IPG PHOTONICS CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors including,
but not limited to, those discussed under Item 1A, "Risk Factors." The following
analysis generally discusses 2021 and 2020 items and year-to-year comparisons
between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons
between 2020 and 2019 that are not included in this Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the fiscal year ended December
31, 2020 filed with the SEC on February 22, 2021.

Overview

We develop, manufacture and sell high-performance fiber lasers, fiber amplifiers
and diode lasers that are used for diverse applications, primarily in materials
processing. We also manufacture and sell complementary products used with our
lasers including optical delivery cables, fiber couplers, beam switches, optical
processing heads, in-line sensors and chillers. In addition, we offer
laser-based and non-laser based systems for certain markets and applications.
Our portfolio of laser solutions are used in materials processing,
communications, medical and advanced applications. We sell our products globally
to original equipment manufacturers ("OEMs"), system integrators and end users.
We market our products internationally, primarily through our direct sales
force. Our major manufacturing facilities are located in the United States,
Germany, Russia and Belarus. We have sales service offices and applications
laboratories worldwide.
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We are vertically integrated such that we design and manufacture most of the key
components used in our finished products, from semiconductor diodes to optical
fiber preforms, finished fiber lasers, amplifiers and complementary products.
Our vertically integrated operations allow us to reduce manufacturing costs,
control quality, rapidly develop and integrate advanced products and protect our
proprietary technology.

Description of our Net salesCosts and expenses

Net sales. We derive net sales primarily from the sale of fiber lasers, diode
lasers, laser and non-laser based systems, amplifiers and complementary
products. We sell our products to OEMs that supply materials processing laser
systems, communications systems, medical laser systems and other laser systems
to end users. We also sell our laser products and laser and non-laser based
systems to end users. Our scientists and engineers work closely with OEMs,
systems integrators and end users to analyze their system requirements and match
appropriate fiber laser, amplifier or system specifications to those
requirements. Our sales cycle varies substantially, ranging from a period of a
few weeks to as long as one year or more, but is typically several months.

Sales of our products are generally recognized upon shipment, provided that no
obligations remain and collection of the receivable is reasonably assured. Sales
of customized robotic systems are recognized over time. Our sales typically are
made on a purchase order basis rather than through long-term purchase
commitments.

We develop our products to standard specifications and use a common set of
components within our product architectures. Our major products are based upon a
common technology platform. We continually enhance these and other products by
improving their components and developing new components and new product
designs.

Cost of sales. Our cost of sales consists primarily of the cost of raw materials
and components, direct labor expenses and manufacturing overhead. We are
vertically integrated and currently manufacture all critical components for our
products as well as assemble finished products. We believe our vertical
integration allows us to increase efficiencies, leverage our scale and lower our
cost of sales. Cost of sales also includes personnel costs and overhead related
to our manufacturing, engineering and service operations, related occupancy and
equipment costs, shipping costs and reserves for inventory obsolescence and for
warranty obligations. Inventories are written off and charged to cost of sales
when identified as excess or obsolete.

Due to our vertical integration strategy and ongoing investment in plant and
machinery, we maintain a relatively high fixed manufacturing overhead. We may
not be able to or choose not to adjust these fixed costs to adapt to rapidly
changing market conditions. Our gross margin is therefore significantly affected
by our sales volume and the corresponding utilization of capacity and absorption
of fixed manufacturing overhead expenses.

Sales and marketing. Our sales and marketing expense consists primarily of costs
related to compensation, trade shows, professional and technical conferences,
travel, facilities, depreciation of equipment used for demonstration purposes
and other marketing costs.

Research and development. Our research and development expense consists
primarily of compensation, development expenses related to the design of our
products and certain components, the cost of materials and components to build
prototype devices for testing and facilities costs. Costs related to product
development are recorded as research and development expenses in the period in
which they are incurred.

General and administrative. Our general and administrative expense consists
primarily of compensation and associated costs for executive management,
finance, legal, human resources, information technology and other administrative
personnel, outside legal and professional fees, insurance premiums and fees,
allocated facilities costs and other corporate expenses such as charges and
benefits related to the change in allowance for doubtful debt.

Factors and trends that affect our operations and financial results

When reading our financial statements, you should be aware of the following factors and trends that our management believe are important to understanding our financial performance.

COVID-19 Update. Global demand trends have been impacted by the ongoing COVID-19
pandemic and therefore remain uncertain at this time. While business conditions
generally improved from the severe contraction experienced in 2020, it is
difficult to predict whether conditions could change if there are additional
restrictions imposed as a result of a resurgence in COVID-19 infections. This
uncertainty continues to make forecasting our business challenging in the near
to medium-term.

Currently, our four main production facilities in United States, Germany,
Russia and Belarus are operating normally with enhanced employee safety and sanitization protocols which have not had a significant impact on productivity and efficiency. We have vertically integrated manufacturing, and many of the components that one facility supplies to another facility come from a single source

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internally and not available from third party suppliers, for example our
semiconductor diodes manufactured in Oxford, Massachusetts. While we have
attempted to build safety stock of critical components at our various locations,
if government restrictions to address COVID-19 become more severe or if
absenteeism becomes significant as a result of COVID-19 in the places where we
operate, it could impact our internal supply chain.

