IPG PHOTONICS CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision of our Chief Executive Officer and our Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Annual Report on Form 10-K (the "Evaluation Date") utilizing the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control - Integrated Framework ("COSO") Updated Framework issued in 2013. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management's Annual Report on Internal Control Over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and its subsidiaries. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of the Evaluation Date based on criteria established in COSO utilizing the Updated Framework issued in 2013. Based on this assessment, our management concluded that, as of the Evaluation Date, our internal control over financial reporting was effective. 46 Table of Contents Our independent registered public accounting firm, Deloitte & Touche LLP, has audited our internal control over financial reporting, as stated in their report below. Changes in Internal Controls There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure controls and procedures or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected. 47 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of IPG Photonics Corporation Marlborough, Massachusetts Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of IPG Photonics Corporation and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 21, 2024, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Boston, Massachusetts February 21, 2024 48 Table of Contents ITEM 9B. OTHER INFORMATION None of our directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarter ended December 31, 2023. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 49 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain of the information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2023. Pursuant to General Instruction G(3) of Form 10-K, additional information required hereunder relating to our executive officers is contained in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2023. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2023, with the exception of the information regarding securities authorized for issuance under our equity compensation plans, which is set forth below. Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, RSUs and PSUs (a) Weighted-Average Exercise Price of Outstanding Options, RSUs and PSUs (b) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) Equity Compensation Plans Approved by Security Holders (1) 1,388,347 $ 144.72 3,247,512 Equity Compensation Plans Not Approved by Security Holders — — Total 1,388,347 3,247,512 (1) As of December 31, 2023, there were 3,107,336 shares available for future issuance under the 2006 Incentive Compensation Plan and 140,176 shares available for future issuance under the employee stock purchase plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2023. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2023. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements. See Index to Financial Statements on page F-1. 2. Financial Statement Schedules. 50 Table of Contents All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto. 3. Exhibits. 51 Table of Contents Exhibit Number Description 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q filed w i t h the Commission on August 1, 2023) 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed with the Commission on January 23 , 202 3 ) 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement No. 333-136521 filed with the Commission on November 14, 2006) 4.2 Description of the Registrant's Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 24, 2020) 10.1 † 2006 Incentive Compensation Plan, as amended and restated effective May 23, 2023 (incorporated by reference to Exhibit 10 .1 to the Registrant's Quarterly Report on Form 10-Q filed w i t h the Commission on August 1, 2023) 10.2 † IPG Photonics Corporation Non-Employee Director Compensation Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 22, 2023) 10.3 † Senior Executive Annual Incentive Plan, as amended and restated April 28, 2020 (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K filed with the Com mission on February 27, 2023) 10.4 † IPG Photonics Corporation 2008 Employee Stock Purchase Plan, as amended and restated effective December 1, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 3, 2019) 10.5 † Secondment Agreement dated May 4, 2021 among the Registrant, IPG Laser GmbH and Dr. Eugene Scherbakov (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 4, 2021) 10.6 † Service Agreement dated May 4, 2021 between IPG Laser GmbH and Dr. Eugene Scherbakov (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 4, 2021) 10.7 † Amendment to Dr. Scherbakov Service Agreement (incorporated by reference to Exhibit 10.1 to the Registrant 's Current Report on Form 8-K filed with the Commission on September 1, 2023) 10.8 † Confidentiality, Non-Competition and Confirmatory Assignment Agreement dated May 4, 2021 between the Registrant and Dr. Eugene Scherbakov (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 4, 2021) 10.9 † Form of Employment Agreement dated May 30, 2019 between the Registrant and each of Timothy P.V. Mammen, Angelo P. Lopresti and Alexander Ovtchinnikov (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed with the Commission on February 24, 2020) 10.10 † Form of Confidentiality, Non-Competition and Confirmatory Assignment Agreement between the Registrant and each of the named executive officers and certain other executive officers, (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on October 15, 2013) 10.11 † Form of Letter amending Confidentiality, Non-Competition and Confirmatory Assignment Agreements between the Registrant and each of the named executive officers and certain other executive officers (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K/A filed with the Commission on February 22, 2017) 10.12 Form of Indemnification Agreement between the Registrant and each of its Directors and Executive Officers (incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K/A filed with the Commission on February 22, 2017) 10.13 Second Amended and Restated Loan Agreement, between the Registrant and Bank of America, N.A. dated as of March 25, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 26, 2020) 52 Table of Contents Exhibit Number Description 10.14 Revolving Credit Note, between the Registrant and Bank of America, N.A., dated March 25, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on March 26, 2020) 21.1* List of Subsidiaries 23.1* Consent of Deloitte & Touche LLP 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1** Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 97* IPG Photonics Corporation Incentive Based Compensation Recoupment Policy 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF* Inline XBRL Taxonomy Definition Linkbase 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase 104* Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) * Filed herewith. ** Furnished herewith. The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is deemed furnished and not filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation. † Identifies management contract or compensatory plans or arrangements required to be filed as an exhibit. b. Exhibits. See (a)(3) above. c. Additional Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto. ITEM 16. FORM 10-K SUMMARY None. 53 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 21, 2024. IPG P HOTONICS C ORPORATION By: /s/ Eugene A. Scherbakov Eugene A. Scherbakov Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eugene A. Scherbakov and Angelo P. Lopresti, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Eugene A. Scherbakov Eugene A. Scherbakov Chief Executive Officer and Director (Principal Executive Officer) February 21, 2024 /s/ Timothy P.V. Mammen Timothy P.V. Mammen Senior Vice President, Chief Financial Officer (Principal Financial Officer) February 21, 2024 /s/ Thomas J. Burgomaster Thomas J. Burgomaster Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) February 21, 2024 /s/ Gregory Beecher Gregory Beecher Director February 21, 2024 /s/ Michael Child Michael Child Director February 21, 2024 /s/ Jeanmarie Desmond Jeanmarie Desmond Director February 21, 2024 /s/ Gregory Dougherty Gregory Dougherty Director February 21, 2024 /s/ Kolleen Kennedy Kolleen Kennedy Director February 21, 2024 /s/ Eric Meurice Eric Meurice Director February 21, 2024 /s/ Natalia Pavlova Natalia Pavlova Director February 21, 2024 /s/ John Peeler John Peeler Non-Executive Chair of the Board and Director February 21, 2024 /s/ Agnes Tang Agnes Tang Director February 21, 2024 54 Table of Contents INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) F- 2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F- 4 Consolidated Statements of Income for the Years Ended December 31, 2023, 2022, and 2021 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022, and 2021 F- 6 Consolidated Statements of Equity for the Years Ended December 31, 2023, 2022, and 2021 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of IPG Photonics Corporation Marlborough, Massachusetts Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of IPG Photonics Corporation and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Excess or Obsolete Inventory Reserve: Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company evaluates inventory each reporting period for excess quantities and obsolescence, establishing reserves when necessary based upon historic usage, estimated future usage and age. Once recorded, these reserves are considered permanent adjustments to the carrying value of inventory. As of December 31, 2023, the Company has inventories of $453.9 million, net of excess quantities and obsolescence reserves. We identified the reserve for excess quantities and obsolete inventory as a critical audit matter because of the significant estimates and assumptions management makes to quantify the reserve, including the determination of expected demand, especially when considering the vertically integrated nature of the Company as well as parts subject to technological obsolescence. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the policy and the reasonableness of assumptions including expected demand. F-2 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s judgments underlying the calculation of excess or obsolete inventory reserve, included the following, among others: • We tested the effectiveness of controls over inventory, including those over the estimation of reserves for excess quantities and obsolescence. • We evaluated the reasonableness of the Company's excess and obsolete reserve policy, considering historical experience and the underlying assumptions. • We tested the calculation of the excess and obsolete reserve pursuant to the Company’s policy, including the completeness and accuracy of the data used in the calculation. • For a sample of inventory parts, we evaluated management’s ability to estimate future demand by comparing actual inventory usage to estimates made in prior years. • We considered the existence of contradictory evidence based on consideration of internal communication to management and the board of directors, Company press releases, and analysts’ reports, as well as any changes within the business. /s/ Deloitte & Touche LLP Boston, Massachusetts February 21, 2024 We have served as the Company's auditor since 1999. F-3 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2023 2022 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 514,674 $ 698,209 Short-term investments 662,807 479,374 Accounts receivable, net 219,053 211,347 Inventories 453,874 509,363 Prepaid income taxes 26,038 40,934 Prepaid expenses and other current assets 38,208 47,047 Total current assets 1,914,654 1,986,274 Deferred income taxes, net 88,788 75,152 Goodwill 38,540 38,325 Intangible assets, net 26,234 34,120 Property, plant and equipment, net 602,257 580,561 Other assets 28,425 28,848 Total assets $ 2,698,898 $ 2,743,280 LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt $ — $ 16,031 Accounts payable 28,618 46,233 Accrued expenses and other liabilities 181,350 202,764 Income taxes payable 4,893 9,618 Total current liabilities 214,861 274,646 Other long-term liabilities and deferred income taxes 68,652 83,274 Total liabilities 283,513 357,920 Commitments and contingencies (Note 14) IPG Photonics Corporation equity: Common stock, $ 0.0001 par value, 175,000,000 shares authorized; 56,317,438 and 46,320,671 shares issued and outstanding, respectively, at December 31, 2023; 56,017,672 and 48,138,257 shares issued and outstanding, respectively, at December 31, 2022. 6 6 Treasury stock, at cost, 9,996,767 and 7,879,415 shares held at December 31, 2023 and December 31, 2022, respectively. ( 1,161,505 ) ( 938,009 ) Additional paid-in capital 994,020 951,371 Retained earnings 2,795,394 2,576,516 Accumulated other comprehensive loss ( 212,530 ) ( 204,524 ) Total IPG Photonics Corporation stockholders' equity 2,415,385 2,385,360 Total liabilities and equity $ 2,698,898 $ 2,743,280 See notes to consolidated financial statements. F-4 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2023 2022 2021 (In thousands, except per share data) Net sales $ 1,287,439 $ 1,429,547 $ 1,460,860 Cost of sales 745,741 874,134 764,462 Gross profit 541,698 555,413 696,398 Operating expenses: Sales and marketing 85,679 76,643 78,180 Research and development 98,704 116,114 139,573 General and administrative 125,749 131,253 125,882 Gain on divestiture and sale of asset — ( 31,846 ) — Impairment of long-lived assets 1,237 79,949 — Restructuring charges (recoveries), net ( 288 ) 9,697 — (Gain) loss on foreign exchange ( 1,356 ) 4,103 ( 15,120 ) Total operating expenses 309,725 385,913 328,515 Operating income 231,973 169,500 367,883 Other income (expense), net: Interest income (expense), net 41,735 12,620 ( 1,839 ) Other income, net 1,167 1,231 437 Total other income (expense) 42,902 13,851 ( 1,402 ) Income before provision for income taxes 274,875 183,351 366,481 Provision for income taxes 55,997 72,589 88,615 Net income 218,878 110,762 277,866 Less: net income (loss) attributable to non-controlling interests — 853 ( 550 ) Net income attributable to IPG Photonics Corporation common stockholders $ 218,878 $ 109,909 $ 278,416 Net income attributable to IPG Photonics Corporation per common share: Basic $ 4.64 $ 2.17 $ 5.21 Diluted $ 4.63 $ 2.16 $ 5.16 Weighted average shares outstanding: Basic 47,154 50,761 53,410 Diluted 47,320 50,925 53,930 See notes to consolidated financial statements. F-5 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2023 2022 2021 (In thousands) Net income $ 218,878 $ 110,762 $ 277,866 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments and other ( 7,854 ) ( 14,838 ) ( 44,267 ) Unrealized (loss) gain on derivatives ( 152 ) 336 278 Total other comprehensive (loss) income ( 8,006 ) ( 14,502 ) ( 43,989 ) Comprehensive income 210,872 96,260 233,877 Less: comprehensive income (loss) attributable to non-controlling interest — 924 ( 653 ) Comprehensive income attributable to IPG Photonics Corporation $ 210,872 $ 95,336 $ 234,530 See notes to consolidated financial statements. F-6 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF EQUITY Year Ended December 31, Common Stock Treasury Stock Additional Paid In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Non- controlling Interest Total Stockholders' Equity (In thousands, except share data) Shares Amount Shares Amount Balance, January 1, 2021 53,427,234 $ 6 ( 2,034,012 ) $ ( 303,614 ) $ 854,301 $ 2,188,191 $ ( 146,065 ) $ 1,292 $ 2,594,111 Vesting of RSUs and PSUs, net of shares withheld for taxes, and exercise of stock options 292,849 — — — 10,766 — — — 10,766 Common stock issued under employee stock purchase plan 34,151 — — — 5,492 — — — 5,492 Purchased common stock ( 743,969 ) — ( 743,969 ) ( 134,889 ) — — — — ( 134,889 ) Stock-based compensation — — — — 37,864 — — — 37,864 Net income — — — — — 278,416 — ( 550 ) 277,866 Foreign currency translation adjustments and other — — — — — — ( 44,164 ) ( 103 ) ( 44,267 ) Unrealized gain on derivatives, net of tax — — — — — — 278 — 278 Balance, December 31, 2021 53,010,265 6 ( 2,777,981 ) ( 438,503 ) 908,423 2,466,607 ( 189,951 ) 639 2,747,221 Vesting of RSUs and PSUs, net of shares withheld for taxes, and exercise of stock options 167,193 — — — 693 — — — 693 Common stock issued under employee stock purchase plan 62,233 — — — 4,890 — — — 4,890 Purchased common stock ( 5,101,434 ) — ( 5,101,434 ) ( 499,506 ) — — — — ( 499,506 ) Stock-based compensation — — — — 38,302 — — — 38,302 Net income — — — — — 109,909 — 853 110,762 Foreign currency translation adjustments and other — — — — — — ( 14,909 ) 71 ( 14,838 ) Purchase of non-controlling interests — — — — ( 937 ) — — ( 1,563 ) ( 2,500 ) Unrealized gain on derivatives, net of tax — — — — — — 336 — 336 Balance, December 31, 2022 48,138,257 6 ( 7,879,415 ) ( 938,009 ) 951,371 2,576,516 ( 204,524 ) — 2,385,360 Vesting of RSUs and PSUs, net of shares withheld for taxes, and exercise of stock options 241,782 — — — ( 1,891 ) — — — ( 1,891 ) Common stock issued under employee stock purchase plan 57,984 — — — 5,038 — — — 5,038 Purchased common stock ( 2,117,352 ) — ( 2,117,352 ) ( 223,496 ) — — — — ( 223,496 ) Stock-based compensation — — — — 39,502 — — — 39,502 Net income — — — — — 218,878 — — 218,878 Foreign currency translation adjustments and other — — — — — — ( 7,854 ) — ( 7,854 ) Unrealized loss on derivatives, net of tax — — — — — — ( 152 ) — ( 152 ) Balance, December 31, 2023 46,320,671 $ 6 ( 9,996,767 ) $ ( 1,161,505 ) $ 994,020 $ 2,795,394 $ ( 212,530 ) $ — $ 2,415,385 See notes to consolidated financial statements. F-7 Table of Contents IPG PHOTONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 2021 (In thousands) Cash flows from operating activities: Net income $ 218,878 $ 110,762 $ 277,866 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 69,621 90,564 96,330 Deferred income taxes ( 13,789 ) ( 27,575 ) ( 6,885 ) Stock-based compensation 39,502 38,302 37,864 Impairment of long-lived assets and restructuring charges (recoveries), net ( 486 ) 79,949 — Unrealized gain on foreign currency transactions ( 4,334 ) ( 592 ) ( 8,560 ) Gain on divestiture and sales of asset — ( 31,846 ) — Provisions for inventory, warranty and bad debt 61,058 153,652 68,441 Amortization of premium/discount on investments ( 25,102 ) ( 4,557 ) 2,502 Other 5,194 6,211 6,116 Changes in assets and liabilities that (used) provided cash, net of acquisitions: Accounts receivable ( 10,395 ) 34,100 ( 2,091 ) Inventories 1,823 ( 189,013 ) ( 149,754 ) Prepaid expenses and other current assets ( 2,025 ) 22,545 ( 23,697 ) Accounts payable ( 16,319 ) ( 12,174 ) 30,997 Accrued expenses and other liabilities ( 44,693 ) ( 43,547 ) 24,715 Income and other taxes payable 17,053 ( 14,132 ) 35,856 Net cash provided by operating activities 295,986 212,649 389,700 Cash flows from investing activities: Purchases of and deposits on property, plant and equipment ( 110,483 ) ( 110,141 ) ( 123,108 ) Proceeds from sales of property, plant and equipment 31,241 26,862 1,409 Purchases of short-term investments ( 1,232,863 ) ( 1,117,022 ) ( 1,940,605 ) Proceeds from sale of short-term investments 1,073,993 1,446,355 1,647,537 Acquisitions of businesses, net of cash acquired — ( 2,000 ) — Proceeds from divestiture, net of cash sold — 52,941 — Other 558 ( 43 ) ( 1,515 ) Net cash (used in) provided by investing activities ( 237,554 ) 296,952 ( 416,282 ) Cash flows from financing activities: Principal payments on long-term borrowings ( 16,031 ) ( 18,126 ) ( 3,810 ) Proceeds from issuance of common stock under employee stock option and purchase plans less payments for taxes related to net share settlement of equity awards 3,147 5,583 16,258 Purchase of treasury stock, at cost ( 223,496 ) ( 499,506 ) ( 134,889 ) Payment of purchase price holdback from business combination — — ( 2,625 ) Purchase of non-controlling interests — ( 2,500 ) — Net cash used in financing activities ( 236,380 ) ( 514,549 ) ( 125,066 ) Effect of changes in exchange rates on cash, cash equivalents and restricted cash ( 5,587 ) ( 5,948 ) ( 17,800 ) Net decrease in cash, cash equivalents and restricted cash ( 183,535 ) ( 10,896 ) ( 169,448 ) Cash, cash equivalents and restricted cash — Beginning of year 698,209 709,105 878,553 Cash, and cash equivalents — End of year $ 514,674 $ 698,209 $ 709,105 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,284 $ 3,214 $ 2,714 Cash paid for income taxes $ 62,916 $ 113,200 $ 62,998 Non-cash transactions: Demonstration units transferred from inventory to other assets $ 5,404 $ 5,178 $ 5,729 Inventory transferred to machinery and equipment $ 2,767 $ 4,172 $ 3,701 Additions to property, plant and equipment included in accounts payable $ 3,251 $ 1,073 $ 816 Leased assets obtained in exchange for new operating lease liabilities $ 4,457 $ 7,566 $ 7,489 See notes to consolidated financial statements. F-8 