

and compare recorded costs with estimates of current market value.

In addition, we review the inventory and compare recorded costs with estimates of current market value.

Write-downs are recorded to reduce the carrying value to the net realizable value with respect to any part with costs in excess of current market value.

In the fourth quarter of 2022, we performed a review of the inventory in Russia in light of new sanctions which restricted our Russian factory's ability to supply components and finished goods to other IPG locations.

We recorded $74.1 million of additional inventory provision and related charges as a result of that review.

Judgments and Uncertainties:

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Because of our vertical integration, a significant or sudden decrease in sales could result in a significant change in the estimates of excess or obsolete inventory valuation.

We recorded provisions for slow-moving, obsolete or excess inventory totaling $34.3 million, $45.4 million and $38.9 million in 2021, 2020 and 2019, respectively.

We recorded provisions for slow-moving, obsolete or excess inventory, and inventory related charges totaling $128.0 million, $34.3 million and $45.4 million in 2022, 2021 and 2020, respectively.

Because our calculation of slow-moving, excess or obsolete inventory is based on historical and estimated future use of inventory items, the calculation is affected by sales trends.

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In 2021, as sales increased due to recovery from the impact of the Covid 19 pandemic and other factors, our provisions for slow-moving, excess and obsolete inventory reserves decreased.

As mentioned above, in the fourth quarter of

2022, we recorded inventory provision and related charges of $74.1 million.

For the rest of our operations, as safety stock increased excess and obsolete inventory reserves increased.

Long-lived Asset Impairment Definite-lived intangible assets are amortized on a straight-line basis over the estimated useful life.

We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable.

Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life.

We perform undiscounted operating cash flow analyses to determine if an impairment exists.

When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable.

If an impairment is determined to exist, the loss is calculated based on estimated fair value.

In the fourth quarter of 2022, we performed a review of the estimated of fair value of the long-lived assets in Russia in light of new sanctions and recorded long-lived asset impairment of $79.0 million as a result of that review.

Judgments and Uncertainties:

Estimating undiscounted operating cash flow used to determine if there is indication of impairment of a long lived asset requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions.

Fair value estimates performed if there is indication of impairment are subject to underlying changes in estimates and market conditions.

Assumptions used in long-lived asset impairment are made at a point in time and require significant judgment;

therefore, they are subject to change based on the facts and circumstances present at each impairment test date.

Sensitivity of Estimate to Change:

Undiscounted cash flow and fair value are sensitive to changes in underlying assumptions, estimates, and market factors.

We recorded long-lived asset impairment charge of $79.9 million, nil, and $0.7 million in 2022, 2021 and 2020, respectively.

Income Taxes and Deferred Taxes .

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Additionally, due to the lack of uniformity among all of the foreign and domestic taxing authorities, there may be situations where the tax treatment of an item in one jurisdiction is different from the tax treatment in another jurisdiction or that the transaction causes a tax liability to arise in another jurisdiction.

In addition, we review the deferred tax assets in each jurisdiction and the positive and negative evidence that would support a conclusion that a valuation allowance is or is not needed.

Where it is more likely than not that some portion of the deferred tax assets will not be realized, we record a valuation allowance against the deferred tax assets.

In 2022, a valuation allowance of $35.8 million was recorded primarily related to deferred tax assets in our Russian subsidiary.

The decision to establish a valuation allowance or reverse it is based on management’s judgment based on the weight of available evidence including forecasts of future taxable income and the future reversal of existing taxable temporary differences.

Sensitivity of Estimate to Change:

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As of December 31, 2022, we had $15.8 million of unrecognized tax benefits, excluding interest and penalties, recorded in deferred income taxes and other long-term liabilities.

This tax benefit increased by $6.4 million for tax positions taken in the current year offset by reductions of $2.0 million for changes in prior period positions.

This tax liability increased by $0.7 million for tax positions taken in the current year offset by reductions of $3.9 million for changes in prior period positions.