We and our customers are experiencing increased lead times for certain
components purchased from third party suppliers; particularly electronic
components. We, our customers and our suppliers continue to face constraints
related to supply chain and logistics, including availability of capacity,
materials, air cargo space, sea containers and higher freight rates. Supply
chain and logistics constraints are expected to continue for the foreseeable
future and could impact our ability to supply products and our customers' demand
for our product or readiness to accept deliveries. Supply chain constraints have
not significantly affected our business but they have moderately increased our
freight costs, caused us to carry higher levels of safety stock for certain
inventory items, increased the cost of certain electronic components and caused
delays in recognizing revenue for certain custom processing systems in our
Genesis business due to delays in receiving robots. Notwithstanding these
effects, we believe we have the ability to meet the near-term demand for our
products, but the situation is fluid and subject to change if there is a
resurgence in COVID-19 or if governments implement new restrictions.

Net sales.  Our annual revenue growth rates have varied from year to year. Net
sales increased by 22% in 2021 and decreased by 9% and 10% in 2020 and 2019,
respectively. In 2021, the increase in net sales was driven by improvement in
the macroeconomic environment driven by recoveries from the COVID-19 pandemic.
In 2020, the decline in net sales was driven by decreased demand for our
products related to the COVID-19 pandemic that extended and deepened the weak
macroeconomic environment prevailing at the end of 2019. In 2019, the decline in
net sales was driven by decreased demand for our products related to the trade
war between the U.S. and China that weakened macroeconomic conditions in the
second half of 2019. In addition to these factors, sales in 2021 were positively
affected by growth of new or recently introduced products, including high power
pulsed lasers, green pulsed lasers, ultra-fast pulsed lasers, handheld welding
systems, optical heads and other accessories and the development of new
applications for our products some of which displace non-laser technologies. The
increases in sales were partially offset by decreased demand for high power CW
lasers used for cutting due to softer market demand and increased competition in
China.

Our business depends substantially upon capital expenditures by end users,
particularly by manufacturers using our products for materials processing, which
includes general manufacturing, automotive including electric vehicles (EV),
other transportation, aerospace, heavy industry, consumer, semiconductor and
electronics. Approximately 91% of our revenues in 2021 were from customers using
our products for materials processing. Although applications within materials
processing are broad, the capital equipment market in general is cyclical and
historically has experienced sudden and severe downturns. For the foreseeable
future, our operations will continue to depend upon capital expenditures by end
users of materials processing equipment and will be subject to the broader
fluctuations of capital equipment spending.

In 2022, inflationary pressures are likely to result in global central banks
adopting less accommodating monetary policy that would result in an increase in
interest rates. An increase in interest rates could impact global growth and
could lead to a recession that may reduce the demand for our products. In
addition, an increase in interest rates would increase the cost of equipment
financed with leases or debt.

We are also susceptible to global or regional disruptions such as political
instability, geopolitical conflicts, acts of terrorism, significant fluctuations
in currency values, natural disasters, macroeconomic concerns and the impact of
the COVID-19 outbreak that affect the level of capital expenditures or global
commerce. With respect to the COVID-19 outbreak specifically, while our
financial results for 2021 improved compared to 2020, the possible affect over
the longer term remains uncertain and dependent on future developments that
cannot be accurately predicted at this time, such as the severity and
transmission rate of COVID-19 or new variants, the extent and effectiveness of
containment actions taken, the approval, effectiveness, timing and widespread
vaccination of the global population, and the impact of these and other factors
on our customer base and general commercial activity.

The average selling prices of our products generally decrease as the products
mature. These decreases result from factors such as increased competition,
decreased manufacturing costs and increases in unit volumes. We may also reduce
selling prices in order to penetrate new markets and applications. Furthermore,
we may negotiate discounted selling prices from time to time with certain
customers that place high unit-volume orders.

The secular shift to fiber laser technology in large materials processing
applications, such as cutting applications, had a positive effect on our sales
trends in the past such that our sales trends were often better than other
capital equipment manufacturers in both positive and negative economic cycles.
As the secular shift to fiber laser technology matures in such applications, our
sales trends are more susceptible to economic cycles which affect other capital
equipment manufacturers broadly and the machine tool and industrial laser
industries more specifically.
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Gross margin. Our total gross margin in any period can be significantly affected
by a number of factors, including net sales, production volumes, competitive
factors, product mix, and by other factors such as changes in foreign exchange
rates relative to the U.S. Dollar. Many of these factors are not under our
control. The following are examples of factors affecting gross margin:

•As our products mature, we may face additional competition which tends to drive down average selling prices and affects gross margin;

•Our gross margin can be significantly affected by product mix. Within each of
our product categories, the gross margin is generally higher for devices with
greater average power. These higher power products often have better
performance, more difficult specifications to attain and fewer competing
products in the marketplace;

•Higher power lasers also use more optical components, improving the absorption of fixed overhead and allowing economies of scale in manufacturing;

•The gross margin of certain specialty products may be higher because there are fewer or sometimes no equivalent competing products;

•Customers that purchase devices in greater unit volumes generally are provided
lower prices per device than customers that purchase fewer units. In general,
lower selling prices to high unit volume customers reduce gross margin although
this may be partially offset by improved absorption of fixed overhead costs
associated with larger product volumes, which drive economies of scale;

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

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

We expect that some new technologies, products and systems will have returns
above our cost of capital but may have gross margins below our corporate
average. If we are able to develop opportunities that are significant in size,
competitively advantageous or leverage our existing technology base and
leadership, our current gross margin levels may not be maintained. Instead, we
aim to deliver industry-leading levels of gross margins by growing sales, by
taking market share in existing markets, or by developing new applications and
markets we address, by reducing the cost of our products and by optimizing the
efficiency of our manufacturing operations.