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business — IPG Photonics Corporation (the "Company" or "IPG") develops, manufactures and sells high-performance fiber lasers, fiber amplifiers, and diode lasers that are used for diverse applications, primarily in materials processing. The Company was incorporated as a Delaware corporation in December 1998. Its world headquarters is located in Marlborough, Massachusetts. It also has facilities and sales offices elsewhere in North and South America, Europe and Asia. Russian Operations — In October 2022, the European Union (“EU”) issued sanctions that restricted the Company’s Russian subsidiary from supplying laser components to its other manufacturing facilities beginning in January 2023. These EU sanctions, coupled with increased tariffs in the United States on items imported from Russia, negatively affected what had been the Russian subsidiary’s most significant source of revenue, which was selling components and finished goods to other IPG subsidiaries. As a result of these changes in business conditions in Russia at the end of 2022, the Company completed an impairment analysis of assets in Russia during the fourth quarter of 2022 and recorded charges in the accompanying Consolidated Statement of Income. In 2022, the Company recorded $ 74,055 of inventory provision and related charges included in Cost of sales, $ 79,030 of impairment of long-lived asset charges included in Impairment of long-lived assets and a $ 35,518 valuation allowance for deferred tax assets included in provision for income taxes. The long-lived asset impairment charge was based on a probability-weighted average of valuations using the discounted cash flow method under the income approach, the guideline public company method and the guideline transaction method under the market approach, to estimate the fair value of the long-lived assets in Russia. Further, in 2022 the Company implemented a restructuring program at its Russian subsidiary and recorded restructuring charges of $ 8,542 for personnel-related restructuring charges and other post employment benefits included in Restructuring charges (recoveries), net. In 2023, the Company substantially completed the restructuring program. As a result, the remaining restructuring accrual was substantially recovered. This resulted in net restructuring recoveries of $ 288 for the year ended December 31, 2023. Principles of Consolidation — The accompanying financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Foreign Currency — The financial information for entities outside the United States is measured using local currencies as the functional currency. Assets and liabilities are translated into U.S. dollars at the exchange rate in effect on the respective balance sheet dates. Income and expenses are translated into U.S. dollars based on the average rate of exchange for the corresponding period. Exchange rate differences resulting from translation adjustments are accounted for directly as a component of accumulated other comprehensive (loss) income. Cash and Cash Equivalents and Short-Term Investments — Cash and cash equivalents consist primarily of highly liquid investments, such as money market fund deposits, term deposits, corporate bonds, and commercial paper with maturities of three months or less at the date of purchase with insignificant interest rate risk. Short-term investments consist of liquid investments including commercial paper, corporate bonds, U.S. government and government agency notes and term deposits with original maturities of greater than three months but less than one year with insignificant interest rate risk. Fixed-term securities included in cash equivalents and short-term investments are held-to-maturity and accounted for at amortized cost. Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable include $ 17,313 and $ 12,977 of bank acceptance drafts at December 31, 2023 and 2022, respectively. Bank acceptance drafts are bank guarantees of payment on specified dates. The weighted average maturity of these bank acceptance drafts is approximately 102 days. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected. The allowance is based upon an estimate of expected credit losses over the life of outstanding receivables. The estimate involves an assessment of customer creditworthiness, historical payment experience, an assumption of future expected credit losses, and the age of outstanding receivables. F-9 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Activity related to the allowance for doubtful accounts was as follows: 2023 2022 2021 Balance at January 1 $ 2,639 $ 2,108 $ 2,156 Provision for bad debts, net of recoveries 36 712 434 Uncollectible accounts written off ( 840 ) ( 125 ) ( 437 ) Foreign currency translation ( 72 ) ( 56 ) ( 45 ) Balance at December 31 $ 1,763 $ 2,639 $ 2,108 Inventories — Inventories are stated at the lower of cost and net realizable value on a first-in, first-out basis. Inventories include parts and components that may be specialized in nature and subject to obsolescence. The Company periodically reviews the quantities and carrying values of inventories to assess whether the inventories are recoverable. The costs associated with provisions for excess quantities, technological obsolescence, or scrap related to out of specification components are charged to cost of sales as incurred. Goodwill — Goodwill is the amount by which the cost of the acquired net assets in a business acquisition exceeded the fair values of the net identifiable assets on the date of purchase. Goodwill is assessed for impairment at least annually, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. If the carrying value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying value of goodwill. If the carrying value of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess. The results of the goodwill assessments for the years ended December 31, 2023 and 2022 are discussed in Note 7, "Goodwill and Intangible Assets". Intangible Assets — Intangible assets result from the Company's various business acquisitions. Intangible assets are reported at cost, less accumulated amortization, and are amortized on a straight-line basis either over their estimated useful lives of one year to thirteen years or over the period the economic benefits of the intangible asset are consumed. Property, Plant and Equipment — Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is determined using the straight-line method based on the estimated useful lives of the related assets. In the case of leasehold improvements, the estimated useful lives of the related assets do not exceed the remaining terms of the corresponding leases. The following table presents the assigned economic useful lives of property, plant and equipment: Category Economic Useful Life Buildings 20 - 30 years Machinery and equipment 5 - 7 years Office furniture and fixtures 5 - 7 years Expenditures for maintenance and repairs are charged to operating expenses when they are incurred. Long-Lived Assets — Long-lived assets, which consist primarily of property, plant and equipment and identifiable intangible assets, are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When undiscounted expected future cash flows are less than the carrying value, an impairment loss is recorded equal to the amount by which the carrying value exceeds the fair value of assets. The impact of the long-lived assets impairment for the years ended December 31, 2023, and 2022 are discussed in Note 8, "Property, Plant and Equipment" and Note 13, "Leases". Included in other long-term assets is certain demonstration equipment. The demonstration equipment is amortized over the respective estimated economic lives, generally 3 years. The carrying value of the demonstration equipment totaled $ 3,726 and $ 3,686 at December 31, 2023 and 2022, respectively. Amortization expense of demonstration equipment for the years ended December 31, 2023, 2022 and 2021, was $ 3,480 , $ 2,387 and $ 3,596 , respectively. Authorized Capital — The Company has authorized capital stock consisting of 175,000,000 shares of common stock, par value $ 0.0001 per share, and 5,000,000 shares of preferred stock, par value $ 0.0001 per share. There are no shares of preferred stock outstanding as of December 31, 2023. F-10 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) Revenue Recognition — Revenue is recognized when transfer of control to the customer occurs in an amount reflecting the consideration that the Company expects to be entitled. In order to achieve this core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer's ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is identified as a distinct performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company's standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment but which can occur over time for certain of the Company's systems contracts. The Company often receives orders with the customer's schedule of delivery dates for products that may extend across several reporting periods. The Company allocates the transaction price of the contract to each delivery based on the product standalone selling price. The Company invoices for each scheduled delivery upon shipment and recognizes revenues for such delivery at that point, when transfer of control has occurred. As scheduled delivery dates are generally within one year , under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed. Rights of return are not generally included in customer contracts. Accordingly, upon application of steps one through five above, product revenue is recognized upon shipment and transfer of control. Returns are infrequent and are recorded as a reduction of revenue. In certain subsidiaries the Company provides sales commissions to sales representatives based on sales volume. The Company has determined that the incentive portion of its sales commissions qualify as contract costs. The Company has elected the practical expedient in ASC 340-40-25-4 to expense sales commissions when incurred as the amortization period of the asset that would otherwise have been recognized is one year or less. Revenue Recognition at a Point in Time — Revenues recognized at a point in time consist primarily of product, installation and service sales. The Company sells products to original equipment manufacturers ("OEMs") that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. The Company also sells products to end users that use IPG products directly to build their own systems, which incorporate or use IPG products as an energy