Results of Operations

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Goodwill impairment — — — — 44,589 3.7

Impairment of long-lived assets and other restructuring charges — — 1,177 0.1 7,130 0.5

(Gain) loss on foreign exchange (15,120) (1.0) (12,915) (1.1) 12,827 1.0

Gain on divestiture and sale of asset (31,846) (2.2) — — — —

Impairment of long-lived assets 79,949 5.6 — — 671 0.1

Other restructuring charges 9,697 0.7 — — 506 —

Loss (gain) on foreign exchange 4,103 0.3 (15,120) (1.0) (12,915) (1.1)

Total operating expenses 385,913 27.0 328,515 22.6 340,337 28.4

Operating income 169,500 11.8 367,883 25.2 198,659 16.5

Interest (expense) income, net (1,839) (0.1) 6,270 0.5 14,238 1.1

Interest income (expense), net 12,620 0.9 (1,839) (0.1) 6,270 0.5

Other income, net 1,231 0.1 437 — 763 0.1

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Net income 110,762 7.7 277,866 19.0 160,338 13.3

net (loss) income attributable to non-controlling interest (550) — 766 0.1 27 —

net income (loss) attributable to non-controlling interest 853 0.1 (550) — 766 0.1

Net income attributable to IPG Photonics Corporation common stockholders $ 109,909 7.6 % $ 278,416 19.0 % $ 159,572 13.2 %

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Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

Net sales increased by $260.1 million, or 21.7%, to $1,460.8 million in 2021 from $1,200.7 million in 2020.

Net sales decreased by $31.3 million, or 2.1%, to $1,429.5 million in 2022 from $1,460.8 million in 2021.

The table below sets forth sales by application:

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Materials processing

Sales for materials processing applications increased due to higher sales volumes of pulsed lasers, high power lasers, laser and non-laser systems, other laser products and service, medium power lasers, and QCW lasers.

• The increase in high power laser sales related to welding applications partially offset by a reduction in cutting applications.

The increase in sales of high power lasers used in welding applications was driven by higher sales into electric vehicle and E-mobility and general manufacturing industries.

Within cutting applications, the decrease in sales was attributable to softer demand and increased competition in China.

• The increase in medium power sales related to an increase in demand for additive manufacturing, cutting and welding applications.

• Pulsed laser sales, including high power pulsed lasers, increased due to growth in sales for foil cutting and cleaning for EV battery processing applications, marking and engraving applications, other cleaning and stripping applications and green pulsed lasers used for solar cell manufacturing applications.

• QCW laser sales increased due to higher demand in fine processing for consumer electronics applications.

• The increase of revenue in laser and non-laser systems was attributable to higher demand for laser systems used for welding applications including the launch of LightWELD and cutting applications.

Sales for materials processing applications decreased due to lower sales volumes of high power lasers, QCW lasers and medium power lasers, offset by higher sales volumes of laser and non-laser systems, other laser products, and pulsed lasers.

• The decrease in high power CW laser sales was due to lower sales for cutting application, partially offset by an increase in sales for welding applications.

The decrease in sales of high power CW lasers used in cutting applications was attributable to softer demand and increased competition in China.

The increase in sales of high power CW lasers used in welding applications was driven by higher sales into electric vehicle and general manufacturing industries.

• The decrease in medium power CW laser sales related to a decrease in demand for cutting and additive manufacturing applications.

• Pulsed laser sales, including high power pulsed lasers, increased due to growth in sales for cleaning and stripping applications, welding and brazing and foil cutting for EV battery processing applications, and pulsed lasers used for solar cell manufacturing applications.

• QCW laser sales decreased due to lower demand in fine processing for consumer electronics applications.

• Laser and non-laser systems sales increased due to higher demand for laser systems and LightWELD.

• Other revenue for materials processing increased due to higher sales of options and accessories and parts and service.

Other Applications

Sales from other applications increased due to increased demand for lasers used in medical procedures, and advanced applications.

Sales from other applications increased due to increased demand for lasers used in medical procedures, partially offset by decreased demand for lasers used in advanced applications and decreased sales for telecommunications products mainly due to the business divestiture during the third quarter.

