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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-27 · 176 added, 161 removed, 348 unchanged (49% of the section changed)

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We develop, manufacture and sell high-performance fiber lasers, fiber amplifiers and diode lasers that are used for diverse applications, primarily in materials processing.

We also manufacture and sell complementary products used with our lasers including optical delivery cables, fiber couplers, beam switches, optical processing heads, in-line sensors and chillers.

We also manufacture and sell complementary products used with our

lasers including optical delivery cables, fiber couplers, beam switches, optical processing heads, in-line sensors and chillers.

In addition, we offer laser-based and non-laser based systems for certain markets and applications.

Our portfolio of laser solutions are used in materials processing, communications, medical and advanced applications.

Our portfolio of laser solutions is used in materials processing, medical procedures, advanced applications and communications.

We sell our products globally to original equipment manufacturers ("OEMs"), system integrators and end users.

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

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

As a result of the Russia-Ukraine conflict and related sanctions, our ability to ship and receive components from our Russian operations, has been significantly curtailed.

We have and will continue to expand our manufacturing operations in Germany and the United States, and have added manufacturing capacity in Poland and expanded capacity in Italy to replace capacity in Russia.

We have sales and 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.

With the sale of our communications transmission product lines 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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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.

The Russia-Ukraine conflict and the sanctions imposed in response to this crisis have significantly curtailed our ability to use our manufacturing operations in Russia to supply other IPG operations outside of Russia.

The conflict and the risk of additional sanctions has also increased the levels of uncertainty and risks facing the Company due to our manufacturing operations in Belarus.

Since the start of the 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.

Since 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.

We believe the contingency measures outlined above that we have already put in place substantially mitigate 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.

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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 evaluated the recoverability of certain assets located in Russia during the fourth quarter of 2022 and incurred impairment charges that reduced the value of fixed assets, inventory and other current assets.

We also incurred restructuring charges in 2022 and 2023.

As of December 31, 2023, we have substantially completed the restructuring program in Russia and recovered the majority of the remaining restructuring charges accrual.

Refer to Note 6 "Restructuring" in the notes to the consolidated financial statements for further information.

Sales to third-parties in Russia were approximately 3% of our revenue for the years ended December 31, 2023 and 2022.

Our Russian subsidiary has historically supplied certain finished goods for our Chinese market.

Sanctions have limited our ability to provide components to Russia for the completion of finished lasers.

Although our Russian operation has an amount of safety stock, we are also producing more finished lasers for China at other IPG locations.

The total value of product shipped to the Chinese market from Russia was approximately $15.8 million and $61.5 million for the years ended December 31, 2023 and 2022, respectively.

At December 31, 2023, we had working capital excluding cash and cash equivalents of $23.6 million in Russia of which $20.2 million is inventory.

We had $76.4 million of cash and cash equivalents in Russia.

The net asset value of our Russian subsidiary was $103.9 million.

The net value of assets in Russia was reduced by a $138.5 million other comprehensive loss related to the cumulative translation of the Russian ruble into U.S.

Depending upon the outcome of our review of our Russian operations, we may incur additional asset impairment charges and the other comprehensive loss that is currently in the equity section of 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.

Trade sanctions 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 $31.8 million at December 31, 2023, and we had working capital excluding cash of $4.4 million in Belarus of which $4.5 million is inventory.

In addition, we had $5.5 million cash 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 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.

Global demand trends have been impacted by the COVID-19 pandemic 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.

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.

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.

Supply Chain .

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

particularly electronic components.

We, our customers and our suppliers continue to face constraints related to supply chain and logistics, including availability of capacity, materials, air cargo space, sea containers and higher freight rates.

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, 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.

We and our customers are experiencing improvements in lead times and availability of components purchased from third party suppliers;

including many electronic components as compared to those experienced during the COVID-19 pandemic.

We, our customers and our suppliers continue to face some constraints related to supply chain and logistics, including availability of capacity, materials, warehouse space, sea containers and higher freight rates.

While supply chain and logistics constraints moderated in 2023, they have not yet fully returned to pre-pandemic conditions.