We have invested $123.1 million, $87.7 million and $133.5 million capital expenditures in 2021, 2020 and 2019, respectively. Most of this investment is related to the expansion of our manufacturing capacity and, to a lesser extent, research and development and sales facilities.

A high proportion of our costs is fixed so costs are generally difficult to
adjust or may take time to adjust in response to changes in demand. In addition,
our fixed costs increase as we expand our capacity. If we expand capacity faster
than is required by sales growth, gross margins could be negatively affected.
Gross margins generally decline if production volumes are lower as a result of a
decrease in sales or a reduction in inventory because the absorption of fixed
manufacturing costs will be reduced. Gross margins generally improve when the
opposite occurs. If both sales and inventory decrease in the same period, the
decline in gross margin may be greater if we cannot reduce fixed costs or choose
not to reduce fixed costs to match the decrease in the level of production. If
we experience a decline in sales that reduces absorption of our fixed costs, or
if we have production issues, our gross margins will be negatively affected.

We also regularly review our inventory for items that are slow-moving, have been
rendered obsolete or are determined to be excess. Any provision for such
slow-moving, obsolete or excess inventory affects our gross margins. For
example, we recorded provisions for slow-moving, obsolete or excess inventory
totaling $34.3 million, $45.4 million and $38.9 million in 2021, 2020 and 2019,
respectively.

Selling and general and administrative expenses. In the past, the Company has
invested in selling and general and administrative costs in order to support
continued growth in the Company. As the secular shift to fiber laser technology
matures, our sales growth becomes more susceptible to the cyclical trends
typical of capital equipment manufacturers. Accordingly, our future management
of and investments in selling and general and administrative expenses will also
be influenced by these trends, although we may still invest in selling or
general and administrative functions to support certain initiatives even in
economic down cycles. Certain general and administrative expenses are not
related to the level of sales and may vary quarter to quarter based primarily
upon the level of acquisitions and litigation.
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Research and development expenses. We plan to continue to invest in research and
development to improve our existing components and products and develop new
components, products, systems and applications technology. We believe that these
investments will sustain our position as a leader in the fiber laser industry
and will support development of new products that can address new markets and
growth opportunities. The amount of research and development expense we incur
may vary from period to period.

Foreign exchange. Because we are a U.S. based company doing business globally,
we have both translational and transactional exposure to fluctuations in foreign
currency exchange rates. Changes in the relative exchange rate between the U.S.
Dollar and the foreign currencies in which our subsidiaries operate directly
affects our sales, costs and earnings. Differences in the relative exchange
rates between where we sell our products and where we incur manufacturing and
other operating costs (primarily in the U.S., Germany, Russia, and Belarus) also
affects our costs and earnings. Certain currencies experiencing significant
exchange rate fluctuations like the Euro, the Russian Ruble, the Japanese Yen
and Chinese Yuan have had and could have an additional significant impact on our
sales, costs and earnings. Our ability to adjust the foreign currency selling
prices of products in response to changes in exchange rates is limited and may
not offset the impact of the changes in exchange rates on the translated value
of sales or costs. In addition, if we increase the selling price of our products
in local currencies, this could have a negative impact on the demand for our
products.

Major customers. While we have historically depended on a few customers for a
large percentage of our annual net sales, the composition of this group can
change from year to year. Net sales derived from our five largest customers as a
percentage of our annual net sales were 19%, 24% and 21% in 2021, 2020 and 2019,
respectively. Our largest customer accounted for 22% and 21% of our net accounts
receivable as of December 31, 2021 and 2020, respectively. We seek to add new
customers and to expand our relationships with existing customers. We anticipate
that the composition of our significant customers will continue to change. We
generally do not enter into agreements with our customers obligating them to
purchase a fixed number or large volume of our fiber lasers or amplifiers. If
any of our significant customers were to substantially reduce their purchases
from us, our results would be adversely affected.