Our net sales were derived from customers in the following geographic regions:

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Germany 85,491 6.0 % 101,738 7.0 % (16,247) (16.0) %

Other including Eastern Europe/CIS 289,136 19.8 % 219,540 18.3 % 69,596 31.7 %

Asia and Australia:

Other Europe 294,481 20.6 % 289,136 19.8 % 5,345 1.8 %

China 479,926 33.6 % 548,348 37.5 % (68,422) (12.5) %

Japan 57,865 4.0 % 54,077 3.7 % 3,788 7.0 %

Other 139,148 9.5 % 103,785 8.6 % 35,363 34.1 %

Other Asia 152,373 10.7 % 139,148 9.5 % 13,225 9.5 %

Rest of World 20,698 1.4 % 13,429 0.9 % 7,269 54.1 %

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Cost of sales increased by $109.6 million, or 14.3%, to $874.1 million in 2022 from $764.5 million in 2021.

Our gross margin increased to 47.7% in 2021 from 44.9% in 2020.

Gross margin increased mainly due to a reduction of manufacturing costs as a percentage of sales and a decrease in provisions for excess and obsolete inventory as a percentage of sales, while absorption of manufacturing costs and cost of products sold from inventory as a percentage of sales were approximately the same as one year ago.

Expenses related to provisions for excess or obsolete inventory and other valuation adjustments decreased by $11.1 million to $34.3 million, or 2.3% of sales, for the year ended December 31, 2021, as compared to $45.4 million, or 3.8% of sales, for the year ended December 31, 2020.

Our gross margin decreased to 38.9% in 2022 from 47.7% in 2021.

Gross margin decreased mainly due to inventory provision and related charges of $74.1 million related to our Russian operations which accounted for 5.2% of the decrease in gross margin.

In addition, gross margin decreased due to an increased provision for excess and obsolete inventory other than Russia, an increase in manufacturing costs and an increase in shipping costs and tariffs as a percentage of sales.

Expenses related to provisions for excess or obsolete inventory and other valuation adjustments increased by $93.7 million to $128.0 million, or 9% of sales, for the year ended December 31, 2022, as compared to $34.3 million, or 2.3% of sales, for the year ended December 31, 2021.

Sales and marketing expense.

Sales and marketing expense increased by $7.6 million, or 10.8%, to $78.2 million in 2021 from $70.6 million in 2020.

This change was primarily a result of an increase of $6.2 million in personnel and related costs, mainly from bonus expense for having achieved 2021 bonus targets.

The remaining change was due to other sales and marketing expenses.

As a percentage of sales, sales and marketing expense decreased to 5.4% of sales in 2021 from 5.9% in 2020.

Sales and marketing expense decreased by $1.6 million, or 2.0%, to $76.6 million in 2022 from $78.2 million in 2021.

This change was primarily a result of a decrease of $1.6 million in personnel and related costs, mainly from reductions in bonus expense.

As a percentage of sales, sales and marketing expense was 5.3% and 5.4% of sales in 2022 and 2021, respectively.

Research and development expense.

Research and development expense increased by $12.7 million, or 10.0%, to $139.6 million in 2021 from $126.9 million in 2020.

This change was primarily a result of an increase of $9.3 million in personnel and related costs, mainly from bonus expense for having achieved 2021 bonus targets.

The remaining change was due to other research and development expenses.

Research and development expense decreased by $23.5 million, or 16.8%, to $116.1 million in 2022 from $139.6 million in 2021.

This change was primarily a result of a decrease of $14.4 million in personnel and related costs and a decrease of $5.4 million expense for materials used for research and development projects.

These decreases were primarily due to research and development expense associated with the telecommunications transmission product line that we divested in August 2022.

As a percentage of sales, research and development expense decreased to 8.1% in 2022 from 9.6% in 2021.

We expect to continue to invest in research and development and that research and development expense will increase in the aggregate.

We expect to continue to invest in research and development efforts for our continuing products and increase expenses in whole dollars.