We received substantial shipments in 2023 of electronic components ordered during the occurrence of shortages from the COVID-19 pandemic.

We are implementing changes to our logistics process to address increased freight costs.

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

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

Net sales decreased by 10% in 2023, decreased by 2% in 2022 and increased 22% in 2021.

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

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• 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.

We are experiencing declines for sales in cutting applications.

OEM’s that manufacture cutting machines were some of the earliest adopters of fiber lasers and this market is now mature so growth trends are more subject to general economic factors affecting capital equipment purchases.

In addition, we are experiencing significant price competition in China for lasers sold in this application and we have lost market share in China to competitors as a result.

The declines in revenue that we are experiencing in cutting are significantly, but not completely, offset by growth in sales of lasers in other applications and new products.

Lasers used for welding applications are growing generally and for electric vehicle and battery manufacturing in particular.

Lasers used for foil cutting related to battery manufacturing are another area of growth.

We are also experiencing growth in new or emerging products such as LightWELD and laser based systems, lasers used for medical procedures and lasers with short pulse durations and at mid infrared and visible wavelengths.

Lasers used for applications such as cleaning and ablation, additive manufacturing, solar cell manufacturing and annealing have become a more significant component of our total sales.

While these products and applications are growing, they are only partially offsetting the decline in cutting and sales trends for any one product or application may vary from quarter to quarter or year.

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 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.

In response to inflation, some global central banks have adopted less accommodating monetary policy and have increased benchmark interest rates in several major global economies 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.

If inflation starts to moderate in 2024, global central banks may adopt more accommodating monetary policy and reduce benchmark interest rates.

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

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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, 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.

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 and pandemics to the extent that they affect macroeconomic conditions, global supply chains or individual IPG locations

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

These decreases result from factors such as increased competition, decreased manufacturing costs and increases in unit volumes.

We may also reduce selling prices in order to penetrate new markets and applications.

We may also reduce selling prices

in order to penetrate new markets and applications.

Furthermore, we may negotiate discounted selling prices from time to time with certain customers that place high unit-volume orders.

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.

The secular shift to fiber laser technology in large materials processing applications, such as welding and 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 can broadly affect the demand for capital equipment including machine tools and industrial lasers, and competition from other fiber laser manufacturers.

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

• Our gross margin from products on new manufacturing lines can be lower due to production inefficiencies and high scrap costs.

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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Most of this investment relates to expansion of our manufacturing capacity and, to a lesser extent, research and development and sales-related facilities.

We received $31.2 million, $26.9 million and $1.4 million in proceeds from the sale of property, plant and equipment in 2023, 2022 and 2021, respectively.

A high proportion of our costs is fixed so costs are generally difficult to adjust or may take time to adjust in response to changes in demand.

In addition, our fixed costs increase as we expand our capacity.

If we expand capacity faster than is required by sales growth, gross margins could be negatively affected.

Gross margins generally decline if production volumes are lower as a result of a decrease in sales or a reduction in inventory because the absorption of fixed manufacturing costs will be reduced.

If we expand capacity faster than is required by sales levels, gross margins could be negatively affected.

Gross margins generally decline if production volumes are lower as a result of a decrease in sales or a reduction in inventory because the absorption of fixed manufacturing costs will be

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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For example, we recorded provisions for slow-moving, obsolete or excess inventory and other inventory related charges totaling $45.5 million, $128.0 million and $34.3 million in 2023, 2022 and 2021, respectively.

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

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

Selling and general and administrative expenses.

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Research and development expenses.

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.

In 2023 and 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.

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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.

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

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.

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In addition, if we increase the selling price of our products in local currencies, this could have a negative impact on the demand for our products.

Income taxes.

The Organization for Economic Cooperation & Development (OECD) has proposed a two-pillared plan for a revised international tax system.

Pillar 1 proposes to reallocate taxing rights among the jurisdictions in which in-scope multinational corporations operate.

Based on the current guidance, we do not meet the revenue threshold for Pillar 1 and thus

do not expect any tax impact from implementation.