or light source. The Company recognizes revenue for laser and spare part sales following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Installation revenue is recognized upon completion of the installation service, which typically occurs within 90 days of delivery. When sales contracts contain multiple performance obligations, such as the shipment or delivery of products and installation, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. Revenue Recognition over Time — Warranties are limited and provide that the product meets specifications and is free from defects in materials and workmanship. The Company also offers extended warranty agreements, which extend the standard warranty periods. Extended warranties are sold separately from products and represent a distinct performance obligation. Revenue related to the performance obligation for extended warranties is recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company. The customer receives the assurance that the product will operate in accordance with agreed-upon specifications evenly during the extended warranty period regardless of whether they make a claim during that period, and therefore, revenue at time of sale is deferred and recognized over the time period of the extended warranty period. The Company enters into contracts to sell customized large scale materials processing systems through its subsidiary Genesis Systems Group, LLC, for which revenue is generally recognized over time, depending on the terms of the contract. Recognizing revenue over time for these contracts is based on the Company’s judgment that the customized large scale F-11 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) materials processing systems do not have an alternative use and the Company has an enforceable right to payment for performance completed to date. The determination of the revenue to be recognized in a given period for performance obligations over time is based on the input method. The Company generally uses the total cost-to-cost input method of progress because it best depicts the transfer of control to the customer that occurs as costs are incurred. Under the cost-to-cost method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. Customer Deposits and Deferred Revenue — When the Company receives consideration from a customer or such consideration is unconditionally due prior to transferring goods or services under the terms of a sales contract, the Company records customer deposits or deferred revenue, which represent contract liabilities. The Company recognizes deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria are met. Warranties — The Company typically provides one to five-year warranties on lasers and amplifiers. Most of the Company's sales offices provide support to customers in their respective geographic areas. The Company estimates the warranty accrual considering past claims experience, the number of units still covered by warranty and the average life of the remaining warranty period. The warranty accrual has generally been sufficient to cover product warranty repair and replacement costs. Stock-based Compensation — The Company accounts for stock-based compensation expense using the fair value of the awards granted. The Company issues equity incentive awards in the form of time-based restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs"). The fair value for RSUs is based on the closing share price of the Company's common stock on the date of grant. PSUs are aligned to specified performance targets such as financial metrics or the relative return of the Company's common stock compared to an index ("TSR PSUs"). The fair value of PSUs aligned to specified financial performance metrics is determined based on the number of units expected to vest upon achievement of the performance conditions. The fair value for PSUs aligned to the TSR is based on a Monte Carlo simulation model. The Company recognizes stock-based compensation as an expense on a straight-line basis, over the requisite service period. The Company accounts for forfeitures as they occur. The Company has an employee stock purchase plan ("ESPP") offered to its U.S. and German employees. The Company uses the Black-Scholes model to calculate the purchase date fair value of the shares issued under the employee stock purchase plan and recognize expense related to shares purchased ratably over the offering period. The description of the Company's stock-based compensation plans and the assumptions it uses to calculate the fair value of stock-based compensation is described in Note 15, "Stock-based Compensation." Advertising Expense — The cost of advertising is expensed as incurred. The Company conducts substantially all of its sales and marketing efforts through trade shows, professional and technical conferences, direct sales and the Company's website. The Company's advertising costs were not material for the periods presented. Research and Development — Research and development costs are expensed as incurred. Restructuring — The Company records charges associated with approved restructuring plans to reorganize operations, to remove redundant headcount and infrastructure associated with business acquisitions or to improve the efficiency of business processes. Restructuring charges can include severance costs to eliminate a specific number of positions, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges when they are probable and estimable. The Company accrues for severance and other employee separation costs under these plans when the plan is communicated to employees and an amount per employee can be reasonably estimated either by the communicated terms, or by legal requirements, if applicable. The results of restructuring program implemented during the years ended December 31, 2023, and 2022 are discussed in Note 6, "Restructuring". Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and credit carryforwards. These differences are valued using enacted rates in effect when those differences are expected to reverse. Valuation allowances are provided against deferred tax assets that are not deemed to be recoverable. The Company recognizes tax positions that are more likely than not to be sustained upon examination by relevant tax authorities. The tax F-12 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) positions are measured at the greatest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement. The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. The reserves are based on a determination of whether a tax benefit claimed in our tax filings is 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. Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains substantially all of its cash and cash equivalents and short-term investments in various financial institutions, which it believes to be high-credit quality financial institutions. The Company grants credit to customers in the ordinary course of business and provides a reserve for potential credit losses. Such losses historically have been within management's expectations. One of our customers accounted for 14 % of our net accounts receivable as of both December 31, 2023 and 2022. The Company has historically depended on a few customers for a significant percentage of its annual net sales. The composition of this group can change from year to year. Net sales derived from the Company's five largest customers as a percentage of its annual net sales were 13 %, 15 % and 19 % in 2023, 2022 and 2021, respectively. Comprehensive Income — Comprehensive income includes charges and credits to equity that are not the result of transactions with stockholders. Included within comprehensive income is the cumulative foreign currency translation adjustment, and unrealized gains or losses on derivatives. These adjustments are accumulated within the consolidated statements of comprehensive income. Total components of accumulated other comprehensive loss were as follows: Foreign currency translation adjustments and other Unrealized (loss) gain on derivatives, net of tax Total Balance, January 1, 2021 $ ( 145,603 ) $ ( 462 ) $ ( 146,065 ) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments and other, net of tax benefit of $ 246 ( 44,164 ) — ( 44,164 ) Unrealized gain on derivatives, net of tax of $ 83 — 278 278 Total other comprehensive (loss) income ( 44,164 ) 278 ( 43,886 ) Balance, December 31, 2021 ( 189,767 ) ( 184 ) ( 189,951 ) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments and other before reclassification, net of tax of $ 156 ( 15,117 ) — ( 15,117 ) Reclassification for foreign currency translation adjustments and other included in net income 208 — 208 Unrealized gain on derivatives, net of tax of $ 104 — 336 336 Total other comprehensive (loss) income ( 14,909 ) 336 ( 14,573 ) Balance, December 31, 2022 ( 204,676 ) 152 ( 204,524 ) Other comprehensive loss, net of tax: Foreign currency translation adjustments and other before reclassification, net of tax of $ 151 ( 7,854 ) — ( 7,854 ) Unrealized (loss) on derivatives, net of tax benefit of $ 46 — ( 152 ) ( 152 ) Total other comprehensive loss ( 7,854 ) ( 152 ) ( 8,006 ) Balance, December 31, 2023 $ ( 212,530 ) $ — $ ( 212,530 ) Derivative Instruments — The Company's primary market exposures are to interest rates and foreign exchange rates. The Company from time to time may use certain derivative financial instruments to help manage these exposures. The Company F-13 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) executes these instruments with financial institutions it judges to be credit-worthy. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. Business Segment Information — The Company operates in one segment which involves the design, development, production and distribution of fiber lasers, laser and non-laser systems, fiber amplifiers, and related optical components. The Company has a single, company-wide management team that administers all properties as a whole rather than as discrete operating segments. The chief operating decision maker, who is the Company's chief executive officer, measures financial performance as a single enterprise, and not on geography, legal entity, or end market basis. Throughout the year, the chief operating decision maker allocates capital resources on a project-by-project basis across the Company's entire asset base to maximize profitability without regard to geography, legal entity, or end market basis. The Company operates in a number of countries throughout the world in a variety of product lines. Information regarding product lines and geographic financial information is provided in Note 2, "Revenue from Contracts with Customers" and Note 8, "Property, Plant and Equipment." Earnings Per Share — Basic net income per common share is computed by dividing net income attributable to common shareholders of the Company by the weighted-average number of common shares outstanding during the reporting period. Diluted net income per common share is computed similarly to basic net income per common share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Information about potentially dilutive and antidilutive shares for the reporting period is provided in Note 18, "Net Income Attributable to IPG Photonics Corporation Per Share." Leases — The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets, accrued expenses and other liabilities, and other long-term liabilities and deferred income taxes on the Company's consolidated balance sheets. Right of use ("ROU") assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, IPG uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The ROU assets include any lease payments made and initial direct costs incurred and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. Recent Accounting Pronouncements Adopted Pronouncements — None. Pronouncements Currently Under Evaluation - In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an annual and interim basis. Under the new guidance an entity is required to disclose the title and position of the chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The ASU also requires that an entity that has a single reportable segment provide all the disclosures required by this ASU and all existing segment disclosures in Topic 280. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the impact of this ASU and does not expect this standard will have a material impact. In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-07"), which requires an entity on an annual basis to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The guidance also requires an entity to disclose on an annual basis information about income taxes paid. ASU 2023-07 is effective for fiscal years beginning after December 15, 2024. The Company is evaluating the impact of this ASU and does not expect this standard will have a material impact. F-14 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. REVENUE FROM CONTRACTS WITH CUSTOMERS Sales are derived from products for different applications: fiber lasers, diode lasers, systems and accessories for materials processing, fiber lasers, amplifiers and diodes for advanced applications, and fiber lasers, systems and fibers for medical applications. The following tables represent a disaggregation of revenue from contracts with customers for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 Sales by Application Materials processing $ 1,152,804 $ 1,291,262 $ 1,325,404 Other applications 134,635 138,285 135,456 Total $ 1,287,439 $ 1,429,547 $ 1,460,860 Sales by Product High Power Continuous Wave ("CW") Lasers $ 524,981 $ 613,734 $ 687,406 Medium Power CW Lasers 71,672 77,079 80,501 Pulsed Lasers 185,581 250,677 240,978 Quasi-Continuous Wave ("QCW") Lasers 48,648 50,212 60,668 Laser and Non-Laser Systems 161,177 153,471 126,642 Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue 295,380 284,374 264,665 Total $ 1,287,439 $ 1,429,547 $ 1,460,860 Sales by Geography North America $ 313,986 $ 338,713 $ 314,984 Europe: Germany 88,026 85,491 101,738 Other Europe 291,336 294,481 289,136 Asia: China 355,321 479,926 548,348 Japan 72,333 57,865 54,077 Other 142,378 152,373 139,148 Rest of World 24,059 20,698 13,429 Total $ 1,287,439 $ 1,429,547 $ 1,460,860 Timing of Revenue Recognition Goods and services transferred at a point in time $ 1,239,551 $ 1,377,996 $ 1,402,498 Goods and services transferred over time 47,888 51,551 58,362 Total $ 1,287,439 $ 1,429,547 $ 1,460,860 The Company enters into contracts to sell lasers and spare parts, for which revenue is generally recognized upon shipment or delivery, depending on the terms of the contract. The Company also provides installation services and extended warranties. The Company frequently receives consideration from a customer prior to transferring goods to the customer under the terms of a sales contract. The Company records customer deposits related to these prepayments, which represent a contract liability. The Company also records deferred revenue related to installation services when consideration is received before the services have been performed. The standalone selling price for installation services is determined based on the estimated number of days of service technician time required for installation at standard service rates. The Company recognizes customer deposits and deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue F-15 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) recognition criteria are met. The Company bills customers for extended warranties upon entering into the agreement with the customer, resulting in deferred revenue that is recognized over the period of the extended warranty contract. The Company recognizes revenue over time on contracts for the sale of large scale materials processing systems. The timing of customer payments on these contracts generally differs from the timing of revenue recognized. If revenue recognized exceeds customer payments, a contract asset is recorded and if customer payments exceed revenue recognized, a contract liability is recorded. Contract assets are included within prepaid expense and other current assets on the consolidated balance sheets. Contract liabilities are included within accrued expenses and other current liabilities on the consolidated balance sheets. Certain deferred revenues related to extended warranties in excess of one year from the balance sheet date are included within other long-term liabilities and deferred income taxes on the consolidated balance sheets. The following table reflects the changes in the Company's contract assets and liabilities for the years ended December 31, 2023 and 2022: December 31, January 1, December 31, January 1, 2023 2023 Change 2022 2022 Change Contract assets Contract assets $ 9,383 $ 8,620 $ 763 $ 8,620 $ 9,345 $ ( 725 ) Contract liabilities Contract liabilities - current 69,219 80,068 ( 10,849 ) 80,068 89,659 ( 9,591 ) Contract liabilities - long-term 2,851 3,142 ( 291 ) 3,142 2,691 451 During the years ended December 31, 2023 and 2022, the Company recognized revenue of $ 62,247 and $ 73,325 , respectively, that was included in the contract liabilities at the beginning of the period. The following table represents the Company's remaining performance obligations from contracts that are recognized over time as of December 31, 2023: Remaining Performance Obligations 2024 2025 2026 2027 2028 Thereafter Total Revenue expected to be recognized for extended warranty agreements $ 3,008 $ 1,287 $ 910 $ 552 $ 98 $ 4 $ 5,859 Revenue to be earned over time from contracts to sell large scale materials processing systems 16,577 2,414 — — — — 18,991 Total $ 19,585 $ 3,701 $ 910 $ 552 $ 98 $ 4 $ 24,850 3. FAIR VALUE MEASUREMENTS The Company's financial instruments consisted of cash equivalents, short-term investments, accounts receivable, accounts payable, long-term debt, interest rate swaps and revolving lines of credit. The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company classifies its financial instruments according to the prescribed criteria. The carrying amounts of money market fund deposits, cash equivalent term deposits, accounts receivable, and accounts payable and revolving lines of credit are considered reasonable estimates of their fair market value due to the short maturity of most of these instruments or as a result of the competitive market interest rates, which have been negotiated. The fair value of the Company's commercial paper, corporate bonds, U.S. Treasury and agency obligations, and term deposits are based on Level 2 inputs. F-16 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The following table presents fair value information related to the Company's assets and liabilities measured at amortized cost on the consolidated balance sheets with the exception of the interest rate swap, which was measured at fair value: Fair Value Measurements at December 31, 2023 Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market fund deposits $ 171,632 $ 171,632 $ — $ — Term deposits 83,965 — 83,965 — Corporate bonds 23,516 — 23,516 — Commercial paper 6,369 — 6,369 — Short-term investments: Commercial paper 244,571 — 244,571 — Corporate bonds 243,915 — 243,915 — U.S. Treasury and agency obligations 171,316 — 171,316 — Term deposits 3,009 — 3,009 — Total assets $ 948,293 $ 171,632 $ 776,661 $ — Fair Value Measurements at December 31, 2022 Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market fund deposits $ 195,654 $ 195,654 $ — $ — Commercial paper 94,661 — 94,661 — Term deposits 68,827 — 68,827 — Corporate bonds 1,497 — 1,497 — Short-term investments: Commercial paper 363,991 — 363,991 — Corporate bonds 65,022 — 65,022 — U.S. Treasury and agency obligations 39,611 — 39,611 — Term deposits 10,113 — 10,113 — Other assets: Interest rate swap 198 — 198 — Total assets $ 839,574 $ 195,654 $ 643,920 $ — Liabilities Term debt $ 16,031 $ — $ 16,031 $ — Total liabilities $ 16,031 $ — $ 16,031 $ — There were no impairments for the investments considered held-to-maturity at December 31, 2023 and December 31, 2022. There were no current expected credit loss allowances for the investments considered held-to-maturity at December 31, 2023 and 2022. The Company holds highly-rated held-to-maturity instruments that are within one year of maturity. The following table presents the effective maturity dates of debt investments, which are held-to-maturity: December 31, 2023 December 31, 2022 Book Value Fair Value Book Value Fair Value Investment maturity Less than 1 year $ 662,807 $ 662,811 $ 479,374 $ 478,737 F-17 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) The Company entered into an interest rate swap that is designated as a cash flow hedge associated with a long-term note issued during the second quarter of 2016. In May 2023, the Company's long-term variable rate note matured and the interest rate swap associated with this note matured. At December 31, 2022, the carrying value of the note approximates the estimated fair value of $ 16,031 . The long-term notes were reported at amortized cost on the consolidated balance sheets and were classified within Level 2 of the fair value hierarchy. 