General and administrative expense.

General and administrative expense increased by $5.4 million, or 4.3%, to $131.3 million in 2022 from $125.9 million in 2021.

This change was primarily a result of an increase of $10.3 million in personnel and related costs mainly from bonus expense for having achieved 2021 bonus targets.

The remaining change was due to increases in other general and administrative expenses, partially offset by a reduction in losses on disposal of fixed assets.

As a percentage of sales, general and administrative expense decreased to 8.6% in 2021 from 9.2% in 2020 .

Goodwill impairment .

There was no impairment of goodwill in 2021.

During the third quarter of 2020, we 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.

As a result of the analysis, we incurred a non-cash goodwill impairment loss of $44.6 million in 2020.

This change was primarily a result of an increase of $4.7 million in consultants and information systems expense.

As a percentage of sales, general and administrative expense increased to 9.2% in 2022 from 8.6% in 2021.

Effect of exchange rates on sales, gross margin and operating expenses.

We estimate that if exchange rates had been the same as one year ago, sales in 2021 would have been $45.9 million lower, gross margin would have been $27.0 million lower and operating expenses in total would have been $1.0 million lower.

We estimate that if exchange rates had been the same as one year ago, sales in 2022 would have been $79.0 million higher, gross margin would have been $46.5 million higher and sales and marketing, research and development and general and administrative expenses would have been $3.9 million higher.

These estimates assume constant exchange rates between fiscal year 2022 and fiscal year 2021 and are calculated using the average exchange rates for the twelve-month period ended December 31, 2021 for the respective currencies, which were US$1=Euro 0.85, US$1=Japanese yen 110, US$1=Chinese yuan 6.45 and US$1=Russian ruble 74.

(Gain) loss on foreign exchange.

We incurred a foreign exchange gain of $15.1 million in 2021 as compared to a gain of $12.9 million in 2020.

The gain was primarily attributable to the depreciation of the Euro and the appreciation of the Chinese Yuan as compared to the U.S.

Interest (expense) income, net.

Interest (expense) income, net was $1.8 million of expense in 2021 compared to $6.3 million of income in 2020.

The change in interest (expense) income, net, was due to a reduction in yields on cash equivalents and short term investments that resulted in lower market interest rates as compared to prior year rates.

Gain on divestiture and sale of asset.

During third quarter of 2022, we divested our telecommunications transmission product lines for $56.2 million.

The divestiture resulted in a gain of $21.9 million for 2022.

During the fourth quarter of 2022, we completed the sale of our corporate aircraft and recorded a gain of $9.9 million.

Impairment of long-lived assets.

We recorded non-cash long-lived asset impairment charge of $79.9 million in Q4 2022, related to Russian operations as a result of additional sanctions issued by the European Union in October 2022.

Those sanctions, coupled with tariffs on Russian product issued by the United States, severely affect our ability to use our Russian manufacturing capacity to supply components to other IPG factories which accounted for a majority of their manufacturing activity prior to sanctions.

Other restructuring charges Other restructuring charges of $9.7 million primarily relate to restructuring costs in Russia due to the change in business after the issuance of additional sanctions as discussed above.

In addition, some restructuring charges related to the closure of our office in Lebanon which had supported the telecommunications transmission business which we divested in the third quarter of 2022.

Loss (gain) on foreign exchange.

We incurred a foreign exchange loss of $4.1 million in 2022 as compared to a gain of $15.1 million in 2021.

The loss was primarily attributable to the depreciation of the Chinese yuan and the appreciation of the Russian ruble, partially offset by the gain from the depreciation of Euro as compared to the U.S.

Interest income (expense), net.

Interest income (expense), net was $12.6 million of income in 2022 compared to $1.8 million of expense in 2021.

The change in interest income (expense), net, was due to an increase in yields on cash equivalents and short term investments that resulted in higher market interest rates as compared to prior year rates.

Provision for income taxes .

Provision for income taxes was $72.6 million in 2022 compared to $88.6 million in 2021, representing an effective tax rate of 39.6% in 2022 and 24.2% in 2021.