Significant Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net sales and expenses.
Refer to Note 1, "Nature of Business and Summary of Significant Accounting
Policies," in our consolidated financial statements for additional information.
By their nature, these estimates and judgments are subject to an inherent degree
of uncertainty. We base our estimates and judgments on our historical experience
and on other assumptions that we believe are reasonable under the circumstances,
the results of which form the basis for making the judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates, which may materially
affect our operating results and financial position. We have identified the
following items that require the most significant judgment and often involve
complex estimation:

Revenue Recognition. Revenue is recognized when transfer of control to the
customer occurs (i.e., when our performance obligation is satisfied) in an
amount reflecting the consideration that we expect to be entitled. For the
majority of our revenue, this typically occurs at a point in time such as
shipment or delivery date, but can occur over time for certain of our customized
robotic systems contracts. We also recognize revenue over time for sales of
extended warranties. When goods or services have been delivered to the customer,
but all conditions for revenue recognition have not been met, deferred revenue
and deferred costs are recorded on our consolidated balance sheets.

Judgments and Uncertainties: Recognizing revenue at shipment or delivery
involves some judgment, particularly when we receive orders with multiple
delivery dates. We allocate the transaction price of the contract to each
delivery date based upon the standalone selling price of each distinct product
in the contract. We invoice for each scheduled delivery upon shipment and
recognize revenue for such delivery when transfer of control has occurred.
Recognizing revenue over time for customized robotic systems contracts is based
on our judgment that these systems do not have an alternative use and we have an
enforceable right to payment for performance completed to date. Recognizing
revenue over time also requires estimation of the progress towards completion
based on the projected costs of the contract.

Sensitivity of Estimate to Change: Recognizing revenue at a point in time is
sensitive to changes in shipping or delivery dates. Revenue recognition over
time is sensitive to the actual costs incurred as compared to the projected
total cost of the project. We monitor the actual and projected costs of these
contracts closely. A change in the projected cost of a project will affect the
estimated percentage of completion, the amount of revenue recognized and
estimated gross margin.

Inventory. We maintain a reserve for excess or obsolete inventory items. The
reserve is based upon a review of inventory materials on hand, which we compare
with historic usage, estimated future usage and age. In addition, we review the
inventory
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and compare recorded costs with current market value estimates. Write-downs are recorded to reduce the carrying value to net realizable value for any part whose costs exceed current market value.

Judgments and Uncertainties: Estimating demand and current market values is
inherently difficult, particularly given that we make highly specialized
components and products. We determine the valuation of excess and obsolete
inventory by making our best estimate considering the current quantities of
inventory on hand and our forecast of the need for this inventory to support
future sales of our products. We often have limited information on which to base
our forecasts. If future sales differ from these forecasts, the valuation of
excess and obsolete inventory may change and additional inventory provisions may
be required.

Sensitivity of Estimate to Change: Because of our vertical integration, a
significant or sudden decrease in sales could result in a significant change in
the estimates of excess or obsolete inventory valuation. We recorded provisions
for slow-moving, obsolete or excess inventory totaling $34.3 million, $45.4
million and $38.9 million in 2021, 2020 and 2019, respectively. Because our
calculation of slow-moving, excess or obsolete inventory is based on historical
and estimated future use of inventory items, the calculation is affected by
sales trends. In 2020, as sales decreased due to the impact of the COVID 19
pandemic and other factors, our provisions for slow-moving, excess and obsolete
inventory reserves increased. In 2021, as sales increased due to recovery from
the impact of the Covid 19 pandemic and other factors, our provisions for
slow-moving, excess and obsolete inventory reserves decreased.

Income Taxes and Deferred Taxes. Our annual tax rate is based on our income,
statutory tax rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. We file federal and state income tax
returns in the United States and tax returns in numerous international
jurisdictions.

Judgments and Uncertainties: We must estimate our income tax expense after
considering, among other factors, the pricing of inter-company transactions on
an arm's length basis, differing tax rates between jurisdictions, allocation
factors, tax credits, nondeductible items and changes in enacted tax rates.
Significant judgment is required in determining our annual tax expense and in
evaluating our tax positions. As we continue to expand globally, there is a risk
that, due to complexity within and diversity among the various jurisdictions in
which we do business, a governmental agency may disagree with the manner in
which we have computed our taxes. Additionally, due to the lack of uniformity
among all of the foreign and domestic taxing authorities, there may be
situations where the tax treatment of an item in one jurisdiction is different
from the tax treatment in another jurisdiction or that the transaction causes a
tax liability to arise in another jurisdiction.

Sensitivity of Estimate to Change: We provide reserves for potential payments of
tax to various tax authorities related to uncertain tax positions and other
issues. Reserves recorded are based on a determination of whether and how much
of a tax benefit taken by us in our tax filings or positions is "more likely
than not" to be realized following resolution of any potential contingencies
present related to the tax benefit, assuming that the matter in question will be
raised by the tax authorities. Potential interest and penalties associated with
such uncertain tax positions is recorded as a component of income tax expense.
As of December 31, 2021, we had $19.2 million of unrecognized tax benefits,
excluding interest and penalties, recorded in deferred income taxes and other
long-term liabilities. This tax benefit increased by $6.4 million for tax
positions taken in the current year offset by reductions of $2.0 million for
changes in prior period positions.
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Operating results

The following table sets forth selected statement of operations data for the
periods indicated in dollar amounts and expressed as a percentage of net sales:

                                                                                           Year Ended December 31,
                                                              2021                                     2020                                  2019
                                                                            (In thousands, except percentages and per share data)
Net sales                                     $       1,460,860            100.0  %       $ 1,200,724            100.0  %       $ 1,314,581            100.0  %
Cost of sales                                           764,462             52.3              661,728             55.1              708,372             53.9
Gross profit                                            696,398             47.7              538,996             44.9              606,209             46.1
Operating expenses:
Sales and marketing                                      78,180              5.4               70,583              5.9               77,745              5.9
Research and development                                139,573              9.6              126,898             10.6              129,997              9.9
General and administrative                              125,882              8.6              110,005              9.2              107,597              8.2
Goodwill impairment                                           -                -               44,589              3.7               37,120              2.8
Impairment of long-lived assets and other
restructuring charges                                         -                -                1,177              0.1                7,130             

0.5

(Gain) loss on foreign exchange                         (15,120)            (1.0)             (12,915)            (1.1)              12,827              1.0
Total operating expenses                                328,515             22.6              340,337             28.4              372,416             28.3
Operating income                                        367,883             25.2              198,659             16.5              233,793             17.8
Interest (expense) income, net                           (1,839)            (0.1)               6,270              0.5               14,238              1.1
Other income, net                                           437                -                  763              0.1                  345                -
Income before provision for income taxes                366,481             25.1              205,692             17.1              248,376             18.9
Provision for income taxes                               88,615              6.1               45,354              3.8               68,115              5.2
Net income                                              277,866             19.0              160,338             13.3              180,261             13.7
Less: net (loss) income attributable to
non-controlling interest                                   (550)               -                  766              0.1                   27             

Net income attributable to IPG Photonics
Corporation common stockholders               $         278,416             19.0  %       $   159,572             13.2  %       $   180,234             13.7  %
Net income attributable to IPG Photonics
Corporation per common share:
Basic                                         $            5.21                           $      3.00                           $      3.40
Diluted                                       $            5.16                           $      2.97                           $      3.35
Weighted average common shares outstanding:
Basic                                                    53,410                                53,186                                53,061
Diluted                                                  53,930                                53,785                                53,839


Year Ended Comparison December 31, 2021 at the end of the year December 31, 2020

Net sales. Net sales increased by $260.1 million, or 21.7%, to $1,460.8 million
in 2021 from $1,200.7 million in 2020. The table below sets forth sales by
application:

                                                                      Year Ended December 31,
                                                         2021                                          2020                                     Change
                                                               (In thousands, except for percentages)
Sales by Application                                             % of Total                                    % of Total
Materials Processing                   $  1,325,404                     90.7  %       $ 1,082,478                     90.2  %       $ 242,926               22.4  %
Other Applications                          135,456                      9.3  %           118,246                      9.8  %          17,210               14.6  %
Total                                  $  1,460,860                    100.0  %       $ 1,200,724                    100.0  %       $ 260,136               21.7  %


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The table below shows sales by product type and other revenues:

                                                                                Year Ended December 31,
                                                                    2021                                        2020                                    Change
                                                                         (In thousands, except for percentages)
Sales by Product                                                            % of Total                                  % of Total
High Power Continuous Wave ("CW") Lasers           $    687,406                   47.1  %       $   646,062                   53.8  %       $  41,344               6.4  %
Medium Power CW Lasers                                   80,501                    5.5  %            50,796                    4.2  %          29,705              58.5  %
Pulsed Lasers                                           240,978                   16.5  %           158,448                   13.2  %          82,530              52.1  %
Quasi-Continuous Wave ("QCW") Lasers                     60,668                    4.2  %            50,333                    4.2  %          10,335              20.5  %
Laser and Non-Laser Systems                             126,642                    8.7  %            93,727                    7.8  %          32,915              35.1  %
Other Revenue including Amplifiers, Service,
Parts, Accessories and Change in Deferred
Revenue                                                 264,665                   18.0  %           201,358                   16.8  %          63,307              31.4  %
Total                                              $  1,460,860                  100.0  %       $ 1,200,724                  100.0  %       $ 260,136              21.7  %


Materials processing

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

•The increase in high power laser sales related to welding applications
partially offset by a reduction in cutting applications. The increase in sales
of high power lasers used in welding applications was driven by higher sales
into electric vehicle and E-mobility and general manufacturing industries.
Within cutting applications, the decrease in sales was attributable to softer
demand and increased competition in China.

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

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

•Sales of QCW lasers increased due to increased demand for precision processing for consumer electronics applications.

• The increase in laser and non-laser systems revenue was driven by increased demand for laser systems used for welding applications, including the launch of LightWELD and cutting applications.

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

Other Apps

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

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

                                                                        Year Ended December 31,
                                                           2021                                          2020                                    Change
                                                                 (In thousands, except for percentages)
Sales by Geography                                                 % of Total                                   % of Total
North America (1)                         $    314,984                    21.6  %       $   246,189                    20.5  %       $  68,795              27.9  %
Europe:
Germany                                        101,738                     7.0  %            65,646                     5.5  %          36,092              55.0  %
Other including Eastern Europe/CIS             289,136                    19.8  %           219,540                    18.3  %          69,596              31.7  %
Asia and Australia:
China                                          548,348                    37.5  %           502,278                    41.8  %          46,070               9.2  %
Japan                                           54,077                     3.7  %            53,180                     4.4  %             897               1.7  %
Other                                          139,148                     9.5  %           103,785                     8.6  %          35,363              34.1  %
Rest of World                                   13,429                     0.9  %            10,106                     0.9  %           3,323              32.9  %
Total                                     $  1,460,860                   100.0  %       $ 1,200,724                   100.0  %       $ 260,136              21.7  %

(1)The vast majority of sales in North America are to customers in United States.

Cost of sales and gross margin. Cost of sales increased by $102.8 million, or
15.5%, to $764.5 million in 2021 from $661.7 million in 2020. Our gross margin
increased to 47.7% in 2021 from 44.9% in 2020. Gross margin increased mainly due
to a reduction of manufacturing costs as a percentage of sales and a decrease in
provisions for excess and obsolete inventory as a percentage of sales, while
absorption of manufacturing costs and cost of products sold from inventory as a
percentage of sales were approximately the same as one year ago. Expenses
related to provisions for excess or obsolete inventory and other valuation
adjustments decreased by $11.1 million to $34.3 million, or 2.3% of sales, for
the year ended December 31, 2021, as compared to $45.4 million, or 3.8% of
sales, for the year ended December 31, 2020.

Sales and marketing expense. Sales and marketing expense increased by $7.6
million, or 10.8%, to $78.2 million in 2021 from $70.6 million in 2020. This
change was primarily a result of an increase of $6.2 million in personnel and
related costs, mainly from bonus expense for having achieved 2021 bonus targets.
The remaining change was due to other sales and marketing expenses. As a
percentage of sales, sales and marketing expense decreased to 5.4% of sales in
2021 from 5.9% in 2020.

Research and development expense. Research and development expense increased by
$12.7 million, or 10.0%, to $139.6 million in 2021 from $126.9 million in 2020.
This change was primarily a result of an increase of $9.3 million in personnel
and related costs, mainly from bonus expense for having achieved 2021 bonus
targets. The remaining change was due to other research and development
expenses. As a percentage of sales, research and development expense decreased
to 9.6% in 2021 from 10.6% in 2020. We expect to continue to invest in research
and development and that research and development expense will increase in the
aggregate.

General and administrative expense. General and administrative expense increased
by $15.9 million, or 14.5%, to $125.9 million in 2021 from $110.0 million in
2020. This change was primarily a result of an increase of $10.3 million in
personnel and related costs mainly from bonus expense for having achieved 2021
bonus targets. The remaining change was due to increases in other general and
administrative expenses, partially offset by a reduction in losses on disposal
of fixed assets. As a percentage of sales, general and administrative expense
decreased to 8.6% in 2021 from 9.2% in 2020 .

Goodwill impairment. There was no impairment of goodwill in 2021. During the
third quarter of 2020, we concluded that declines in revenue and order flow for
the Genesis custom systems business caused by pandemic-related decreases in
capital spending in the aerospace and transportation industries were a
triggering event requiring a goodwill impairment evaluation. As a result of the
analysis, we incurred a non-cash goodwill impairment loss of $44.6 million in
2020.

Effect of exchange rates on sales, gross margin and operating expenses. We
estimate that if exchange rates had been the same as one year ago, sales in 2021
would have been $45.9 million lower, gross margin would have been $27.0 million
lower and operating expenses in total would have been $1.0 million lower. These
estimates assume constant exchange rates between fiscal year 2021 and fiscal
year 2020 and are calculated using the average exchange rates for the
twelve-month period ended December 31, 2020 for the respective currencies, which
were US$1=Euro 0.88, US$1=Japanese Yen 107, US$1=Chinese Yuan 6.90 and
US$1=Russian Ruble 72.
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(Gain) loss on foreign exchange. We incurred a foreign exchange gain of $15.1
million in 2021 as compared to a gain of $12.9 million in 2020. The gain was
primarily attributable to the depreciation of the Euro and the appreciation of
the Chinese Yuan as compared to the U.S. Dollar.

Interest (expense) income, net. Interest (expense) income, net was $1.8 million
of expense in 2021 compared to $6.3 million of income in 2020. The change in
interest (expense) income, net, was due to a reduction in yields on cash
equivalents and short term investments that resulted in lower market interest
rates as compared to prior year rates.

Provision for income taxes. Provision for income taxes was $88.6 million in 2021
compared to $45.4 million in 2020, representing an effective tax rate of 24.2%
in 2021 and 22.0% in 2020. The increase in tax expense was due to an increase in
pre-tax income. Discrete adjustments in 2021 resulted in a $9.1 million
reduction in tax expense, which includes (i) $5.4 million for equity-based
compensation deductions for tax in excess of the deductions reflected in book
income, (ii) $2.4 million for prior year provision to return adjustments and
(iii) $2.0 million for the reduction in tax reserves as a result of the close of
the statute of limitations for the year in which the tax reserve was
established. The discrete benefits were offset by $1.2 million for an increase
to tax expense for the tax impact of losses in subsidiaries for which no tax
benefit was taken. Discrete adjustments in 2020 were $10.6 million and include a
decrease to tax expense for (i) $9.7 million related to equity-based
compensation deductions for tax in excess of the deductions reflected in book
income (ii) $3.2 million for an investment credit in Russia requested in amended
returns filed for prior years and (iii) $1.2 million for prior year provision to
return adjustments, offset by an increase to tax expense of $3.6 million for
losses in subsidiaries for which no tax benefit was taken.