4. INVENTORIES Inventories consist of the following: December 31, 2023 2022 Components and raw materials $ 263,652 $ 322,506 Work-in-process 47,997 18,911 Finished goods 142,225 167,946 Total $ 453,874 $ 509,363 The Company recorded inventory provisions of $ 45,499 , $ 127,960 and $ 34,285 for the years ended December 31, 2023, 2022 and 2021, respectively. These provisions relate to the recoverability of the value of inventories due to excess quantities and technological changes. These provisions are reported as a reduction to components and raw materials, work-in-process and finished goods. Within the inventory provision and related charges recorded in 2022, $ 74,055 is related to Russian operations. See Note 1, "Nature of Business and Summary of Significant Accounting Policies", section Russian Operations for further detail. 5. DIVESTITURE AND SALE OF ASSET During the third quarter of 2022, the Company completed the sale of its telecommunications transmission product line for $ 56,222 . The Company recorded a gain on divestiture of $ 21,918 for the year ended December 31, 2022, which was included in the Company's consolidated statements of income. As part of the transaction and just prior to closing, the Company also acquired the remaining non-controlling interests related to the business that was sold for $ 2,500 . During the fourth quarter of 2022, the Company completed the sale of its corporate aircraft for $ 25,693 and recorded a gain of $ 9,928 which was included in the Company's consolidated statements of income. 6. RESTRUCTURING In the fourth quarter of 2022, the Company implemented a restructuring program at its Russian subsidiary. In 2023, the Company substantially completed the restructuring program. As a result, the remaining restructuring accrual was substantially recovered. This resulted in net restructuring recoveries of $ 288 for the year ended December 31 2023. The Company incurred restructuring charges of $ 9,697 for the year ended December 31, 2022. The restructuring accrual was included in accrued expenses and other liabilities in the Company's consolidated balance sheets. Activities related to the restructuring accrual were as follows: 2023 2022 Balance at January 1 $ 4,869 $ — Charges 1,436 9,697 Cash payments ( 3,719 ) ( 4,493 ) Recoveries ( 1,724 ) — Foreign exchange adjustment ( 862 ) ( 335 ) Balance at December 31 $ — $ 4,869 F-18 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 7. GOODWILL AND INTANGIBLE ASSETS The following table sets forth the changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022: 2023 2022 Balance at January 1 $ 38,325 $ 38,609 Goodwill arising from business combinations — 1,000 Goodwill written off related to divestiture — ( 796 ) Foreign exchange adjustment 215 ( 488 ) Balance at December 31 $ 38,540 $ 38,325 The Company performed the 2023 and 2022 annual impairment test as of October 1, 2023 and 2022, respectively, and no impairments were recorded as a result of the tests. The carrying balance of goodwill at December 31, 2023, and 2022 was net of accumulated impairments of $ 81,709 . Intangible assets, subject to amortization, consisted of the following: December 31, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted- Average Lives Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted- Average Lives Customer relationships $ 48,216 $ ( 25,973 ) $ 22,243 11 years $ 48,155 $ ( 21,734 ) $ 26,421 11 years Technology, trademark and trade name 29,903 ( 25,960 ) 3,943 7 years 30,360 ( 23,189 ) 7,171 7 years Production know-how 9,155 ( 9,155 ) — 7 years 9,109 ( 8,818 ) 291 7 years Patents 8,035 ( 7,987 ) 48 8 years 8,034 ( 7,797 ) 237 8 years Total $ 95,309 $ ( 69,075 ) $ 26,234 $ 95,658 $ ( 61,538 ) $ 34,120 Amortization expense for the years ended December 31, 2023, 2022 and 2021 was $ 7,895 , $ 10,454 and $ 12,427 , respectively. The estimated future amortization expense for intangibles as of December 31, 2023 is as follows: 2024 2025 2026 2027 2028 Thereafter Total $ 5,556 $ 4,978 $ 4,217 $ 4,005 $ 3,636 $ 3,842 $ 26,234 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, 2023 2022 Land $ 52,506 $ 52,618 Buildings 446,031 434,698 Machinery and equipment 457,968 424,197 Office furniture and fixtures 81,313 73,636 Construction-in-progress 118,341 103,655 Total property, plant and equipment 1,156,159 1,088,804 Accumulated depreciation ( 553,902 ) ( 508,243 ) Total property, plant and equipment — net $ 602,257 $ 580,561 The Company recorded depreciation expense of $ 58,245 , $ 76,063 and $ 78,563 for the years ended December 31, 2023, 2022 and 2021, respectively. In 2022, the Company recorded an impairment charge of $ 79,030 for long-lived asset in Russia. F-19 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) See Note 1, "Nature of Business and Summary of Significant Accounting Policies", section Russian Operations for further detail. Long-lived assets include property, plant and equipment, related deposits on such assets and demonstration equipment. The geographic locations of the Company's long-lived assets, net, based on physical location of the assets, as of December 31, 2023 and 2022 are as follows: December 31, 2023 2022 United States $ 384,088 $ 388,111 Germany 132,218 111,726 Belarus 31,833 39,380 Italy 10,747 9,340 Japan 9,024 5,043 China 4,328 5,406 Other 41,494 31,258 Total $ 613,732 $ 590,264 9. OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: December 31, 2023 2022 Contract liabilities $ 69,219 $ 80,068 Accrued compensation 67,053 78,251 Current portion of accrued warranty 27,283 28,504 Short-term lease liabilities 4,597 5,234 Other 13,198 10,707 Total $ 181,350 $ 202,764 Other long-term liabilities and deferred income taxes consist of the following: December 31, 2023 2022 Accrued warranty $ 19,926 $ 24,358 Long-term lease liabilities 13,664 16,787 Unrecognized tax benefits 17,176 15,841 Transition tax related to 2017 U.S. tax reform act 11,009 19,874 Deferred income taxes 1,508 1,469 Other 5,369 4,945 Total $ 68,652 $ 83,274 F-20 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 10. PRODUCT WARRANTIES Activity related to the warranty accrual was as follows: 2023 2022 2021 Balance at January 1 $ 52,862 $ 49,864 $ 45,669 Provision for warranty accrual 13,596 22,565 33,289 Warranty claims ( 19,801 ) ( 17,829 ) ( 26,568 ) Foreign currency translation 552 ( 1,738 ) ( 2,526 ) Balance at December 31 $ 47,209 $ 52,862 $ 49,864 Accrued warranty reported in the accompanying consolidated financial statements as of December 31, 2023 and December 31, 2022 consists of $ 27,283 and $ 28,504 in accrued expenses and other liabilities and $ 19,926 and $ 24,358 in other long-term liabilities and deferred income taxes, respectively. 11. FINANCING ARRANGEMENTS Term Debt: The Company's unsecured long-term note matured and was paid in May 2023, at which time the outstanding principal balance was $ 15,438 . At December 31, 2023, the Company has no long-term debt outstanding. Revolving Line of Credit Facilities: The Company maintains an unsecured revolving line of credit with a principal amount of $ 75,000 , expiring in April 2025. The line of credit bears interest at a variable rate of the Bloomberg Short-term Bank Yield Index ("BSBY") plus 0.80 % to 1.20 % depending on the Company's financial performance. Part of this credit facility is available to the Company's foreign subsidiaries including those in India, China, Japan and Brazil based on management discretion. At December 31, 2023, there were no outstanding drawings, however, there were $ 2,487 of guarantees issued against the line which reduced the total availability. At December 31, 2023, the remaining availability under this line was $ 72,513 . In addition, the Company maintains Euro line of credit facilities with a total principal amount of € 6,500 ($ 7,173 as of December 31, 2023), which are available to certain European subsidiaries. The Company is required to meet certain financial covenants associated with its U.S. revolving line of credit and long-term debt facility. These covenants, tested quarterly, include an interest coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. The interest coverage covenant requires that the Company maintains a trailing twelve-month ratio of EBITDA to interest on all obligations that is at least 3.0 :1.0. The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than three times its trailing twelve months EBITDA. Funded debt is decreased by its cash and available marketable securities not classified as long-term investments in the U.S. in excess of $ 50,000 up to a maximum of $ 500,000 . 12. DERIVATIVE INSTRUMENTS The Company's previous outstanding derivative financial instrument was an interest rate swap that was classified as a cash flow hedge of its variable rate debt. The interest rate swap matured with the long-term note in May 2023. The derivative gains and losses in the consolidated financial statements related to the Company's previous interest rate swap contracts were as follows: Year Ended December 31, 2023 2022 2021 Effective portion recognized in other comprehensive (loss) income, pre-tax: Interest rate swap $ ( 198 ) $ 440 $ 361 F-21 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 13. LEASES The Company leases certain warehouses, office spaces, land, vehicles and equipment under operating lease agreements. The remaining terms of these leases range from less than 1 year to 41 years. The operating lease expense for the years ended December 31, 2023, 2022 and 2021, totaled $ 4,529 , $ 8,112 and $ 7,975 , respectively. The cash paid for amounts included in the measurement of lease liabilities included in the operating cash flows from operating leases was $ 6,110 , 7,192 and 6,854 for the years ended December 31, 2023, 2022 and 2021, respectively. The Company does not have any finance lease arrangements. The Company's operating lease assets and lease liabilities consist of the following as of December 31, 2023 and 2022: Year Ended December 31, Account Classification 2023 2022 Right-of-use assets Other assets $ 13,947 $ 15,564 Short-term lease liabilities Accrued expenses and other liabilities 4,597 5,234 Long-term lease liabilities Other long-term liabilities and deferred income taxes 13,664 16,787 Total lease liabilities $ 18,261 $ 22,021 The Company incurred $ 1,237 of non-cash impairment charges related to long-lived assets during the year ended December 31, 2023, related to the right-of-use ("ROU") asset for a leased building associated with the Company's 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 table below presents the maturities of operating lease liabilities as of December 31, 2023: 2024 $ 5,224 2025 4,291 2026 3,283 2027 2,084 2028 1,758 Thereafter 4,356 Total future minimum lease payments 20,996 Less: imputed interest ( 2,735 ) Present value of lease liabilities $ 18,261 Other information relevant to the Company's operating leases consist of the following as of December 31, 2023 and 2022: Year Ended December 31, 2023 2022 Weighted-average remaining lease term 6.66 years 7.35 years Weighted-average discount rate 4.39 % 4.33 % 14. COMMITMENTS AND CONTINGENCIES Employment Agreements — The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to two years and include non-competition, non-solicitation and nondisclosure provisions, as well as provisions for defined severance for terminations of employment under certain conditions and a change of control of the Company. The Company also maintains a severance plan for certain of its senior management providing for defined severance for terminations of employment under certain conditions and a change of control of the Company. Contractual Obligations — The Company has entered into various purchase obligations that include agreements for construction of buildings, raw materials and equipment. Obligations under these agreements were $ 27,404 and $ 25,070 as of F-22 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) December 31, 2023 and 2022, respectively, and the obligations related to raw materials and equipment are generally expected to be fulfilled within one year. Legal Proceedings — From time to time, the Company may be involved in legal disputes and other proceedings in the ordinary course of its business. These matters may include allegations of infringement of intellectual property, commercial disputes and employment matters. As of December 31, 2023 and through the date of the Company's subsequent review period of February 21, 2024, the Company is aware of no ongoing legal proceedings that management estimates could have a material effect on the Company's Consolidated Financial Statements. Following the submission of a limited number of voluntary self-disclosures regarding compliance with export control laws and regulations to the Bureau of Industry and Security of the U.S. Department of Commerce ("BIS"), the Company received subpoenas from the U.S. Department of Justice ("DOJ") and BIS in October 2021 and October 2022, respectively. The Company has been informed by the DOJ and BIS that the Company has satisfied its obligations under the subpoenas. The Company believes that those investigations are concluded. 15. STOCK-BASED COMPENSATION Stock-based compensation, including the employee stock purchase plan, is included in the following financial statement captions: Year Ended December 31, 2023 2022 2021 Cost of sales $ 7,929 $ 11,741 $ 11,245 Sales and marketing 5,421 4,889 4,320 Research and development 9,396 7,585 9,533 General and administrative 16,858 14,120 12,883 Total stock-based compensation 39,604 38,335 37,981 Tax effect of stock-based compensation ( 8,660 ) ( 8,261 ) ( 8,071 ) Net stock-based compensation $ 30,944 $ 30,074 $ 29,910 Incentive Plans — In 2006, the Company's stockholders approved the 2006 Incentive Compensation Plan (as amended and restated from time to time, the "2006 Plan"), which provides for the issuance of stock options, PSUs, RSUs, other equity-based awards and cash awards to the Company's directors, employees, consultants and advisors. Also in 2006, the Company's stockholders approved the Non-Employee Directors Stock Plan (the "Directors Plan") for non-employee directors, which was subsequently merged into the 2006 Plan. The Company's stockholders approved amendments to the 2006 Plan in May 2006 and May 2023, including an increase in the authorized shares. A total of 11,563,465 shares are reserved under the 2006 Plan. At December 31, 2023, 3,107,336 shares of the Company's stock were available for future grant under the 2006 Plan. The Company may grant stock options only at an exercise price equal to or greater than the fair market value of its common stock on the date of grant. Equity awards generally vest over periods of one to four years and, in the case of stock options, generally expire ten years after the date of the grant. The vesting of awards under the 2006 Plan accelerate following the occurrence of certain change of control events if the participant's employment is terminated within two years by the Company without cause or by the participant for good reason or if an entity acquires control of the Company and does not agree to assume existing awards or replace with equivalent value awards. Awards granted to non-employee directors automatically become vested upon a change of control. All shares issued under the 2006 Plan are registered shares, newly issued by the Company. The Company granted certain RSUs and PSUs to executive officers and other senior managers. The RSUs provide for time-based vesting of a fixed number of shares over three years . The PSUs provide the holder with the right to receive shares of the Company's common stock after the applicable award vesting period, generally three years . The final number of shares, if any, delivered upon vesting of PSUs are determined over the relevant performance period, generally three years . Outstanding PSUs are based on either TSR or financial metrics. In the case of TSR PSUs, performance is measured by the Company's total shareholder return over the performance period compared to the S&P 1500 Composite / Electronic Equipment & Instruments Index. In the case of all other PSUs, performance is measured against internal financial metrics established by the Company's Board. The final number of shares to be delivered under the PSUs range from 0 % to 200 % of the target award amount. F-23 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) The Company has not granted stock options since 2020. The following table summarizes the option activity for the year ended December 31, 2023: Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding at January 1, 2023 881,887 $ 138.16 Granted — — Exercised ( 84,146 ) 66.90 Forfeited ( 28,579 ) 180.77 Outstanding at December 31, 2023 769,162 $ 144.38 3.21 years $ 6,271 Exercisable at December 31, 2023 769,162 $ 144.38 3.21 years $ 6,271 The intrinsic value of the options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 4,085 , $ 6,069 and $ 28,353 , respectively. All option awards were vested during the year ended December 31, 2023. Cash received from option exercises during the year ended December 31, 2023 was $ 5,630 . Tax benefit received from option exercises during the year ended December 31, 2023 was $ 1,017 . The following table summarizes the RSUs activity for the year ended December 31, 2023: Number of Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2023 422,736 $ 154.22 Granted 265,661 128.71 Vested ( 190,133 ) 148.94 Forfeited ( 22,333 ) 146.59 Nonvested at December 31, 2023 475,931 $ 142.51 The fair value of each restricted stock unit is the market price of Company stock on the date of grant. The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2023, 2022 and 2021 was $ 128.71 , $ 131.32 and $ 229.13 , respectively. The intrinsic value of the RSUs that vested during the years ended December 31, 2023, 2022 and 2021, was $ 23,082 , $ 14,750 and $ 26,036 , respectively. The total compensation cost related to nonvested RSU awards not yet recorded at December 31, 2023 was $ 41,522 which is expected to be recognized over a weighted-average of 1.8 years. The aggregate fair value of awards vested during the years ended December 31, 2023, 2022 and 2021 was $ 28,319 , $ 22,779 , $ 18,042 , respectively. The fair value of TSR PSUs was determined using the Monte Carlo simulation model incorporating the following assumptions: 2021 Performance term (years) 3.0 Volatility 29 % - 51 % Risk-free rate of return 0.23 % - 0.26 % Dividend yield — % Fair value per share $ 248.49 - $ 165.15 F-24 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) The following table summarizes TSR PSUs activity for the year ended December 31, 2023: Number of Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2023 39,090 $ 195.82 Granted — — Vested ( 1,331 ) 248.49 Canceled / Forfeited ( 22,851 ) 168.82 Nonvested at December 31, 2023 14,908 $ 233.75 The Company has not granted TSR PSUs since 2021. For the year ended December 31, 2021, the weighted average grant date fair value for new grants was $ 236.11 . TSR PSUs are expensed at 100% of the target goal. The intrinsic value of the TSR PSUs vested during the years ended December 31, 2023, 2022 and 2021 was $ 128 , nil , nil . The aggregate fair value of awards vested during the years ended December 31, 2023, 2022 and 2021 was $ 331 , nil , and nil , respectively. The total compensation cost related to nonvested awards not yet recorded at December 31, 2023 was $ 220 which is expected to be recognized over a weighted average of 0.3 year. The following table summarizes financial metric-based PSUs activity for the year ended December 31, 2023: Number of Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2023 97,552 $ 153.56 Granted 64,706 131.13 Vested ( 27,561 ) 144.32 Canceled / Forfeited ( 6,351 ) 146.63 Nonvested at December 31, 2023 128,346 $ 144.61 For the years ended December 31, 2023, 2022 and 2021, the weighted average grant date fair value for new grants was $ 131.13 , $ 136.64 , and $ 228.62 . The financial metric-based PSUs are expensed at 50 % to 80 % of the target goals. The total compensation cost related to nonvested awards not yet recorded at December 31, 2023 was $ 6,098 , which is expected to be recognized over a weighted average period of 2.0 years. The Company has an employee stock purchase plan ("ESPP") offered to its U.S. and German employees. The plan allows employees who participate to purchase shares of common stock through payroll deductions at a 15 % discount to the lower of the stock price on the first day or the last day of the six-month purchase period. Payroll deductions may not exceed 10 % of the employee's compensation and are subject to other limitations. The assumptions used in the Black-Scholes model for the calculation of the ESPP fair values were as follows: 2023 2022 2021 Performance term (year) 0.5 0.5 0.5 Volatility 35 % - 37 % 41 % - 52 % 33 % - 42 % Risk-free rate of return 4.76 % - 5.47 % 0.19 % - 2.52 % 0.09 % - 0.05 % Dividend yield 0.10 % 0.10 % 0.10 % Fair value per share $ 23.42 - $ 33.55 $ 45.91 - $ 26.68 $ 53.09 - $ 56.43 Compensation expense related to the employee stock purchase plan was $ 1,595 , $ 1,924 and $ 1,861 for the years ended December 31, 2023, 2022 and 2021, respectively. During the years ended December 31, 2023, 2022 and 2021, 57,984 , 62,233 and 34,151 shares, respectively, were issued at an average price of $ 86.89 , $ 78.57 and $ 160.81 , respectively, under the employee stock purchase plan. As of December 31, 2023, there were 140,176 shares available for issuance under the employee stock purchase plan. F-25 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) 16. EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution retirement plan offered to its eligible U.S. employees, as well as plans at certain foreign and domestic subsidiaries. The Company makes matching contributions to each plan, which amounted to approximately $ 6,496 , $ 6,344 and $ 6,081 , respectively, for the years ended December 31, 2023, 2022 and 2021. 17. INCOME TAXES Income before the impact of income taxes consisted of the following: Year Ended December 31, 2023 2022 2021 U.S. $ 131,601 $ 135,041 $ 103,980 Foreign 143,274 48,310 262,501 Total $ 274,875 $ 183,351 $ 366,481 The Company's provision for income taxes consisted of the following: Year Ended December 31, 2023 2022 2021 Current: Federal $ 22,908 $ 39,435 $ 13,842 State 4,623 3,697 273 Foreign 42,255 57,032 81,385 Total current 69,786 100,164 95,500 Deferred: Federal ( 10,306 ) ( 25,979 ) ( 179 ) State ( 1,635 ) ( 2,121 ) 844 Foreign ( 1,848 ) 525 ( 7,550 ) Total deferred ( 13,789 ) ( 27,575 ) ( 6,885 ) Provision for income taxes $ 55,997 $ 72,589 $ 88,615 F-26 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) A reconciliation of income tax expense at the U.S. federal statutory income tax rate to the recorded tax provision were as follows: Year Ended December 31, 2023 2022 2021 Tax at statutory rate $ 57,724 $ 38,504 $ 76,955 Non-U.S. rate differential — net 12,685 21,352 18,710 State income taxes — net 3,380 4,904 2,050 Stock-based compensation — tax detriment (benefit) 1,835 2,736 ( 5,440 ) Foreign derived intangible income benefit ("FDII") ( 9,322 ) ( 14,576 ) ( 4,704 ) Prior year and audit adjustments ( 4,793 ) ( 2,240 ) ( 2,119 ) Withholding tax on intercompany dividend — 1,005 2,883 Federal and state tax credits ( 6,375 ) ( 5,238 ) ( 7,482 ) Foreign investment tax credit — ( 9,559 ) ( 324 ) Change in reserves, including interest and penalties 2,379 ( 3,355 ) 4,072 Change in valuation allowance ( 2,548 ) 36,993 1,681 Other — net 1,032 2,063 2,333 Provision for income taxes $ 55,997 $ 72,589 $ 88,615 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows: Year Ended December 31, 2023 2022 Property, plant and equipment $ ( 5,019 ) $ 6,275 Intangible assets 43,020 27,044 Inventory provisions 46,808 43,628 Allowances and accrued liabilities 951 2,584 Withholding tax on intercompany dividend ( 1,504 ) ( 1,461 ) Other tax credits 20,864 18,554 Deferred compensation 22,682 27,114 Net operating loss carryforwards 8,299 7,410 Valuation allowance ( 48,821 ) ( 57,465 ) Net deferred tax assets $ 87,280 $ 73,683 The Company accrues taxes on dividend distributions to the extent that foreign subsidiaries have cash in excess of their operational needs. The Company has recorded $ 1,504 and $ 1,461 as a deferred tax liability on December 31, 2023 and 2022, respectively, for certain withholding and dividend taxes related to possible future distributions of excess cash from certain non-U.S. subsidiaries to their respective parent companies. In 2023, the German subsidiary paid a dividend of $ 107,941 to the U.S. parent company. There was no federal or withholding tax due on the distribution from Germany to the U.S., but in 2023 the Company has accrued a nominal amount of state tax expected to be paid in 2024 relating to the distribution. With regard to the other non-U.S. subsidiaries, the Company continues to consider the earnings from these entities to be indefinitely reinvested to the extent the cash balance in each subsidiary is not greater than the current needs for operations and expansion. At December 31, 2023 and 2022, the cumulative undistributed earnings in non-U.S. subsidiaries were approximately $ 944,867 and $ 967,674 , respectively. In determining the Company’s 2023 and 2022 tax provisions, the Company calculated the deferred tax assets and liabilities for each separate tax entity. The Company then considered a number of factors including the positive and negative F-27 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) evidence regarding the realization of deferred tax assets to determine whether a valuation allowance should be recognized with respect to the deferred tax assets. As of December 31, 2023 and 2022, the Company had state tax credit carryforwards (net of federal tax benefit) of $ 20,704 and $ 18,398 , respectively. The state tax credit carryforwards begin expiring in 2024. The Company has determined that some of the state credits will more likely than not expire before they can be used and has recorded a valuation allowance of $ 17,996 and $ 15,690 as of December 31, 2023 and 2022, respectively. The Company has tax loss carryforwards in foreign jurisdictions totaling $ 25,747 and $ 22,134 as of December 31, 2023 and 2022, respectively. The Company believes it is more likely than not that most of the loss carryforwards will expire before they can be used and has provided a valuation allowance against the tax benefit of the losses in foreign jurisdictions of $ 6,952 and $ 5,942 at December 31, 2023 and 2022, respectively. In addition, the Company has a valuation allowance primarily from its Russian subsidiary against other deferred tax assets of $ 23,873 and $ 35,833 at December 31, 2023 and 2022, respectively. The Company's acquisition of Menara Networks, Inc. in 2016 included net operating loss carryforwards of $ 22,242 . As of December 31, 2023 and 2022, the Company had $ 790 and $ 1,844 of these net operating loss carryforwards remaining, respectively. No valuation allowance has been provided for these loss carryforwards as the Company expects them to be fully utilized to offset future income. The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves recorded are based on a determination of the amount of a tax benefit taken by the Company that is more likely than not to be realized, assuming that the matter in question will be reviewed by the tax authorities. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: 2023 2022 2021 Balance at January 1 $ 15,841 $ 19,209 $ 14,706 Change in prior period positions ( 1,306 ) ( 3,921 ) ( 1,969 ) Additions for tax positions in current period 3,041 735 6,400 Foreign exchange adjustments ( 400 ) ( 182 ) 72 Balance at December 31 $ 17,176 $ 15,841 $ 19,209 The liability for uncertain tax benefits is included in other long-term liabilities and deferred income taxes at December 31, 2023 and 2022. Substantially all of the uncertain tax benefits reserved for as of December 31, 2023 will benefit the Company's effective tax rate, if recognized. Estimated penalties and interest related to the potential underpayment of income taxes were a net expense of $ 646 and net benefit of $ 168 for the years ended December 31, 2023 and 2022, respectively, and are included within the provision for income taxes. Total accrued penalties and interest related to the underpayment of income taxes were $ 2,043 and $ 1,476 at December 31, 2023 and 2022, respectively. The Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The Company is currently under a tax audit in the U.S. for the years 2019 and 2020. Open tax years by major jurisdictions are: Jurisdiction Open Tax Years United States 2019 - 2023 Germany 2021 - 2023 Russia 2021 - 2023 F-28 Table of Contents IPG PHOTONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (In thousands, except share and per share data) 18. NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE The following table sets forth the computation of diluted net income attributable to IPG Photonics Corporation per share: Year Ended December 31, 2023 2022 2021 Net income attributable to IPG Photonics Corporation common stockholders $ 218,878 $ 109,909 $ 278,416 Basic weighted average common shares 47,154,217 50,761,096 53,409,673 Dilutive effect of common stock equivalents 165,858 163,646 520,554 Diluted weighted average common shares 47,320,075 50,924,742 53,930,227 Basic net income attributable to IPG Photonics Corporation per common share $ 4.64 $ 2.17 $ 5.21 Diluted net income attributable to IPG Photonics Corporation per common share $ 4.63 $ 2.16 $ 5.16 The computation of diluted weighted average common shares excludes certain common stock equivalents, including non-qualified stock options, PSUs, RSUs and the ESPP because the effect of including them would be anti-dilutive. The weighted average anti-dilutive shares outstanding for the years ended December 31, 2023, 2022 and 2021, respectively, were as follows: Year Ended December 31, 2023 2022 2021 Non-qualified stock options 533,402 594,290 216,190 Restricted stock units 246,481 344,810 103,998 Performance stock units 51,851 81,348 25,451 Employee stock purchase plan 30,951 — — Total weighed average anti-dilutive shares outstanding 862,685 1,020,448 345,639 On May 2, 2023, the Company announced that its board of directors has authorized the purchase of up to $ 200,000 of IPG common stock. This authorization is in addition to the Company's previously authorized stock repurchase programs. For the years ended December 31, 2023, 2022 and 2021, respectively, the Company repurchased 2,117,352 shares, 5,101,434 shares, and 743,969 shares of its common stock with an average price of $ 104.68 , $ 97.89 and $ 181.28 per share in the open market, respectively. The August 2022 authorization to repurchase common stock was completed in 2023. As of December 31, 2023 the remaining amount authorized under the May 2023 authorization was up to $ 90,518 . The impact on the reduction of weighted average shares for years ended December 31, 2023, 2022 and 2021 was 1,167,412 shares, 2,393,478 shares and 244,451 shares, respectively. 19. SUBSEQUENT EVENTS On February 13, 2024, the Company announced that its board of directors has authorized the purchase of up to $ 300,000 of IPG common stock. Share repurchases may be made periodically in open-market transactions, and are subject to market conditions, legal requirements and other factors. The share repurchase program authorization does not obligate the Company to repurchase any dollar amount or number of its shares, and repurchases may be commenced or suspended from time to time without prior notice. F-29