The increase in tax expense was due to an increase in pre-tax income.

Discrete adjustments in 2021 resulted in a $9.1 million reduction in tax expense, which includes (i) $5.4 million for equity-based compensation deductions for tax in excess of the deductions reflected in book income, (ii) $2.4 million for prior year provision to return adjustments and (iii) $2.0 million for the reduction in tax reserves as a result of the close of the statute of limitations for the year in which the tax reserve was established.

The discrete benefits were offset by $1.2 million for an increase to tax expense for the tax impact of losses in subsidiaries for which no tax benefit was taken.

Discrete adjustments in 2020 were $10.6 million and include a decrease to tax expense for (i) $9.7 million related to equity-based compensation deductions for tax in excess of the deductions reflected in book income (ii) $3.2 million for an investment credit in Russia requested in amended returns filed for prior years and (iii) $1.2 million for prior year provision to return adjustments, offset by an increase to tax expense of $3.6 million for losses in subsidiaries for which no tax benefit was taken.

The decrease in tax expense was due primarily to a reduction in book income before taxes which was partly offset by discrete items.

Discrete adjustments in 2022 resulted in a $23.2 million increase in tax expense, which includes (i) $35.8 million increase in the valuation allowance primarily related to deferred tax assets in our Russian subsidiary which were provided in conjunction with the restructuring and other charges discussed above and (ii) $2.7 million for equity-based compensation deductions reflected in book income in excess of the deductions allowed for tax purposes.

These detriments were partly offset by (i) $10.1 million for the acceptance of amended returns and the receipt of cash in foreign jurisdictions;

(ii) $3.9 million related to a reversal of tax reserves primarily due to the expiry of the statute of limitations for the year in which the reserve was established.

Discrete adjustments in 2021 resulted in a $9.1 million reduction to tax expense, which includes a decrease to tax expense for (i) $5.4 million related to equity-based compensation deductions for tax in excess of the deductions reflected in book income, (ii) $2.4 million for prior year provision to return adjustments and (iii) $2.0 million for a reduction in tax reserves as a result of the expiry of the statute of limitations for the year in which the reserve was established.

The 2021 discrete benefits were offset by $1.2 million for an increase to tax expense for the impact of tax losses in subsidiaries for which no benefit was taken.

Net income attributed to IPG Photonics Corporation.

Net income attributable to IPG Photonics Corporation increased by $118.8 million to $278.4 million in 2021 from $159.6 million in 2020.

Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 5.8% to 19.0% in 2021 from 13.2% in 2020 due to the factors described above.

Net income attributable to IPG Photonics Corporation decreased by $168.5 million to $109.9 million in 2022 from $278.4 million in 2021.

Net income attributable to IPG Photonics Corporation as a percentage of our net sales decreased by 11.4% to 7.6% in 2022 from 19.0% in 2021 due to the factors described above.

Liquidity and Capital Resources

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As of December 31, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

With respect to the current geopolitical situation involving Ukraine and Russia, the imposition of sanctions against Russian banks or international bank messaging systems could impact our ability to access company cash in Russia, but would not materially disrupt our liquidity as a whole.

We attempt to keep only amounts that are needed for working capital there.

A substantial majority of our cash and cash equivalents are located outside of Russia.

Included in cash and cash equivalents are $68.3 million of cash and cash equivalents and $7.1 million of short-term investments located in Russia, and $4.7 million of cash and cash equivalents located in Belarus, as of December 31, 2022.

Cash, cash equivalents and short-term investments in Russia are subject to capital controls that prevent repatriation by dividend or distribution of capital.

There are currently no restrictions on our ability to use cash and cash equivalents in Russia for operating purposes including converting cash to foreign currency for the payment of goods received from vendors outside of Russia.

The Russian operations are self-funding.

Approximately 6% of our consolidated working capital including cash, cash equivalents and short-term investments is located in Russia.

We are making no new investments in Russia.