Net income attributed to IPG Photonics Corporation. Net income attributable to
IPG Photonics Corporation increased by $118.8 million to $278.4 million in 2021
from $159.6 million in 2020. Net income attributable to IPG Photonics
Corporation as a percentage of our net sales increased by 5.8% to 19.0% in 2021
from 13.2% in 2020 due to the factors described above.

Cash and capital resources

We believe that our existing cash and cash equivalents, short-term investments,
our cash flows from operations and our existing lines of credit provide us with
the financial flexibility to meet our liquidity and capital needs. We expect to
continue making investments in capital expenditures, to assess acquisition
opportunities and to repurchase shares of our stock in accordance with our
repurchase program. The extent and timing of such expenditures may vary from
period to period. Our future long-term capital requirements will depend on many
factors including our level of sales, the impact of the economic environment on
our growth including any ongoing impact of the COVID-19 pandemic on certain
global or regional economies, global or regional recessions, the timing and
extent of spending to support development efforts, expansion of global sales and
marketing activities, government regulation including trade sanctions, the
timing and introductions of new products, the need to ensure access to adequate
manufacturing capacity and the continuing market acceptance of our products. As
of December 31, 2021, we had no off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.

With respect to the current geopolitical situation involving Ukraine and Russia,
the imposition of sanctions against Russian banks or international bank
messaging systems could impact our ability to access company cash in Russia, but
would not materially disrupt our liquidity as a whole. We attempt to keep only
amounts that are needed for working capital there. A substantial majority of our
cash and cash equivalents are located outside of Russia.

The following table presents our main sources of liquidity:

                                                                             As of December 31,
                                                                           2021               2020
                                                                               (In thousands)
Cash and cash equivalents                                              $ 709,105          $ 876,231
Short-term investments                                                   805,400            514,835
Unused credit lines and overdraft facilities                             128,772            132,048

Working capital (excluding cash and cash equivalents and short-term investments)

                                                  519,745            542,433


Short-term investments at December 31, 2021 consist of liquid investments
including corporate bonds, commercial paper, U.S. Treasury and agency
obligations and municipal bonds with original maturities of greater than three
months but less than one year. See Note 3, "Fair Value Measurements" in the
notes to the consolidated financial statements for further information about our
short-term investments.
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The following table details our line-of-credit facilities and long-term notes as
of December 31, 2021:

        Description                   Total Facility/ Note               Interest Rate                Maturity                 Security
U.S. Revolving Line of                   $75.0 million                LIBOR plus 0.80% to            April 2025                Unsecured
Credit (1)                                                          1.20%, depending on our
                                                                          performance
Euro Credit Facility                   Euro 50.0 million             Euribor plus 0.75% or           July 2023           Unsecured, guaranteed
(Germany) (2)                           ($56.7 million)                EONIA plus 1.00%                                  by parent company and
                                                                                                                           German subsidiary
Other Euro Facilities (3)               Euro 1.5 million              Euribor plus 2.02%             June 2022           Common pool of assets
                                         ($1.7 million)                                                                  of Italian subsidiary
Long-term Secured Note (4)               $16.9 million                  Fixed at 2.74%               July 2022              Secured by the
                                                                                                                          corporate aircraft
Long-term Unsecured Note (5)             $17.2 million                1.20% above LIBOR,              May 2023                 Unsecured
                                                                    fixed using an interest
                                                                    rate swap at 2.85% per
                                                                             annum


(1) This facility is available to certain foreign subsidiaries in their
respective local currencies. At December 31, 2021, there were no amounts drawn
on this line, however, there were $2.5 million of guarantees issued against the
line which reduces total availability.
(2) This facility is available to certain foreign subsidiaries in their
respective local currencies. At December 31, 2021, there were no drawings,
however, there were $2.2 million of guarantees issued against the line which
reduces total availability.
(3) At December 31, 2021, there were no drawings. This facility renews annually.
(4) At maturity, the outstanding note balance will be $15.4 million.
(5) At maturity, the outstanding note balance will be $15.4 million.

Our largest committed credit lines are with Bank of America N.A. and Deutsche
Bank AG in the amounts of $75.0 million and $56.7 million (or €50.0 million as
described above), respectively, and neither of them is syndicated. We plan to
seek amendments of our credit agreements to modify LIBOR and EONIA reference
rates as these rates are phased out as borrowing rates. We do not plan to amend
our long-term unsecured note as it matures prior to the final phase-out of
LIBOR.

We are required to meet certain financial covenants associated with our
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 we maintain 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 our trailing
twelve months EBITDA. Funded debt is decreased by our cash and available
marketable securities not classified as long-term investments in the U.S. in
excess of $50 million up to a maximum of $500 million. We were in compliance
with all such financial covenants as of and for the three months ended
December 31, 2021.

The financial covenants in our loan documents may cause us to not take or to
delay investments and actions that we might otherwise undertake because of
limits on capital expenditures and amounts that we can borrow or lease. In the
event that we do not comply with any one of these covenants, we would be in
default under the loan agreement or loan agreements, which may result in
acceleration of the debt, cross-defaults on other debt or a reduction in
available liquidity, any of which could harm our results of operations and
financial condition.

See Note 11, “Funding Arrangements” in the Notes to the Consolidated Financial Statements for more information on our facilities and term debt.

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The following table summarizes our material cash commitments at December 31,
2021 and the effect such commitments are expected to have on our liquidity and
cash flow in future periods. We intend to use our existing cash, cash
equivalents and short term investments as well as cash generated from operations
as sources of funds for these material commitments.

                                                                Payments Due in
                                                          Total        Less Than 1 Year
                                                                 (In thousands)
Operating lease obligations                             $ 27,399      $          6,307
Purchase obligations                                      19,880                14,222
Long-term debt obligations (including interest)(1)        35,078                18,860
Contingent consideration                                   1,371                 1,371
Total(2)                                                $ 83,728      $         40,760


(1)Interest for long-term debt obligations was calculated including the effect
of our fixed rate amounts. The weighted average fixed rate amount was 2.80%. See
Note 11, "Financing Arrangements" to the consolidated financial statements for
additional details.
(2)Excludes obligations related to ASC 740, reserves for uncertain tax
positions, because we are unable to provide a reasonable estimate of the timing
of future payments relating to the remainder of these obligations. See Note 17,
"Income Taxes" to the consolidated financial statements.

The following table presents treasury activities:

                                                 As of December 31,
                                                2021           2020
                                                   (In thousands)

Cash flow from operating activities $389,700 $285,335
Cash used by investing activities

             (416,282)       (99,574)
Cash used by financing activities             (125,066)       (10,080)


Operating activities. Net cash provided by operating activities increased by
$104.4 million to $389.7 million in 2021 from $285.3 million in 2020 primarily
due to an increase in net income and an increase in cash provided by working
capital. Our largest working capital items typically are inventory and accounts
receivable. Items such as accounts payable to third parties, prepaid expenses
and other current assets and accrued expenses and other liabilities are not as
significant as our working capital investment in accounts receivable and
inventory because of the amount of value added within IPG due to our vertically
integrated structure. Accruals and payables for personnel costs including
bonuses and income and other taxes payable are largely dependent on the timing
of payments for those items. The increase in cash flow from operating activities
in 2021 primarily resulted from:

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

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

• an increase in liquidity provided by accrued liabilities and accounts payable due to higher premiums payable, increased customer deposits and timing of payments,

•a decrease in cash used by debtors due to the improvement in pending sales; partially offset by,

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

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

Investing activities. Net cash used in investing activities was $416.3 million
and $99.6 million in 2021 and 2020, respectively. The cash used in investing
activities in 2021 primarily related to $293.1 million of net purchases of
short-term investments and $123.1 million for property, plant and equipment. The
cash used in investing activities in 2020 primarily related to $87.7 million for
property, plant and equipment, $12.3 million of net purchases of investments and
$0.4 million for the acquisition of a business during 2020, net of cash
acquired.

In 2022, we expect to hire approximately $130.0 million for $140.0 million in investments, excluding acquisitions. Capital expenditures include investments in properties, facilities and equipment to add capacity globally to

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support anticipated revenue growth, increase vertical integration, increase
redundant manufacturing capacity for critical components and enhance research
and development capabilities. The timing and extent of any capital expenditures
in and between periods can have a significant effect on our cash flow. If we
obtain financing for certain projects, our cash expenditures would be reduced in
the year of expenditure. Many of the capital expenditure projects that we
undertake have long lead times and are difficult to cancel or defer to a later
period. We intend to finance our capital expenditures with existing cash, cash
equivalents and short term investments as well as with cash generated from
operations.

Financing activities. Net cash used in financing activities was $125.1 million
and $10.1 million in 2021 and 2020, respectively. The cash used in financing
activities in 2021 was primarily related to the purchase of $134.9 million of
treasury stock, $3.8 million of principal payments on our long-term borrowings
and $2.6 million of payment of a purchase price holdback from a business
combination; partially offset by net proceeds of $16.3 million from the exercise
of stock options net of amounts disbursed in relation to shares withheld to
cover employee income taxes due upon the vesting and release of restricted stock
units and shares issued under our employee stock purchase plan. The cash used in
financing activities in 2020 was primarily related to the purchase of $37.9
million of treasury stock, $3.7 million of principal payments on our long-term
borrowings, and $1.7 million of payments of a purchase price holdback from a
business combination; partially offset by net proceeds of $33.2 million from the
exercise of stock options net of amounts disbursed in relation to shares
withheld to cover employee income taxes due upon the vesting and release of
restricted stock units and shares issued under our employee stock purchase plan.

Recent accounting pronouncements

See Note 1, "Nature of Business and Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements for a full description of
recent accounting pronouncements, including the respective dates of adoption or
expected adoption and effects on our consolidated financial statements contained
in Part IV of this Annual Report.

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