Pillar 2 proposes to assess a 15% minimum tax on the earnings of in-scope multinational corporations on a country-by-country basis.

Numerous countries have indicated their intent to adopt the proposal and are drafting legislation to implement the Pillar 2 model rules with a subset of the rules becoming effective January 1, 2024, and the remaining rules becoming effective January 1, 2025, or in later periods.

The OECD continues to release additional guidance on the two-pillar framework and it is uncertain if these proposals will be enacted into law in the U.S.

or other countries in which we operate.

We are continuing to evaluate the impact of the proposed and enacted legislative changes as new information becomes available.

It is possible that such proposals as adopted by countries may adversely affect our provision for income taxes.

Based on the current drafts of the Pillar 2 proposals, we do not anticipate this will have a material impact on our tax provision or effective tax rate in 2024.

Major customers.

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Net sales derived from our five largest customers as a percentage of our annual net sales were 13%, 15% and 19% in 2023, 2022 and 2021, respectively.

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

One of our customers accounted for 14% of our net accounts receivable as of both December 31, 2023 and 2022.

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

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

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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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.

We recorded $74.1 million of additional inventory provision and related charges as a result of that review in 2022.

Judgments and Uncertainties:

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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.

In 2020, as sales decreased due to the impact of the COVID 19 pandemic and other factors, our provisions for slow-moving, excess and obsolete inventory reserves increased.

In 2023, as sales decreased the inventory provision related to slow-moving, excess or obsolete inventory increased.

In 2022, we recorded inventory provision and related charges of $74.1 million as a result of the review of the inventory in Russia.

For the rest of our operations, as safety stock increased excess and obsolete inventory reserves increased during 2022.

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.

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

We review these 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.

When testing for impairment of long-lived 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:

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.

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.

Fair value estimates performed to determine impairment charge amounts.

The fair values 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;

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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.

We recorded long-lived asset impairment charge of $1.2 million, $79.9 million, and nil in 2023, 2022 and 2021, respectively.

In the fourth quarter of 2022, we performed a review of the estimated 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.

Income Taxes and Deferred Taxes .

Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.

We file federal and state income tax returns in the United States and tax returns in numerous international jurisdictions.

Our annual tax rate is based on the income generated in the jurisdictions in which we operate, the statutory tax rates in those jurisdictions and tax planning opportunities available to the Company.

We file federal and state income tax returns in the United States and income tax returns in all the foreign jurisdictions in which we operate.

Judgments and Uncertainties:

We must estimate our income tax expense after considering, among other factors, the pricing of inter-company transactions on an arm’s length basis, differing tax rates between jurisdictions, allocation factors, tax credits, nondeductible items and changes in enacted tax rates.

Significant judgment is required in determining our annual tax expense and in evaluating our tax positions.

We estimate our income tax expense in each jurisdiction we operate in after considering, among other factors, the pricing of inter-company transactions on an arm’s length basis, the differing tax rates between jurisdictions, allocation factors, tax credits, nondeductible items and changes in enacted tax rates.

Significant judgment is required in determining the pricing of inter-company transactions, our annual tax expense and in evaluating our tax positions in the various jurisdictions in which we operate.

As we continue to expand globally, there is a risk that, due to complexity within and diversity among the various jurisdictions in which we do business, a governmental agency may disagree with the manner in which we have computed our taxes.

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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.

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We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues.

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

Potential interest and penalties associated with such uncertain tax positions is recorded as a component of income tax expense.

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.

Reserves recorded are based on a determination of tax benefits claimed in our tax filings and whether these positions are more likely than not to be realized following the resolution of any potential tax audits related to the tax benefit, assuming that the matter in question will be reviewed by the tax authorities.

Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense.

As of December 31, 2023, we had $17.2 million of unrecognized tax benefits, excluding interest and penalties, recorded in other long-term liabilities and deferred income taxes.

This tax liability increased by $3.0 million for tax positions taken in the current year offset by reductions of $1.3 million for changes in prior period positions.

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General and administrative 125,749 9.7 131,253 9.2 125,882 8.6

Goodwill impairment — — — — 44,589 3.7

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

Impairment of long-lived assets 1,237 0.1 79,949 5.6 — —

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)

Restructuring charges (recoveries), net

(288) — 9,697 0.7 — —

(Gain) loss on foreign exchange

(1,356) (0.1) 4,103 0.3 (15,120) (1.0)

Total operating expenses 309,725 24.1 385,913 27.0 328,515 22.6

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Materials Processing

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.

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

• The decrease in high power CW laser sales was due to lower sales for cutting applications as a result of soft industrial demand in China and Europe and increased competition in China.

• The decrease in medium power CW laser sales related to a decrease in demand for cutting applications, partially offset by an increase in additive manufacturing applications.

• Pulsed laser sales, including high power pulsed lasers, decreased due to decreases in e-mobility foil cutting applications, marking and engraving applications and solar cell manufacturing applications, partially offset by growth in sales for cleaning and ablation 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.

• Laser and non-laser systems sales benefited from higher demand for LightWELD.

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

Other 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.

Sales from other applications decreased mainly due to decreased sales for communications products as a result of the business divestiture in the third quarter of 2022, partially offset by increased demand for lasers used in medical procedures and advanced applications.

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

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Cost of sales and gross margin.

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 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.

Cost of sales decreased by $128.4 million, or 14.7%, to $745.7 million in 2023 from $874.1 million in 2022.

Our gross margin increased to 42.1% in 2023 from 38.9% in 2022.

Gross margin increased compared to the prior year primarily because we did not record any additional inventory provisions and other charges related to our Russian operations, which were $74.1 million and reduced gross margin by 5.2% in 2022.

This improvement to gross margin was partially offset by an increase in cost of product sold.

As we expand production capacity in the U.S., Germany, Italy and Poland to replace dependency on our Russian and Belarus operations, we incurred higher manufacturing costs as a percentage of sales due to higher compensation costs, lower yields and manufacturing inefficiencies and higher scrap expense as we ramped up manufacturing capacity in existing and new locations.

Expenses related to provisions for excess or obsolete inventory and other valuation adjustments decreased by $82.5 million to $45.5 million, or 3.5% of sales, for the year ended December 31, 2023, as compared to $128.0 million, or 9.0% of sales, for the year ended December 31, 2022.

Sales and marketing expense.

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.

Sales and marketing expense increased by $9.1 million, or 11.9%, to $85.7 million in 2023 from $76.6 million in 2022.

This change was primarily a result of an increase of $7.0 million in personnel and related costs, driven by an increase in sales and marketing department headcount.

As a percentage of sales, sales and marketing expense was 6.7% and 5.3% of sales in 2023 and 2022, respectively.

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Research and development expense decreased by $17.4 million, or 15.0%, to $98.7 million in 2023 from $116.1 million in 2022.

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.

This change was primarily a result of a decrease of $5.1 million in personnel and related costs, a decrease of $5.6 million in depreciation and amortization expenses, and a decrease of $2.0 million in materials and other R&D expense.

The decreases were primarily a result of the divestiture of telecommunications transmission product line in August 2022, and the impairment of fixed assets related to our Russian operation in 2022.

As a percentage of sales, research and development expense decreased to 7.7% in 2023 from 8.1% in 2022.

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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 $4.7 million in consultants and information systems expense.

General and administrative expense decreased by $5.6 million, or 4.3%, to $125.7 million in 2023 from $131.3 million in 2022.

This change was primarily a result of a decrease of $3.9 million in depreciation expense as a result of disposing our corporate aircraft and impairing our Russia long-lived assets in 2022, and a decrease of $2.1 million in consultants, partially offset by an increase of $3.7 million in personnel and related costs.

As a percentage of sales, general and administrative expense increased to 9.8% in 2023 from 9.2% in 2022.

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These estimates assume constant exchange rates between fiscal year 2023 and fiscal year 2022 and are calculated using the average exchange rates for the twelve-month period ended December 31, 2022 for the respective currencies, which were US$1=Euro 0.95, US$1=Japanese yen 131, US$1=Chinese yuan 6.73 and US$1=Russian ruble 68.

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.

We recorded a non-cash long-lived asset impairment charge of $1.2 million in 2023 as compared to $79.9 million in 2022.

The impairment of long-lived assets in 2023 was related to the right-of-use asset ("ROU" asset) for a leased building associated with our Submarine Network Division business that was previously divested.

Attempts to sublease the space have been unsuccessful.

As of December 31, 2023, the ROU asset related to this lease has been reduced to zero.

The long-lived asset impairment in 2022 was related to Russian operations.

Restructuring charges (recoveries), net We recorded a net restructuring recovery of $0.3 million in 2023 as compared to a restructuring charge of $9.7 million in 2022.

In 2023, we substantially completed the restructuring program at our Russian subsidiary.

As a result, we released $1.7 million that had been accrued in relation to restructuring expenses.

The restructuring charges in 2022 are primarily related to restructuring costs in Russia.

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

(Gain) loss on foreign exchange.

We incurred a foreign exchange gain of $1.4 million in 2023 as compared to a loss of $4.1 million in 2022.

The gain in 2023 was primarily attributable to depreciation of the Russian ruble, partially offset by losses from appreciation of the Euro and depreciation of the Chinese yuan as compared to the U.S.

Interest income, net.

Interest income, net was $41.7 million in 2023 compared to $12.6 million in 2022.

The change in interest income, net, was driven by 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 $56.0 million in 2023 compared to $72.6 million in 2022, representing an effective tax rate of 20.4% in 2023 and 39.6% in 2022.

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

The decrease in tax expense was due primarily to discrete items.

Discrete adjustments in 2023 resulted in a $5.7 million decrease in tax expense, which includes (i) $4.3 million decrease in the valuation allowance primarily due to current year profits in our Russian subsidiary and (ii) $3.5 million related to a decrease in uncertain tax positions and the results of tax audits.

These benefits were partly offset by an increase in tax expense for $1.8 million for equity-based compensation deductions reflected in book income in excess of the deductions allowed for tax purposes.

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;

These detriments were partly offset by (i) $10.1 million for the acceptance of amended returns related to incentives offered for capital investment;

(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 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.

Net income attributable to IPG Photonics Corporation increased by $109.0 million to $218.9 million in 2023 from $109.9 million in 2022.

Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 9.4% to 17.0% in 2023 from 7.6% in 2022 due to the factors described above.

Liquidity and Capital Resources

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As of December 31, 2023, 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.

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.

Included in cash and cash equivalents are $76.4 million of cash and cash equivalents located in Russia, and $5.5 million of cash and cash equivalents located in Belarus, as of December 31, 2023.

Cash and cash equivalents 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.

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Working capital (excluding cash and cash equivalents and short-term investments) 522,312 534,045

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.

Short-term investments at December 31, 2023 consist of liquid investments including U.S.

Treasury and agency obligations, corporate bonds, commercial paper, 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.

The following table details our line-of-credit facilities and long-term notes as of December 31, 2022:

The following table details our line-of-credit facilities as of December 31, 2023:

Description Total Facility/ Note Interest Rate Maturity Security

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Euro 5.0 million

($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)

($5.5 million) €STR rate plus 0.97% December 2028 Unsecured, guaranteed by parent company

Euro Facility (3)

Euro 1.5 million

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

Long-term Unsecured Note (4)

$16.0 million 1.20% above LIBOR, fixed using an interest rate swap at 2.85% per annum May 2023 Unsecured

($1.7 million) Euribor plus 1.25% June 2024 Common pool of assets of Italian subsidiary

(1) This facility is available to certain foreign subsidiaries in their respective local currencies.

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(2) This facility is available to certain foreign subsidiaries in their respective local currencies.

At December 31, 2022, there were no drawings, however, there were $1.7 million of guarantees issued against the line which reduces total availability.

At December 31, 2023, there were no amounts drawn on this line, however, there were $1.2 million of guarantees issued against the line which reduces total availability.

(3) At December 31, 2023, there were no drawings.

This facility renews annually.

(4) 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.

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.

Our largest committed credit line is with Bank of America N.A.

in the amount of $75.0 million, which is not syndicated.

We are required to meet certain financial covenants associated with our U.S.

revolving line of credit and long-term debt facility.

revolving line of credit.

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

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We were in compliance with all such financial covenants as of and for the three months ended December 31, 2023.

The financial covenants in our loan documents may cause us to not take or to delay investments and actions that we might otherwise undertake because of limits on capital expenditures and amounts that we can borrow or lease.

In the event that we do not comply with any one of these covenants, we would be in default under the loan agreement or loan agreements, which may result in acceleration of the debt, cross-defaults on other debt or a reduction in available liquidity, any of which could harm our results of operations and financial condition.

See Note 11, "Financing Arrangements" in the notes to the consolidated financial statements for further information about our facilities and term debt.

The following table summarizes our material cash commitments at December 31, 2022 and the effect such commitments are expected to have on our liquidity and cash flow in future periods.

The following table summarizes our material cash commitments at December 31, 2023 and the effect such commitments are expected to have on our liquidity and cash flows in future periods.

We intend to use our existing cash, cash equivalents and short term investments as well as cash generated from operations as sources of funds for these material commitments.

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Purchase obligations 27,404 22,008

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

$ 48,400 $ 27,232

$ 66,662 $ 46,698

(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.

(1) Excludes obligations related to ASC 740, reserves for uncertain tax positions, because we are unable to provide a reasonable estimate of the timing of future payments relating to the remainder of these obligations.

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Cash provided by operating activities $ 295,986 $ 212,649

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

Cash (used in) provided by investing activities

(237,554) 296,952

Cash used in financing activities (236,380) (514,549)

Operating activities.

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.

Net cash provided by operating activities increased by $83.4 million to $296.0 million in 2023 from $212.6 million in 2022 primarily due to a decrease in cash used by working capital.

Our largest working capital items are inventory and accounts receivable.

Items such as accounts payable to third parties, prepaid expenses and other current assets and accrued expenses and other liabilities are not as significant as our working capital investment in accounts receivable and inventory because of the amount of value added within IPG due to our vertically integrated structure.

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 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;

The increase in cash flow from operating activities in 2023 primarily resulted from:

• an increase in cash provided by inventory as we moderated investment in safety stock related to supply chain disruptions for third party electronic parts and components internally manufactured by our factory in Russia;

• an increase in cash provided by other taxes payable driven by the timing of estimated tax payments made and refunds received from filing tax returns.

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

• a decrease in cash provided by net income after adjusting for non-cash operating activities, mainly due to lower sales in 2023;

• an increase in cash used by accounts receivable, including an increase in days sales outstanding;

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

• 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 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;

Net cash used in investing activities was $237.6 million in 2023 as compared to cash provided by investing activities of $297.0 million in 2022.

The cash used in investing activities in 2023 primarily related to $158.9 million of net cash used for purchases of short-term investments, and $110.5 million of cash used for property, plant and equipment, partially offset by $31.2 million of proceeds from the sale of property, plant and equipment.

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.

In 2024, we expect to incur approximately $120.0 million to $130.0 million in capital expenditures net of asset divestitures.

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.

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If we obtain financing for certain projects, our cash expenditures would be reduced in the year of expenditure.

Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer to a later period.

Many of the capital expenditure projects that we undertake have long lead times

and are difficult to cancel or defer to a later period.

We intend to finance our capital expenditures with existing cash, cash equivalents and short term investments as well as with cash generated from operations.

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Net cash used in financing activities was $236.4 million and $514.5 million in 2023 and 2022, respectively.

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;

The cash used in financing activities in 2023 was primarily related to the purchase of $223.5 million of treasury stock, $16.0 million of principal payments on our long-term borrowings;

partially offset by net proceeds of $3.1 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 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;

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.

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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