The following table presents our principal sources of liquidity:

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Working capital (excluding cash and cash equivalents and short-term investments) 534,045 519,745

Short-term investments at December 31, 2021 consist of liquid investments including corporate bonds, commercial paper, U.S.

Treasury and agency obligations and municipal bonds with original maturities of greater than three months but less than one year.

Short-term investments at December 31, 2022 consist of liquid investments including corporate bonds, commercial paper, and U.S.

Treasury and agency obligations and term deposits with original maturities of greater than three months but less than one year.

See Note 3, "Fair Value Measurements" in the notes to the consolidated financial statements for further information about our short-term investments.

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Revolving Line of Credit (1)

$75.0 million LIBOR plus 0.80% to 1.20%, depending on our performance April 2025 Unsecured

$75.0 million BSBY plus 0.8% to 1.2%, depending on our performance April 2025 Unsecured

Euro Credit Facility (Germany) (2)

Euro 50.0 million

($56.7 million) Euribor plus 0.75% or EONIA plus 1.00% July 2023 Unsecured, guaranteed by parent company and German subsidiary

($53.5 million) ESTR plus 0.8% or Euribor plus 0.65% July 2023 Unsecured, guaranteed by parent company and German subsidiary

Other Euro Facilities (3)

Euro 1.5 million

($1.7 million) Euribor plus 2.02% June 2022 Common pool of assets of Italian subsidiary

Long-term Secured Note (4)

$16.9 million Fixed at 2.74% July 2022 Secured by the corporate aircraft

($1.6 million) 2.03% March 2023 Common pool of assets of Italian subsidiary

Long-term Unsecured Note (4)

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(4) At maturity, the outstanding note balance will be $15.4 million.

(5) At maturity, the outstanding note balance will be $15.4 million.

Our largest committed credit lines are with Bank of America N.A.

and Deutsche Bank AG in the amounts of $75.0 million and $53.5 million (or €50.0 million as described above), respectively, and neither of them is syndicated.

We plan to seek amendments of our credit agreements to modify LIBOR and EONIA reference rates as these rates are phased out as borrowing rates.

The banks have made amendments of our credit agreements to modify LIBOR and EONIA reference rates as these rates are phased out as borrowing reference rates.

We do not plan to amend our long-term unsecured note as it matures prior to the final phase-out of LIBOR.

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Purchase obligations 25,070 24,461

Long-term debt obligations (including interest) (1)

Long-term debt obligation (including interest) (1)

16,218 16,218

Contingent consideration 1,371 1,371

$ 66,662 $ 46,698

(1) Interest for long-term debt obligations was calculated including the effect of our fixed rate amounts.

The weighted average fixed rate amount was 2.80%.

(1) Interest for long-term debt obligation was calculated including the effect of our fixed rate of 2.85%.

See Note 11, "Financing Arrangements" to the consolidated financial statements for additional details.

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Cash provided by operating activities $ 212,649 $ 389,700

Cash used by investing activities (416,282) (99,574)

Cash used by financing activities (125,066) (10,080)

Cash provided by (used in) investing activities 296,952 (416,282)

Cash used in financing activities (514,549) (125,066)

Operating activities.

Net cash provided by operating activities increased by $104.4 million to $389.7 million in 2021 from $285.3 million in 2020 primarily due to an increase in net income and an increase in cash provided by working capital.

Net cash provided by operating activities decreased by $177.1 million to $212.6 million in 2022 from $389.7 million in 2021 primarily due to a decrease in net income and an increase in cash used by working capital.

Our largest working capital items typically are inventory and accounts receivable.

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Accruals and payables for personnel costs including bonuses and income and other taxes payable are largely dependent on the timing of payments for those items.

The increase in cash flow from operating activities in 2021 primarily resulted from:

• an increase in cash provided by net income after adding back non-cash charges due to net income,

• an increase in cash provided by income and other taxes payable primarily due to a tax refund received in one of our significant tax jurisdictions,

• an increase in cash provided by accrued expenses and accounts payable due to higher bonus accruals, increased customer deposits and timing of payments,

• a decrease in cash used by accounts receivable due to improved days sales outstanding;

partially offset by,

• an increase in cash used by inventory, including an increase in days inventory on hand,

• and an increase in cash used by prepaid expenses and other assets.

The decrease in cash flow from operating activities in 2022 primarily resulted from:

• a decrease in cash provided by net income after adjusting for amounts to reconcile net income to net cash provided by operating activities, such as the gain on divestiture business and sale of assets, the non-cash impairment of long lived and other assets mainly attributed to our Russian operations and non-cash provisions for inventory, warranty and bad debt;

• an increase in cash used by inventory as the company built safety stock for supply chain disruptions related to third party electronic parts and components internally manufactured by our factory in Russia;

• an increase in cash used by accounts payable due to timing of payments;

• an increase in cash used by accrued expenses and other liabilities due to warranty, bonus payments exceeding bonus accruals and a reduction in customer deposits, partially offset by an increase in restructuring accruals;

• an increase in cash used by other taxes payable driven by the requirement to capitalize research and development expenses in the U.S., taxes due on the divestiture of business and sale of assets, and the timing of estimated tax payments made and refunds received from filing tax returns.

The decreases in cash provided by operating activities were partially offset by:

• an increase in cash provided by accounts receivable, including a decrease in days sales outstanding due to increased collection efforts;

• an increase in cash provided by prepaid expenses and other assets.

Investing activities.

Net cash used in investing activities was $416.3 million and $99.6 million in 2021 and 2020, respectively.

The cash used in investing activities in 2021 primarily related to $293.1 million of net purchases of short-term investments and $123.1 million for property, plant and equipment.

The cash used in investing activities in 2020 primarily related to $87.7 million for property, plant and equipment, $12.3 million of net purchases of investments and $0.4 million for the acquisition of a business during 2020, net of cash acquired.

Net cash provided by investing activities was $297.0 million in 2022 as compared to cash used in investing activities of $416.3 million in 2021.

The cash provided by investing activities in 2022 primarily related to $329.3 million of net proceeds from short-term investments, $52.9 million of proceeds received from the divestiture of the telecommunications transmission product lines, net of cash sold, and $26.9 million of proceeds from the sale of property, plant

and equipment mainly from the sale of corporate aircraft;

partially offset by $110.1 million of cash used for property, plant and equipment.

The cash used in investing activities in 2021 primarily related to $123.1 million for property, plant and equipment, and $293.1 million of net purchases of investments.

In 2023, we expect to incur approximately $140.0 million to $160.0 million in capital expenditures, excluding acquisitions.

Capital expenditures include investments in property, facilities and equipment to add capacity worldwide to

support anticipated revenue growth, increase vertical integration, increase redundant manufacturing capacity for critical components and enhance research and development capabilities.

Capital expenditures include investments in property, facilities and equipment to add capacity worldwide to support anticipated revenue growth, increase vertical integration, increase redundant manufacturing capacity for critical components and enhance research and development capabilities.

The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow.

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Net cash used in financing activities was $514.5 million and $125.1 million in 2022 and 2021, respectively.

The cash used in financing activities in 2021 was primarily related to the purchase of $134.9 million of treasury stock, $3.8 million of principal payments on our long-term borrowings and $2.6 million of payment of a purchase price holdback from a business combination;

The cash used in financing activities in 2022 was primarily related to the purchase of $499.5 million of treasury stock, $18.1 million of principal payments on our long-term borrowings, the purchase of non-controlling interests of $2.5 million related to the divestiture of the telecommunications transmission product lines;

partially offset by net proceeds of $5.6 million from the exercise of stock options net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units and shares issued under our employee stock purchase plan.

The cash used in financing activities in 2020 was primarily related to the purchase of $37.9 million of treasury stock, $3.7 million of principal payments on our long-term borrowings, and $1.7 million of payments of a purchase price holdback from a business combination;

partially offset by net proceeds of $16.3 million from the exercise of stock options net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units and shares issued under our employee stock purchase plan.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis