IPG PHOTONICS CORP - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33155

IPG PHOTONICS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			04-3444218
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification Number)

50 Old Webster Road, Oxford, Massachusetts			01540
(Address of principal executive offices)			(Zip code)

(508) 373-1100

(Registrant’s telephone number, including area code)

__________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	IPGP	Nasdaq Global Select Market

As of August 5, 2019, there were 53,200,337 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS


			Page
Part I. Financial Information			1
Item 1. Financial Statements			1
Condensed C onsolidated Balance Sheets: J une 30 , 2019 and December 31, 2018			1
Condensed C onsolidated Statements of Income: Three and Six Months Ended June 30 , 2019 and 2018			2
Condensed C onsolidated Statements of Comprehensive Income: Three and Six Months Ended June 30 , 2019 and 2018			3
Condensed C onsolidated Statements of Cash Flows: Six Months Ended June 30 , 2019 and 2018			4
Condensed Consolidated Statements of Equity: Three and Six Months Ended June 30 , 2019 and 2018			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			28
Part II. Other Information			29
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Mine Safety Disclosures			43
Item 5. Other Information			43
Item 6. Exhibits			44
Signatures			44

Table of Contents

PART I-FINANCIAL INFORMATION

ITEM 1. UNAUDITED INTERIM FINANCIAL STATEMENTS

IPG PHOTONICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
	2019		2018
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	530,013	$	544,358
Short-term investments	512,816		500,432
Accounts receivable, net	273,697		255,509
Inventories	425,996		403,579
Prepaid income taxes	49,885		43,782
Prepaid expenses and other current assets	70,675		57,764

Total current assets	1,863,082		1,805,424
Deferred income taxes, net	20,833		19,165
Goodwill	110,868		100,722
Intangible assets, net	89,906		87,139
Property, plant and equipment, net	600,977		543,068
Other assets	51,750		18,932
Total assets	$	2,737,416	$	2,574,450
LIABILITIES AND EQUITY
Current liabilities:


Current portion of long-term debt	$	3,705	$	3,671
Accounts payable	38,016		36,302
Accrued expenses and other current liabilities	161,209		154,640

Income taxes payable	19,298		51,161
Total current liabilities	222,228		245,774
Deferred income taxes and other long-term liabilities	107,981		80,734
Long-term debt, net of current portion	39,846		41,707
Total liabilities	370,055		368,215

Commitments and contingencies (Note 12)
IPG Photonics Corporation equity:
Common stock, $0.0001 par value, 175,000,000 shares authorized; 54,629,380 and 53,182,910 shares issued and outstanding, respectively, at June 30, 2019; 54,371,701 and 52,941,607 shares issued and outstanding, respectively, at December 31, 2018	5		5
Treasury stock, at cost, 1,446,470 and 1,430,094 shares held at June 30, 2019 and December 31, 2018, respectively.	(227,282)		(224,998)
Additional paid-in capital	761,936		744,937
Retained earnings	1,975,931		1,848,500
Accumulated other comprehensive loss	(143,943)		(162,896)
Total IPG Photonics Corporation equity	2,366,647		2,205,548
Non-controlling interests	714		687
Total equity	2,367,361		2,206,235
Total liabilities and equity	$	2,737,416	$	2,574,450

See notes to condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands, except per share data)
Net sales	$	363,769	$	413,613	$	678,816	$	773,477
Cost of sales	183,532		178,638		349,668		335,140
Gross profit	180,237		234,975		329,148		438,337
Operating expenses:
Sales and marketing	20,663		14,536		39,938		28,052
Research and development	34,872		31,813		67,368		60,359
General and administrative	28,538		24,117		55,750		49,612
Loss (gain) on foreign exchange	5,074		2,118		6,687		(3,176)
Total operating expenses	89,147		72,584		169,743		134,847
Operating income	91,090		162,391		159,405		303,490
Other income, net:
Interest income, net	4,051		729		8,003		1,041
Other (expense) income, net	658		386		649		829
Total other income	4,709		1,115		8,652		1,870
Income before provision for income taxes	95,799		163,506		168,057		305,360
Provision for income taxes	(23,278)		(41,889)		(40,620)		(77,409)
Net income	72,521		121,617		127,437		227,951
Less: net income attributable to non-controlling interests	249		—		6		—
Net income attributable to IPG Photonics Corporation	$	72,272	$	121,617	$	127,431	$	227,951
Net income attributable to IPG Photonics Corporation per share:
Basic	$	1.36	$	2.27	$	2.40	$	4.24
Diluted	$	1.34	$	2.21	$	2.36	$	4.14
Weighted average shares outstanding:
Basic	53,042		53,662		53,076		53,703
Diluted	53,848		54,992		53,915		55,111

See notes to condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Net income	$	72,521	$	121,617	$	127,437	$	227,951
Other comprehensive income, net of tax:
Translation adjustments	13,800		(78,663)		18,958		(52,025)
Unrealized (loss) gain on derivatives	8		—		(5)		2
Effect of adopted accounting standards	—		—		—		10

Total other comprehensive income	13,808		(78,663)		18,953		(52,013)
Comprehensive income	86,329		42,954		146,390		175,938
Comprehensive income attributable to non-controlling interests	267		—		27		—
Comprehensive income attributable to IPG Photonics Corporation	$	86,062	$	42,954	$	146,363	$	175,938

See notes to condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
	2019		2018
	(In thousands)
Cash flows from operating activities:
Net income	$	127,437	$	227,951
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,486		38,727
Deferred income taxes	2,628		6,097
Stock-based compensation	17,031		13,724
Unrealized loss (gain) on foreign currency transactions	4,185		(1,056)
Other	170		(181)
Provisions for inventory, warranty & bad debt	22,697		20,092
Changes in assets and liabilities that (used) provided cash:
Accounts receivable	(21,056)		(9,491)
Inventories	(40,789)		(91,014)
Prepaid expenses and other assets	8,616		(1,991)
Accounts payable	(445)		9,527
Accrued expenses and other liabilities	(9,320)		(17,860)
Income and other taxes payable	(56,861)		14,026

Net cash provided by operating activities	101,779		208,551
Cash flows from investing activities:
Purchases of and deposits on property, plant and equipment	(86,492)		(96,516)

Proceeds from sales of property, plant and equipment	288		641
Purchases of short-term and long-term investments	(339,828)		(289,830)
Proceeds from short-term investments	334,680		161,618
Acquisitions of businesses, net of cash acquired	(15,115)		(4,422)
Other	209		188
Net cash used in investing activities	(106,258)		(228,321)
Cash flows from financing activities:
Proceeds from line-of-credit facilities	—		255
Payments on line-of-credit facilities	—		(255)



Principal payments on long-term borrowings	(1,827)		(1,794)
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	(32)		10,631


Purchase of treasury stock, at cost	(2,284)		(51,064)
Net cash used in financing activities	(4,143)		(42,227)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash	(2,759)		(31,111)
Net decrease in cash, cash equivalents and restricted cash	(11,381)		(93,108)
Cash and cash equivalents — Beginning of period	544,358		909,900
Cash, cash equivalents and restricted cash — End of period (Note 2)	$	532,977	$	816,792
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,164	$	1,672
Cash paid for income taxes	$	73,855	$	64,495
Non-cash transactions:
Demonstration units transferred from inventory to other assets	$	6,572	$	1,720
Inventory transferred to machinery and equipment	$	6,444	$	5,000
Changes in accounts payable related to property, plant and equipment	$	1,959	$	(1,683)
Leased assets obtained in exchange for new operating lease liabilities	$	10,698	$	—

See notes to condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY


	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, 2019	52,941,607	$	5	(1,430,094)	$	(224,998)	$	744,937	$	1,848,500	$	(162,896)	$	687	$	2,206,235
Exercise of stock options and vesting of RSU's and PSU's	166,606	—		—	—		(6,149)		—		—		—		(6,149)


Stock-based compensation	—	—		—	—		8,138		—		—		—		8,138


Net income	—	—		—	—		—		55,159		—		(243)		54,916
Foreign currency translation adjustments	—	—		—	—		—		—		5,158		3		5,161
Unrealized loss on derivatives, net of tax	—	—		—	—		—		—		(13)		—		(13)
Balance, March 31, 2019	53,108,213	5		(1,430,094)	(224,998)		746,926		1,903,659		(157,751)		447		2,268,288
Exercise of stock options and vesting of RSU's and PSU's	59,590	—		—	—		2,152		—		—		—		2,152
Common stock issued under employee stock purchase plan	31,483	—		—	—		3,965		—		—		—		3,965
Purchased common stock	(16,376)	—		(16,376)	(2,284)		—		—		—		—		(2,284)
Stock-based compensation	—	—		—	—		8,893		—		—		—		8,893


Net income	—	—		—	—		—		72,272		—		249		72,521
Foreign currency translation adjustments	—	—		—	—		—		—		13,800		18		13,818
Unrealized gain on derivatives, net of tax	—	—		—	—		—		—		8		—		8
Balance, June 30, 2019	53,182,910	$	5	(1,446,470)	$	(227,282)	$	761,936	$	1,975,931	$	(143,943)	$	714	$	2,367,361

Balance, January 1, 2018	53,629,439	$	5	(378,269)	$	(48,933)	$	704,727	$	1,443,867	$	(77,344)	$	—	$	2,022,322
Exercise of stock options and vesting of RSU's and PSU's	196,308	—		—	—		3,113		—		—		—		3,113

Purchased common stock	(82,898)	—		(82,898)	(20,071)		—		—		—		—		(20,071)
Stock-based compensation	—	—		—	—		6,415		—		—		—		6,415
Recently adopted accounting standards	—	—		—	—		—		606		10		—		616
Net income	—	—		—	—		—		106,334		—		—		106,334
Foreign currency translation adjustments	—	—		—	—		—		—		26,638		—		26,638
Unrealized gain on derivatives, net of tax	—	—		—	—		—		—		2		—		2
Balance, March 31, 2018	53,742,849	5		(461,167)	(69,004)		714,255		1,550,807		(50,694)		—		2,145,369
Exercise of stock options and vesting of RSU's and PSU's	101,078	—		—	—		5,230		—		—		—		5,230
Common stock issued under employee stock purchase plan	12,198	—		—	—		2,288		—		—		—		2,288
Purchased common stock	(131,680)	—		(131,680)	(30,993)		—		—		—		—		(30,993)
Stock-based compensation	—	—		—	—		7,309		—		—		—		7,309

Net income	—	—		—	—		—		121,617		—		—		121,617
Foreign currency translation adjustments	—	—		—	—		—		—		(78,663)		—		(78,663)

Balance, June 30, 2018	53,724,445	$	5	(592,847)	$	(99,997)	$	729,082	$	1,672,424	$	(129,357)	$	—	$	2,172,157

See notes to condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared by IPG Photonics Corporation, or "IPG", "its" or the "Company". Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated financial statements include the Company's accounts and those of its subsidiaries. All intercompany balances have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

In the opinion of the Company's management, the financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The results reported in these condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.

In accordance with Accounting Standards Codification ("ASC") 842, "Leases," ("ASC 842" or the "new lease standard"), the following significant accounting policy has been adopted as of January 1, 2019.

Leases — The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets, other current liabilities, and other long-term liabilities on our condensed consolidated balance sheets.

Right of use ("ROU") assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, IPG uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The ROU assets also include any lease payments made and initial direct costs incurred and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component.

Reclassifications — Certain prior year amounts have been reclassified to conform with current period presentation. These reclassifications had no effect on the reported results of operations.

The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted Pronouncements —

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. The Company adopted ASC 842, as of January 1, 2019, using the modified retrospective approach as of the date of adoption. Under this approach, comparative periods have not been restated. In addition, IPG elected the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for the carry forward of the historical lease classification.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The cumulative effect of the changes made to the Company's condensed consolidated January 1, 2019 balance sheet for the adoption of ASC 842 related to operating leases was as follows:


	Balance at				Balance at
	December 31, 2018		Adoption of ASC 842		January 1, 2019
Balance Sheet

Prepaid expenses and other current assets	$	57,764	$	(324)	$	57,440
Other assets	18,932		19,463		38,395
Accrued expenses and other current liabilities	154,640		5,292		159,932
Deferred income taxes and other long-term liabilities	80,734		13,847		94,581

In the first quarter of 2018, the Company adopted FASB ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosure about restricted cash balances. The Company considers cash to be restricted when withdrawal or general use is legally restricted. The Company records restricted cash in other assets on the condensed consolidated balance sheets and determines classification based on the expected duration of the restriction.

The reconciliation of the Company's cash and cash equivalents in the condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows is as follows:


	Balance at
	June 30, 2019
Cash and cash equivalents	$	530,013
Restricted cash included in other assets	2,964
Cash, cash equivalents and restricted cash	$	532,977

Other Pronouncements Currently Under Evaluation —

In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (ASU 2016-13"), which adds an impairment model (known as the current expected credit loss ("CECL") model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. ASU 2016-03, along with its subsequent clarifications, is effective for fiscal years beginning after December 15, 2019. The Company does not expect this standard will have a material impact to net income.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following tables represent a disaggregation of revenue from contracts with customers:


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Sales by Application
Materials processing	$	345,591	$	392,001	$	646,676	$	731,215
Other applications	18,178		21,612		32,140		42,262
Total	$	363,769	$	413,613	$	678,816	$	773,477

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Sales by Product
High Power Continuous Wave ("CW") Lasers	$	213,411	$	266,075	$	392,430	$	496,649
Medium and Low Power CW Lasers	15,415		30,972		31,013		56,372
Pulsed Lasers	40,813		41,582		72,250		79,835
Quasi-Continuous Wave ("QCW") Lasers	15,967		20,092		30,133		36,292
Laser and Non-Laser Systems	39,383		13,428		72,014		22,899
Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue	38,780		41,464		80,976		81,430
Total	$	363,769	$	413,613	$	678,816	$	773,477




Sales by Geography


North America	$	64,140	$	47,766	$	128,947	$	86,943
Europe:
Germany	23,664		31,989		42,283		65,225
Other including Eastern Europe/CIS	61,131		76,347		130,331		159,325
Asia and Australia:
China	163,590		203,026		277,956		352,999
Japan	17,406		19,428		33,020		39,057
Other	28,929		33,314		60,667		67,521
Rest of World	4,909		1,743		5,612		2,407
Total	$	363,769	$	413,613	$	678,816	$	773,477




Timing of Revenue Recognition
Goods and services transferred at a point in time	$	342,037	$	412,241	$	634,130	$	771,094
Goods and services transferred over time	21,732		1,372		44,686		2,383
Total	$	363,769	$	413,613	$	678,816	$	773,477

One of our customers accounted for 11.6% and 13.0% of our net sales for the six months ended June 30, 2019 and 2018, respectively. The same customer accounted for 39.2% and 24.7% of our net accounts receivable as of June 30, 2019 and December 31, 2018, respectively.

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 Company recognizes customer deposits and deferred revenue as net sales after control of the goods or services has been transferred to the customer and all revenue recognition criteria is met. The Company bills customers for extended warranties upon entering into the agreement with the customer, resulting in deferred revenue. The timing of customer payments on contracts for the sale of customized robotic systems generally differs from the timing of revenue recognized, resulting in contract assets and liabilities. Contract assets are included within prepaid expense and other current assets on the condensed consolidated balance sheets. Contract liabilities are included within accrued expenses and other current liabilities on the condensed consolidated balance sheets.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The following table reflects the changes in the Company's contract assets and liabilities for the six months ended June 30, 2019 and 2018:


	June 30,		January 1,				June 30,		January 1,
	2019		2019		Change		2018		2018		Change

Contract assets
Contract assets	$	8,460	$	10,102	$	(1,642)	$	—	$	—	$	—
Contract liabilities
Contract liabilities - current	61,506		52,606		8,900		46,986		46,508		478
Contract liabilities - long-term	1,720		1,413		307		1,414		182		1,232

During the three months ended June 30, 2019 and June 30, 2018 the Company recognized revenue of $11,092 and $7,197, respectively, that was included in contract liabilities at the beginning of the period, respectively. During the six months ended June 30, 2019 and June 30, 2018, the Company recognized revenue of $36,252 and $35,529, respectively, that was included in contract liabilities at the beginning of the period, respectively.

The Company has elected the practical expedient in ASC 606-10-50-14, whereby the performance obligations for contracts with an original expected duration of one year or less are not disclosed. The following table represents the Company's remaining performance obligations from contracts that are recognized over time as of June 30, 2019:


	Remaining Performance Obligations
	2019 ^(a)		2020		2021		2022		2023		2024 and thereafter		Total
Revenue expected to be recognized for extended warranty agreements	$	2,638	$	2,063	$	636	$	331	$	133	$	27	$	5,828
Revenue to be earned over time from contracts to sell robotic systems	21,916		3,442		—		—		—		—		25,358
Total	$	24,554	$	5,505	$	636	$	331	$	133	$	27	$	31,186

(a) For the six-month period beginning July 1, 2019.

4. FAIR VALUE MEASUREMENTS

The Company's financial instruments consist of cash equivalents, short-term and long-term investments, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, interest rate swaps and contingent purchase consideration.

The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amounts of money market fund deposits, term deposits, accounts receivable, accounts payable and drawings on revolving lines of credit are considered reasonable estimates of their fair market value due to the short maturity of most of these instruments or as a result of the competitive market interest rates which have been negotiated. The Company's bond securities are reported at fair value based upon quoted prices for instruments with identical terms in active markets. The Company's commercial paper securities reported at fair value are based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. At June 30, 2019 and December 31, 2018, the Company's long-term notes consisted of a variable rate note and a fixed rate note, and the book value is considered a reasonable estimate of fair market value.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(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 condensed consolidated balance sheets with the exception of the interest rate swap, which is measured at fair value:


	Fair Value Measurements at June 30, 2019
	Total		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market fund deposits and term deposits	$	187,562	$	187,562	$	—	$	—

Commercial paper	39,561		—		39,561		—
Short-term investments:
U.S. Treasury and agency obligations	38,828		38,828		—		—
Corporate bonds	262,544		262,544		—		—
Non-U.S. government bonds	5,491		—		5,491		—
Commercial paper	206,337		—		206,337		—
Long-term investments and other assets:

Auction rate securities	852		—		—		852
Interest rate swap	28		—		28		—
Total	$	741,203	$	488,934	$	251,417	$	852
Liabilities
Long-term debt	$	43,551	$	—	$	43,551	$	—
Contingent purchase consideration	300		—		—		300

Total	$	43,851	$	—	$	43,551	$	300
























	Fair Value Measurements at December 31, 2018
	Total		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market fund deposits and term deposits	$	180,965	$	180,965	$	—	$	—
U.S. Treasury and agency obligations	6,495		6,495		—		—
Commercial paper	78,948		—		78,948		—
Short-term investments:
U.S. Treasury and agency obligations	116,800		116,800		—		—
Corporate bonds	227,009		227,009		—		—
Commercial paper	156,321		—		156,321		—
Long-term investments and other assets:
Corporate bonds	3,859		3,859		—		—
Auction rate securities	847		—		—		847
Interest rate swaps	31		—		31		—
Total	$	771,275	$	535,128	$	235,300	$	847
Liabilities
Long-term debt	$	45,378	$	—	$	45,378	$	—
Contingent purchase consideration	898		—		—		898
Total	$	46,276	$	—	$	45,378	$	898

The fair value of the short-term investments considered held-to-maturity as of June 30, 2019 and December 31, 2018 was $513,200 and $500,130, respectively, which include an unrealized gain of $384 and unrealized loss of $302, respectively, as compared to the book value recorded on the condensed consolidated balance sheets for the same periods. There were no long-term investments considered held-to-maturity as of June 30, 2019. The fair value of the long-term investments considered held-

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

to-maturity as of December 31, 2018 was $3,859, which represents the book value recorded within other assets on the condensed consolidated balance sheets for the same period. There were no impairments for the investments considered held-to-maturity at June 30, 2019 and December 31, 2018.

The Company entered into an interest rate swap that is designated as a cash flow hedge associated with a new long-term note issued during the second quarter of 2016 that will terminate with the long-term note in May 2023. The fair value at June 30, 2019 for the interest rate swap considered pricing models whose inputs are observable for the securities held by the Company.

Auction rate securities and contingent consideration are measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The fair value of the auction rate securities was determined using prices observed in inactive markets with limited observable data for the securities held by the Company. The auction rate securities are considered available-for-sale securities. They had a cost basis of $852 and $847 at June 30, 2019 and December 31, 2018, respectively. There were no impairments for the investments considered available-for-sale during the quarters ended June 30, 2019 and 2018.

The fair value of contingent consideration was determined using an income approach at the respective business combination date and at the reporting date. That approach is based on significant inputs that are not observable in the market and include key assumptions such as assessing the probability of meeting certain milestones required to earn the contingent consideration.

The following table presents information about the Company's movement in Level 3 assets and liabilities measured at fair value:


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Auction rate securities
Balance, beginning of period	$	850	$	1,019	$	847	$	1,016

Change in fair value and accretion	2		155		5		158

Balance, end of period	$	852	$	1,174	$	852	$	1,174
Contingent purchase consideration
Balance, beginning of period	$	294	$	902	$	898	$	902
Cash payments	—		—		(632)		—


Foreign exchange adjustment	6		—		34		—
Balance, end of period	$	300	$	902	$	300	$	902

The following table presents the effective maturity dates of held-to-maturity debt investments as of June 30, 2019 and December 31, 2018:


	June 30, 2019						December 31, 2018
	Book Value		Fair Value		Book Value		Fair Value
Investment maturity
Held-to-maturity:
Less than 1 year	$	512,816	$	513,200	$	585,875	$	585,573
1 through 5 years	—		—		3,859		3,859
Total	$	512,816	$	513,200	$	589,734	$	589,432
Available-for-sale:
Greater than 5 years	$	852	$	852	$	847	$	847

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

5. INVENTORIES

Inventories consist of the following:


	June 30,		December 31,
	2019		2018
Components and raw materials	$	243,768	$	233,594
Work-in-process	40,661		66,498
Finished components and devices	141,567		103,487
Total	$	425,996	$	403,579

The Company recorded inventory provisions totaling $7,886 and $3,497 for the three months ended June 30, 2019 and 2018, respectively, and $12,649 and $6,854 for the six months ended June 30, 2019 and 2018, respectively. These provisions relate to the recoverability of the value of inventories due to technological changes and excess quantities. These provisions are reported as a reduction to components and raw materials and finished components and devices.

6. GOODWILL AND INTANGIBLES

The following table sets forth the changes in the carrying amount of goodwill for the six months ended June 30, 2019:



	Amount
Balance at January 1	$	100,722
Goodwill arising from acquisition	9,426
Adjustment to goodwill during measurement period	448
Foreign exchange adjustment	272

Balance at June 30	$	110,868

During the fourth quarter of 2018, the Company acquired 100% of the membership units of Genesis Systems Group, LLC ("Genesis"). During the first quarter of 2019, the working capital adjustment to the purchase price was finalized resulting in an increase in the purchase price of $448. The additional purchase price was allocated entirely to goodwill.

During the first quarter of 2019, the Company acquired the submarine networks division (SND) of Padtec SA, a communications equipment company based in Brazil. SND is a provider of submarine networking technology and systems. The Company paid $19,560 to acquire SND, which represents the fair value on that date. Of the purchase price, $1,956 ($1,948 at June 30, 2019) was held back for potential post-closing adjustments related to government approval of licenses. This balance is included within accrued expenses and other liabilities on the condensed consolidated balance sheets. In addition, $2,934 ($2,964 at June 30, 2019) was held back in a restricted bank account for potential post-closing adjustments related to indemnities provided by the seller. This balance related to restricted cash is included within other assets, and the liability related to the amount due to the sellers if the indemnities are satisfied is included within deferred income taxes and other long-term liabilities on the condensed consolidated balance sheets. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which amounted to $9,426. The Company is assessing the deductibility of the goodwill for tax purposes. As a result of the acquisition, the Company recorded intangible assets of $4,825 related to production know-how with a weighted-average useful life of 6 years and $4,825 related to customer relationships with a weighted-average life of 6 years.

The purchase price allocations included in the Company's condensed consolidated financial statements are not complete. They represent the preliminary fair value estimates as of June 30, 2019 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in changes to the amounts and allocations recorded.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

Intangible assets, subject to amortization, consisted of the following:


	June 30, 2019											December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted- Average Lives	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted- Average Lives

Patents	$	8,036	$	(6,300)	$	1,736	8 years	$	8,036	$	(6,028)	$	2,008	8 years
Customer relationships	62,690		(9,468)		53,222		10 years	57,849		(6,427)		51,422		11 years
Production know-how	14,006		(7,052)		6,954		7 years	9,211		(6,212)		2,999		7 years
Technology, trademark and trade names	41,431		(13,437)		27,994		7 years	41,184		(10,474)		30,710		7 years
Total	$	126,163	$	(36,257)	$	89,906		$	116,280	$	(29,141)	$	87,139

Amortization expense for the three months ended June 30, 2019 and 2018 was $3,648 and $1,908, respectively. Amortization expense for the six months ended June 30, 2019 and 2018 was $6,964 and $3,839, respectively. The estimated future amortization expense for intangibles for the remainder of 2019 and subsequent years is as follows:


2019 ^(a)		2020		2021	2022		2023		Thereafter		Total
$	7,236	$	13,665	13,298	$	12,404	$	11,449	$	31,854	$	89,906

(a) For the six-month period beginning July 1, 2019.

7. 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 46 years. The operating lease expense for the three and six months ended June 30, 2019 was $2,795 and $4,464, respectively. The cash paid for amounts included in the measurement of lease liabilities included in the operating cash flows from operating leases was $1,572 and $3,442 for the three and six months ended June 30, 2019, respectively. The Company does not have any finance lease arrangements.

The Company's operating lease assets and lease liabilities consist of the following as of June 30, 2019:

Account

Classification

Amount

Right-of-use assets

Other assets

27,083

Short-term lease liabilities

Accrued expenses and other liabilities

5,647

Long-term lease liabilities

Deferred income taxes and other long-term liabilities

21,375

Total lease liabilities

27,022

The table below presents the future minimum lease payments to be made under non-cancelable operating leases as of December 31, 2018:


Years ending December 31,
2019	$	6,314
2020	4,603
2021	3,358
2022	2,596
2023	2,078
Thereafter	11,340
Total	$	30,289

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

The table below presents the maturities of operating lease liabilities as of June 30, 2019:


2019 ^(a)	$	6,476
2020	5,017
2021	3,845
2022	3,189
2023	2,418
Thereafter	11,399
Total future minimum lease payments	32,344
Less: imputed interest	(5,322)
Present value of lease liabilities	$	27,022

(a) For the six-month period beginning July 1, 2019.

Other information relevant to the Company's operating leases consist of the following as of June 30, 2019:


Weighted-average remaining lease term	10 years
Weighted-average discount rate	3.63	%

8. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:


	June 30,		December 31,
	2019		2018
Accrued compensation	$	55,238	$	60,107
Contract liabilities	61,506		52,606
Current portion of accrued warranty	23,841		23,106

Short-term lease liabilities	5,647		—
Other	14,977		18,821
Total	$	161,209	$	154,640

9. PRODUCT WARRANTIES

The Company typically provides 1 to 3 years parts and service warranties on lasers and amplifiers. Most of the Company's sales offices provide support to customers in their respective geographic areas. Warranty reserves have generally been sufficient to cover product warranty repair and replacement costs.

The following table summarizes product warranty accrual activity recorded during the six months ended June 30, 2019 and 2018.


	2019		2018
Balance at January 1	$	51,422	$	47,517
Provision for warranty accrual	8,618		12,830
Warranty claims	(9,430)		(8,986)
Foreign currency translation	1		(812)
Balance at June 30	$	50,611	$	50,549

Accrued warranty reported in the accompanying condensed consolidated financial statements as of June 30, 2019 and December 31, 2018 consisted of $23,841 and $23,106 in accrued expenses and other liabilities, respectively, and $26,770 and $28,316 in other long-term liabilities, respectively.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

10. FINANCING ARRANGEMENTS

The Company's borrowings under existing financing arrangements consist of the following:


	June 30,	December 31,
	2019	2018








Long-term notes	43,551	45,378
Less: current portion	(3,705)	(3,671)
Total long-term debt	39,846	41,707

At June 30, 2019, the Company has an unsecured long-term note with an outstanding principal balance of $20,188, of which, $1,188 is the current portion. The interest on this unsecured long-term note is variable at 1.2% above LIBOR and is fixed using an interest rate swap at 2.9% per annum. The unsecured long-term note matures in May 2023, at which time the outstanding principal balance will be $15,438. Also at June 30, 2019, the Company has another long-term note that is secured by its corporate aircraft with an outstanding principal balance of $23,363, of which, $2,517 is the current portion. The interest on this collateralized long-term note is fixed at 2.7% per annum. The collateralized long-term note matures in July 2022, at which time the outstanding principal balance will be $15,375.

The Company maintains both a $50,000 and a €50,000 ($56,832) line-of-credit, which are available to certain foreign subsidiaries and allow for borrowings in the local currencies of those subsidiaries. It also maintains a €2,000 ($2,273) overdraft facility. At June 30, 2019 and December 31, 2018, there were no amounts drawn on the U.S. line-of-credit, and there were $1,337 and $930, respectively, of guarantees issued against the facility which reduce the amount of the facility available to draw. At June 30, 2019 and December 31, 2018, there were no amounts drawn on the Euro line-of-credit, and there were $1,088 and $1,166, respectively, of guarantees issued against those facilities which reduce the amount available to draw. At June 30, 2019 and December 31, 2018, there were no amounts drawn on the Euro overdraft facility. After providing for the guarantees used, the total unused credit lines and overdraft facilities are $106,680 at June 30, 2019.

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company's only outstanding derivative financial instrument is an interest rate swap that is classified as a cash flow hedge of its variable rate debt. The fair value amounts in the condensed consolidated balance sheets were:


Notional Amounts ⁽¹⁾						Other Assets
June 30,		December 31,		June 30,		December 31,
2019		2018		2019		2018



$	20,188	$	20,781	$	28	$	31

(1) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

The derivative gains and losses in the condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018, related to the Company's current and previous interest rate swap contracts were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Effective portion recognized in other comprehensive income, pretax:
Interest rate swap	$	11	$	—	$	(3)	$	2

12. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business. These proceedings may include allegations of infringement of intellectual property, commercial disputes and employment matters. As of June 30, 2019 and through the filing date of these condensed consolidated financial statements, the Company has no legal proceedings ongoing that management estimates could have a material effect on the Company's condensed consolidated financial statements.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

13. INCOME TAXES

The effective tax rates for the three months ended June 30, 2019 and 2018 were 24.3% and 25.6%, respectively. For the six months ended June 30, 2019 and 2018, the effective tax rates were 24.2% and 25.4%, respectively.

There were discrete tax benefits of $575 and $2,407 for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, the discrete tax benefits were $2,913 and $8,907, respectively. The net discrete benefits for both years are primarily related to the excess deduction related to equity based compensation. In 2018, there was minimal guidance available regarding the Global Intangible Low-taxed Income ("GILTI") provisions of the Tax Cuts and Jobs Act. In accordance with SAB 118, which provided guidance on accounting for the tax effects of the Tax Cuts and Jobs Act, the Company was granted a measurement period of up to one year from enactment to complete the accounting related to this tax act under ASC 740, which concluded in the quarter ended December 31, 2018. For the quarter and for the six months ended June 30, 2018, the Company reflected an additional $2,390 and $4,553, respectively, related to GILTI which was then reversed in the third quarter of 2018 as a result of additional IRS guidance issued in September 2018.

The Company accounts for its uncertain tax positions in accordance with the accounting standards for income taxes. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The following is a summary of the activity of the Company’s unrecognized tax benefits for six months ended June 30, 2019 and 2018:


	2019		2018
Balance at January 1	$	11,206	$	10,370

Additions for tax positions in current period	49		745
Foreign currency translation	199		—
Balance at June 30	$	11,454	$	11,115

Substantially all of the liability for uncertain tax benefits related to various federal, state and foreign income tax matters would benefit the Company's effective tax rate, if recognized.

14. 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:


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Net income attributable to IPG Photonics Corporation	$	72,272	$	121,617	$	127,431	$	227,951

Net income attributable to common stockholders	72,272		121,617		127,431		227,951
Weighted average shares	53,042		53,662		53,076		53,703
Dilutive effect of common stock equivalents	806		1,330		839		1,408
Diluted weighted average common shares	53,848		54,992		53,915		55,111
Basic net income attributable to IPG Photonics Corporation per share	$	1.36	$	2.27	$	2.40	$	4.24

Basic net income attributable to common stockholders	$	1.36	$	2.27	$	2.40	$	4.24
Diluted net income attributable to IPG Photonics Corporation per share	$	1.34	$	2.21	$	2.36	$	4.14

Diluted net income attributable to common stockholders	$	1.34	$	2.21	$	2.36	$	4.14

For the three months ended June 30, 2019 and 2018, respectively, the computation of diluted weighted average common shares excludes 38,700 and 10,000 common stock equivalents because the effect of including them would be anti-dilutive. The shares excluded for the three months ended June 30, 2019 and 2018, respectively are comprised of 26,300 and 4,000 restricted stock units ("RSUs") and 7,000 and 2,000 performance stock units ("PSUs"), and 5,400 and 4,000 non-qualified stock options, respectively. For the six months ended June 30, 2019 and 2018, respectively, the computation of diluted weighted average common shares excludes 80,600 and 90,300 common stock equivalents because the effect of including them would be anti-dilutive. The shares excluded for the six months ended June 30, 2019 and 2018, respectively are comprised of 56,400 and 19,500 restricted stock units ("RSUs") and 17,500 and 6,900 performance stock units ("PSUs"), and 6,700 and 63,900 non-qualified stock options, respectively.

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IPG PHOTONICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(In thousands, except share and per share data)

On February 12, 2019, the Company announced that its board of directors authorized a new anti-dilutive stock repurchase program (the "2019 Program") following the completion of its $125 million repurchase program (the "2018 Program") authorized in July 2018. Under the 2019 Program, IPG is authorized to repurchase shares of common stock in an amount not to exceed the lesser of (a) the number of shares issued to employees and directors under the Company's various employee and director equity compensation and employee stock purchase plans from January 1, 2019 through December 31, 2020 and (b) $125 million, exclusive of any fees, commissions or other expenses. Share repurchases will be made periodically in open market transactions using the Company's working capital, and are subject to market conditions, legal requirements and other factors. The 2019 Program authorization does not obligate the Company to repurchase any dollar amount or number of its shares, and repurchases may be commenced or suspended from time to time without prior notice.

For the three and six months ended June 30, 2019, the Company repurchased 15,380 shares of common stock under the 2019 Program with an average price of $148.52 per share in the open market. The impact on the reduction of weighted average shares for the three and six months ended June 30, 2019 was 769 and 386 shares. For the three months ended June 30, 2018, the Company repurchased 131,680 shares of its common stock under the 2018 Program with an average price of $235.37 per share in the open market. The impact on the reduction of weighted average shares for the three months ended June 30, 2018 was 82,546 shares. For the six months ended June 30, 2018, the Company repurchased 214,578 shares of its common stock with an average price of $237.98 per share in the open market. The impact on the reduction of weighted average shares for the six months ended June 30, 2018 was 97,185 shares.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."

Overview

We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used in numerous applications, primarily in materials processing. In addition, we offer laser and non-laser based systems for certain markets and 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.

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 and amplifiers. We also manufacture certain complementary products used with our lasers, including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers.

Factors and Trends That Affect Our Operations and Financial Results

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

Net sales. We derive net sales primarily from the sale of fiber lasers and amplifiers. We also sell diode lasers, communications systems, laser and non-laser systems and complementary products. We sell our products through our direct sales organization and our network of distributors and sales representatives, as well as system integrators. We sell our products to OEMs that supply materials processing laser systems, communications systems, medical laser systems and other laser systems for advanced applications to end users. We also sell our products to end users that build their own systems, which incorporate our products or use our products as an energy or light source. Our scientists and engineers work closely with OEMs, systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications. 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, in general, recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments. Revenue from sales of customized robotic systems is recognized over time.

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.

The average selling prices of our products generally decrease as the products mature. These decreases result from factors such as decreased manufacturing costs and increases in unit volumes, increased competition, the introduction of new products and market share considerations. In the past, we have lowered our selling prices in order to penetrate new markets and applications. Furthermore, we negotiate discounted selling prices from time to time with certain customers that place high unit volume orders.

Gross margin. Our total gross margin in any period can be significantly affected by total net sales in any period, by product mix, by sales mix between OEM customers who purchase devices from us in high unit volumes and other customers, by mix of sales in different geographies, by competitive factors and by other factors such as changes in foreign exchange rates relative to the U.S. Dollar, some of which are not under our control.

Historically, we have been able to offset decreasing average selling prices with reductions in the cost of our components, subassemblies and finished products that has enabled us either to maintain or increase gross margin. However, recent reductions in average selling price have been greater than the decrease in component and manufacturing costs which has resulted in a decrease in gross margin. The decrease in average selling prices over the last year has exceeded the historical average and has primarily been driven by increasing competition in the materials processing market. Further cost reductions, which may not be achieved, will be necessary in order for gross margin to increase.

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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 a greater number of optical components, improving absorption of fixed overhead costs and enabling economies of scale in manufacturing. The gross margin for 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 receive lower prices per device than customers that purchase fewer units. These lower selling prices to high unit volume customers may be partially offset by the improved absorption of fixed overhead costs associated with larger product volumes, which drive economies of scale in manufacturing. Finally, gross margin on systems and communication components can be lower than margins for our laser and amplifier sources, depending on the configuration, volume and competitive forces, among other factors.

The mix of sales between OEM customers and other customers can affect gross margin because we provide sales price discounts on products based on the number of units ordered. As the number of OEM customers increase and the number of units ordered increases, the average sales price per unit will be reduced. We expect that the impact of reduced sales price per unit will be offset by the manufacturing efficiency provided by high unit volume orders, but the timing and extent of achieving these efficiencies may not always match the mix of sales in any given time period or be realized at all.

Fluctuations in foreign exchange rates can affect gross margin. Generally, when the U.S. Dollar weakens as compared to the Euro, Chinese Yuan or other foreign currencies in which our product is sold, it will benefit gross margin. When the U.S. dollar strengthens as compared to foreign currencies in which our product is sold, it will be a detriment to gross margin.

We also regularly review our inventory for items that are slow-moving, have been rendered obsolete or 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 $7.9 million and $3.5 million for the three months ended June 30, 2019 and 2018, respectively, and $13.0 million, $16.9 million and $22.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Sales and marketing expense. We expect to continue to expand our worldwide direct sales organization, build and expand applications centers, hire additional sales and marketing personnel at our existing and new geographic locations as well as to support sales of new product lines, increase the number of units for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales. As such, we expect that our sales and marketing expenses will increase in the aggregate.

Research and development expense. 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. The amount of research and development expense we incur may vary from period to period. In general, if net sales continue to increase we expect research and development expense to increase in the aggregate.

Long-lived assets impairments. We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Negative industry or economic trends, including reduced estimates of future cash flows, disruptions to our business, slower growth rates, lack of growth in our relevant business units or differences in the estimated product acceptance rates could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets.

Our valuation methodology for assessing impairment requires management to make significant judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance at many points during the analysis. Also, the process of evaluating the potential impairment of goodwill is subjective. We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results. In particular, the telecommunications transceiver market continues to experience rapid changes in technology and competitive environment. If our analysis indicates potential impairment to goodwill in one or more of our reporting units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

General and administrative expense. We expect our general and administrative expenses to increase as we continue to invest in systems and resources in management, finance, legal, information technology, human resources and administration to support our worldwide operations and our acquisition strategy. Legal expenses vary from quarter to quarter based primarily upon the level of transaction activities and litigation.

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

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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 and Russia) 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 net sales was 24.3 % for the six months ended June 30, 2019 and 26%, 28% and 22% for the full years 2018, 2017 and 2016, respectively. One of our customers accounted for 12% and 13% of our net sales for the six months ended June 30, 2019 and 2018, respectively. The same customer accounted for 39% and 25% of our net accounts receivable as of June 30, 2019 and December 31, 2018, 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. If any of our significant customers substantially reduced their purchases from us, our results would be adversely affected.

Results of Operations for the three months ended June 30, 2019 compared to the three months ended June 30, 2018

Net sales. Net sales decreased by $49.8 million, or 12.1%, to $363.8 million for the three months ended June 30, 2019 from $413.6 million for the three months ended June 30, 2018.


	Three Months Ended June 30,
	2019						2018						Change
Sales by Application			% of Total				% of Total
Materials processing	$	345,591	95.0	%	$	392,001	94.8	%	$	(46,410)	(11.8)	%
Other applications	18,178		5.0	%	21,612		5.2	%	(3,434)		(15.9)	%
Total	$	363,769	100.0	%	$	413,613	100.0	%	$	(49,844)	(12.1)	%





Sales by Product
High Power Continuous Wave ("CW") Lasers	$	213,411	58.7	%	$	266,075	64.3	%	$	(52,664)	(19.8)	%
Medium and Low Power CW Lasers	15,415		4.2	%	30,972		7.5	%	(15,557)		(50.2)	%
Pulsed Lasers	40,813		11.2	%	41,582		10.1	%	(769)		(1.8)	%
Quasi-Continuous Wave ("QCW") Lasers	15,967		4.4	%	20,092		4.9	%	(4,125)		(20.5)	%
Laser and Non-Laser Systems	39,383		10.8	%	13,428		3.2	%	25,955		193.3	%
Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue	38,780		10.7	%	41,464		10.0	%	(2,684)		(6.5)	%
Total	$	363,769	100.0	%	$	413,613	100.0	%	$	(49,844)	(12.1)	%

Materials processing

Sales for materials processing applications decreased due to lower sales from high power lasers, medium power lasers, pulsed lasers and QCW lasers offset by increased revenue from laser and non-laser systems.

•The decline in high power lasers related to the decrease in sales of cutting, metal welding, and laser sintering applications. Within cutting applications, decreased sales were driven by lower average selling prices and weaker demand in Europe. The decrease in sales of high power lasers used in metal welding applications was driven by decreased sales of metal welding applications into the traditional automotive industry as well as a decrease in average selling prices.

•The decrease in medium and low power sales related to weakness in fine cutting applications and laser sintering for metal-based additive manufacturing. The reduced revenue in fine cutting applications was due in part to the ongoing transition to kilowatt scale high power lasers for these applications.

•The decrease in pulsed laser sales was due to the decline in sales of low and high power pulsed products, which were largely offset by the growth in green and ultrafast pulsed lasers.

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

•The increase in laser and non-laser systems sales was largely due to the acquisition of Genesis and partially driven by growth in macro-systems for welding and cutting applications.

•The increase in Other Revenue within the Sales by Product chart above was driven by growth in accessories and service sales.

Other Applications

Sales from other applications decreased due to a sales decline in government, semiconductor, and telecom, partially offset by an increase in the medical market. Government sales decreased due to the decrease in sales of directed energy applications in the quarter. Telecom sales decreased due to the decreased demand in Europe and North America.

Cost of sales and gross margin. Cost of sales increased by $4.9 million, or 2.7%, to $183.5 million for the three months ended June 30, 2019 from $178.6 million for the three months ended June 30, 2018. Our gross margin decreased to 49.5% for the three months ended June 30, 2019 from 56.8% for the three months ended June 30, 2018. Gross margin decreased mainly due to a decrease in average selling prices and higher inventory provisions as compared to the second quarter of 2018. In addition, gross margin was impacted by lower revenues in the second quarter of 2019 versus the year ago period which resulted in an increase in unabsorbed manufacturing expense as a percentage of revenue. Product mix also reduced gross margins because the systems sold by Genesis, a business that we acquired in December 2018, have a lower gross margin than the core laser business. The acquisition of Genesis reduced gross margin by 1.9% for the three months ended June 30, 2019.

Sales and marketing expense. Sales and marketing expense increased by $6.2 million, or 42.8%, to $20.7 million for the three months ended June 30, 2019 compared with $14.5 million for the three months ended June 30, 2018. The majority of this change was a result of additional sales and marketing expenses of new acquisitions, including Genesis, as well as increases in salaries and benefits, depreciation and other selling expenses. As a percentage of sales, sales and marketing expense increased to 5.7% of sales for the three months ended June 30, 2019 from 3.5% for the three months ended June 30, 2018.

Research and development expense. Research and development expense increased by $3.1 million, or 9.7%, to $34.9 million for the three months ended June 30, 2019, compared to $31.8 million for the three months ended June 30, 2018. This change was primarily a result of increases in personnel, consultants, and R&D materials, partially offset by reductions in contractor expense. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as UV, visible and mid-IR, lasers with ultrafast pulses, laser based systems for material processing, projection, display and medical as well as accessories such as welding and cutting heads. In addition to new products, research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense increased to 9.6% for the three months ended June 30, 2019 from 7.7% for the three months ended June 30, 2018.

General and administrative expense. General and administrative expense increased by $4.4 million, or 18.3%, to $28.5 million for the three months ended June 30, 2019 from $24.1 million for the three months ended June 30, 2018. This change was primarily a result of the acquisition of Genesis, and increases in stock based compensation and bad debt expense. As a percentage of sales, general and administrative expense increased to 7.8% for the three months ended June 30, 2019 from 5.8% for the three months ended June 30, 2018.

Effect of exchange rates on net sales, gross profit and operating expenses. We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro 0.84, Russian Ruble 62, Japanese Yen 109 and Chinese Yuan 6.38, respectively, we would have expected net sales to be $18.1 million higher, gross profit to be $10.4 million higher and total operating expenses to be $1.8 million higher.

Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $5.1 million for the three months ended June 30, 2019 as compared to a $2.1 million loss for the three months ended June 30, 2018. The foreign exchange loss for the three months ended June 30, 2019 was primarily attributable to depreciation of the Chinese Yuan, the appreciation of the Russian Ruble, and appreciation of the Euro as compared to the U.S. Dollar. The foreign exchange loss for the three months ended June 30, 2018 was primarily attributable to the depreciation of the Chinese Yuan offset by a gain attributable to depreciation of the Euro and the Russian Ruble as compared to the U.S. Dollar.

Provision for income taxes. Provision for income taxes was $23.3 million (effective tax rate of 24.3%) for the three months ended June 30, 2019 compared to $41.9 million (effective tax rate of 25.6%) for the three months ended June 30, 2018.

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There were net discrete tax benefits included in tax expense of $0.6 million and $2.4 million for the three months ended June 30, 2019 and 2018, respectively.

Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation decreased by $49.3 million to $72.3 million for the three months ended June 30, 2019 compared to $121.6 million for the three months ended June 30, 2018. Net income attributable to IPG Photonics Corporation as a percentage of our net sales decreased by 9.5 percentage points to 19.9% for the three months ended June 30, 2019 from 29.4% for the three months ended June 30, 2018 due to the factors described above.

Results of Operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018

Net sales. Net sales decreased by $94.7 million, or 12.2%, to $678.8 million for the six months ended June 30, 2019 from $773.5 million for the six months ended June 30, 2018.


	Six Months Ended June 30,
	2019						2018						Change
Sales by Application			% of Total				% of Total
Materials processing	$	646,676	95.3	%	$	731,215	94.5	%	$	(84,539)	(11.6)	%
Other applications	32,140		4.7	%	42,262		5.5	%	(10,122)		(24.0)	%
Total	$	678,816	100.0	%	$	773,477	100.0	%	$	(94,661)	(12.2)	%


Sales by Product
High Power Continuous Wave ("CW") Lasers	$	392,430	57.8	%	$	496,649	64.2	%	$	(104,219)	(21.0)	%
Medium and Low Power CW Lasers	31,013		4.6	%	56,372		7.3	%	(25,359)		(45.0)	%
Pulsed Lasers	72,250		10.6	%	79,835		10.3	%	(7,585)		(9.5)	%
Quasi-Continuous Wave ("QCW") Lasers	30,133		4.4	%	36,292		4.7	%	(6,159)		(17.0)	%
Laser and Non-Laser Systems	72,014		10.6	%	22,899		3.0	%	49,115		214.5	%
Other Revenue including Amplifiers, Service, Parts, Accessories and Change in Deferred Revenue	80,976		12.0	%	81,430		10.5	%	(454)		(0.6)	%
Total	$	678,816	100.0	%	$	773,477	100.0	%	$	(94,661)	(12.2)	%

Materials processing

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

•The decline in high power lasers related to the decrease in sales of cutting, metal welding, and laser sintering applications. Within cutting applications, decreased sales were driven by lower average selling prices and weaker demand in China and Europe. The decrease in sales of high power lasers used in metal welding applications was driven by decreased sales of metal welding applications into the traditional automotive industry as well as a decrease in average selling prices. Within the laser sintering business, decreased sales were driven by weaker sales in Western Europe.

•The decrease in pulsed laser sales was due to the decline in sales of low and high power pulsed products, which were largely offset by the growth in green and ultrafast pulsed lasers. The solar cell manufacturing application increased significantly compared to last year due to the growth in green pulsed lasers.

•QCW laser sales decreased due to lower demand for drilling and consumer electronics applications.

•The increase in laser and non-laser systems sales was largely due to the acquisition of Genesis and partially driven by growth in macro-systems for welding and cutting applications.

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•Other Revenue sales declined compared to last year due to the decreased sales of amplifiers, largely offset by an increase in accessories and service sales.

Other Applications

Sales from other applications decreased due to sales declines in government, scientific, semiconductor, and telecom, partially offset by slight growth in the instrument and medical markets. Within advanced applications, government sales decreased largely primarily due to a decrease in sales for directed energy applications. Telecom sales decreased due to the decrease demand in Europe and North America.

Cost of sales and gross margin. Cost of sales increased by $14.6 million, or 4.4%, to $349.7 million for the six months ended June 30, 2019 from $335.1 million for the six months ended June 30, 2018. Our gross margin decreased to 48.5% for the six months ended June 30, 2019 from 56.7% for the six months ended June 30, 2018. Gross margin decreased mainly due a decrease in average selling prices and higher inventory provisions as compared to the six months ended June 30, 2018. In addition, gross margin was impacted by lower revenues in the first and second quarter of 2019 versus the year ago period, which, resulted in lower absorption of manufacturing expenses. Product mix also reduced gross margins because the systems sold by Genesis, a business that we acquired in December 2018, have a lower gross margin than the core laser business. The acquisition of Genesis reduced gross margin by 2.1% for the six months ended June 30, 2019.

Sales and marketing expense. Sales and marketing expense increased by $11.8 million, or 42.0%, to $39.9 million for the six months ended June 30, 2019 from $28.1 million for the six months ended June 30, 2018, primarily as a result of sales and marketing expenses for new acquisitions, including Genesis, as well as increases in salaries and benefits, depreciation and other selling expenses. As a percentage of sales, sales and marketing expense increased to 5.9% of sales for the six months ended June 30, 2019 from 3.6% for the six months ended June 30, 2018.

Research and development expense. Research and development expense increased by $7.0 million, or 11.6%, to $67.4 million for the six months ended June 30, 2019, compared to $60.4 million for the six months ended June 30, 2018, primarily as a result of an increase in expenses related to personnel, materials used for research and development projects, consultants, outside processing, leasing, depreciation, and information systems, partially offset by reductions in contractor expense. Research and development continues to focus on developing new products, enhancing performance of existing components, improving production processes and developing manufacturing of new components such as crystals and refining production processes to improve manufacturing yields and productivity. New products include lasers that operate at different wavelengths such as UV, visible and mid-IR, lasers with ultrafast pulses, laser based systems for material processing, projection, display and medical as well as accessories such as welding and cutting heads. In addition to new products, research and development is focused on enhancing the performance of our existing products by improving their electrical efficiency and increasing their average power. As a percentage of sales, research and development expense increased to 9.9% for the six months ended June 30, 2019 from 7.8% for the six months ended June 30, 2018.

General and administrative expense. General and administrative expense increased by $6.2 million, or 12.5%, to $55.8 million for the six months ended June 30, 2019 from $49.6 million for the six months ended June 30, 2018, primarily as a result of the acquisition of Genesis and increased expenses for personnel, bad debt, information technology and depreciation. As a percentage of sales, general and administrative expense increased to 8.2% for the six months ended June 30, 2019 from 6.4% for the six months ended June 30, 2018.

Effect of exchange rates on net sales, gross profit and operating expenses. We estimate that, if exchange rates relative to the U.S. Dollar had been the same as one year ago, which were on average Euro 0.83, Russian Ruble 59, Japanese Yen 109 and Chinese Yuan 6.37, respectively, we would have expected net sales for the six months ended June 30, 2019 to be $32.9 million higher, gross profit to be $18.1 million higher and total operating expenses would have been $4.4 million higher.

(Gain) Loss on foreign exchange. We incurred a foreign exchange loss of $6.7 million for the six months ended June 30, 2019 as compared to a gain of $3.2 million for the six months ended June 30, 2018. The loss for the six months ended June 30, 2019 was primarily attributable to the appreciation of the Russian Ruble and the Chinese Yuan as compared to the U.S. Dollar. The gain for the six months ended June 30, 2018 was primarily attributable to depreciation of the Euro and Russian Ruble compared to the U.S. Dollar, which was partially offset by a loss attributable to depreciation of the Chinese Yuan.

Provision for income taxes. Provision for income taxes was $40.6 million (effective tax rate of 24.2%) for the six months ended June 30, 2019 compared to $77.4 million (effective tax rate of 25.4%) for the six months ended June 30, 2018. There were net discrete tax benefits included in tax expense of $2.9 million and $8.9 million for the six months ended June 30, 2019 and 2018, respectively.

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Net income attributable to IPG Photonics Corporation. Net income attributable to IPG Photonics Corporation decreased by $100.6 million to $127.4 million for the six months ended June 30, 2019 compared to $228.0 million for the six months ended June 30, 2018. Net income attributable to IPG Photonics Corporation as a percentage of our net sales decreased by 10.7 percentage points to 18.8% for the six months ended June 30, 2019 from 29.5% for the six months ended June 30, 2018 due to the factors described above.

Liquidity and Capital Resources

Our principal sources of liquidity as of June 30, 2019 consisted of cash and cash equivalents of $530.0 million, short-term investments of $512.8 million, unused credit lines and overdraft facilities of $106.7 million and other working capital (excluding cash and cash equivalents and short-term investments) of $598.0 million. This compares to cash and cash equivalents of $544.4 million, short-term investments of $500.4 million, unused credit lines and overdraft facilities of $107.4 million and other working capital (excluding cash and cash equivalents and short-term investments) of $514.9 million as of December 31, 2018. The decrease in cash and cash equivalents of $14.4 million relates primarily to cash used in investing activities of $106.3 million and cash used in financing activities of $4.1 million, offset by cash provided by operating activities of $101.8 million. In addition, the effect of exchange rates decreased cash and cash equivalents by $2.8 million.

Short-term investments at June 30, 2019, consist of liquid investments including U.S. government and government agency notes, corporate notes, non-U.S. government notes, commercial paper and certificates of deposit with original maturities of greater than three months but less than one year. We also hold long-term investments, included in other assets on the condensed consolidated balance sheets, which consist of auction rate securities totaling $0.9 million.

Our long-term debt consists of two long-term notes with a combined total outstanding balance at June 30, 2019 of $43.6 million of which $3.7 million is the current portion. We have an unsecured long-term note with an outstanding principal balance at June 30, 2019 of $20.2 million, of which $1.2 million is the current portion. The interest on this unsecured long-term note is variable at 1.2% above LIBOR and is fixed using an interest rate swap at 2.9% per annum. The unsecured long-term note matures in May 2023, at which time the outstanding principal balance will be $15.4 million. We have another long-term note that is secured by our corporate aircraft with an outstanding principal balance of $23.4 million, of which $2.5 million is the current portion. The interest on this collateralized long-term note is fixed at 2.7% per annum. The collateralized long-term note matures in July 2022, at which time the outstanding principal balance will be $15.4 million.

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, as well as to complete certain acquisitions of businesses and technologies. We intend to continue to pursue acquisition opportunities based upon market conditions and the strategic importance and valuation of the target company. We may consider issuing debt or equity to finance acquisitions depending on the timing and size of the acquisition. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of the economic environment on our sales growth, the timing and extent of spending to support development efforts, the expansion of the 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.

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The following table details our line-of-credit facilities as of June 30, 2019:

Description

Total Facility

Interest Rate

Maturity

Security

U.S. Revolving Line of Credit ⁽¹⁾

$50.0 million

LIBOR plus 0.80% to 1.20%, depending on our performance

April 2020

Unsecured

Euro Credit Facility (Germany) ⁽²⁾

Euro 50.0 million ($56.8 million)

Euribor plus 0.75% or EONIA plus 1.00%

July 2020

Unsecured, guaranteed by parent company and German subsidiary

Other Euro Facility ⁽³⁾

Euro 2.0 million
($2.3 million)

Euribor plus 0.89% to 1.78%

May 2020

Common pool of assets of Italian subsidiary

(1) This facility is available to certain foreign subsidiaries in their respective local currencies. At June 30, 2019, there were no amounts drawn on this line, however, there were $1.3 million of guarantees issued against the line which reduces total availability.

(2) This facility is also available to certain foreign subsidiaries in their respective local currencies. At June 30, 2019, there were no drawings on this facility, however, there were $1.1 million of guarantees issued against the line which reduces total availability.

(3) At June 30, 2019, there were no drawings. This facility renews annually.

Our largest committed credit lines are with Bank of America N.A. and Deutsche Bank AG in the amounts of $50.0 million and $56.8 million (or 50 million Euro as described above), respectively, and neither of them is syndicated.

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 a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio. The debt service coverage covenant requires that we maintain a trailing twelve-month ratio of cash flow to debt service that is at least 1.5:1. Debt service is defined as required principal and interest payments during the period. Debt service in the calculation is decreased by our cash held in the U.S.A. in excess of $50 million up to a maximum of $250 million. Cash flow is defined as EBITDA less unfunded capital expenditures. 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. We were in compliance with all such financial covenants as of and for the three months ended June 30, 2019.

The financial covenants in our loan documents may cause us to not make 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.

Operating activities. Net cash provided by operating activities decreased by $106.8 million to $101.8 million for the six months ended June 30, 2019 from $208.6 million for the six months ended June 30, 2018. Our largest working capital items are inventory and accounts receivable. Items such as accounts payable to third parties, prepaid expenses and other current assets and accrued expenses and other liabilities are not as significant as our working capital investment in accounts receivable and inventory because of the amount of value added within IPG due to our vertically integrated structure. Accruals and payables for personnel costs including bonuses and income and other taxes payable are largely dependent on the timing of payments for those items. The decreased cash flow from operating activities for the six months ended June 30, 2019 primarily resulted from:

•A decrease of $83.8 million in cash provided by net income after adding back non-cash charges to $221.6 million for the six months ended June 30, 2019 as compared to $305.4 million for the same period in 2018;

•An increase in cash used by income taxes. Cash used by income and other taxes payable was $56.9 million for the six months ended June 30, 2019 as compared to cash provided by income and other taxes payable of $14.0 million for the same period in 2018 due to timing of tax payments in Germany;

•An increase in the cash used by accounts receivable of $21.1 million for the six months ended June 30, 2019 as compared to $9.5 million for the same period in 2018; partially offset by

•A decrease in the cash used for inventory. Cash used for inventory was $40.8 million for the six months ended June 30, 2019 as compared to $91.0 million for the same period in 2018.

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Given our vertical integration, rigorous and time-consuming testing procedures for both internally manufactured and externally purchased components and the lead time required to manufacture components used in our finished products, the rate at which we turn inventory has historically been comparatively low when compared to our cost of sales. Also, our historic growth rates required investment in inventories to support future sales and enable us to quote short delivery times to our customers, providing what we believe is a competitive advantage. Furthermore, if there was a disruption to the manufacturing capacity of any of our key technologies, our inventories of components should enable us to continue to build finished products for a period of time. We believe that we will continue to maintain a relatively high level of inventory compared to our cost of sales. As a result, we expect to have a significant amount of working capital invested in inventory. A reduction in our level of net sales or the rate of growth of our net sales from their current levels would mean that the rate at which we are able to convert our inventory into cash would decrease.

Investing activities. Net cash used in investing activities was $106.3 million for the six months ended June 30, 2019 as compared to cash used in investing activities of $228.3 million in 2018. The cash used in investing activities in 2019 related to $86.5 million of capital expenditures, $15.1 million for acquisition of business, and $5.1 million of net purchases of short-term investments. The cash used in investing activities in 2018 related to $96.5 million of capital expenditures, $128.2 million of net purchases of short-term and long-term investments and $4.4 million for acquisition of business.

We expect to incur between $170 million and $180 million in 2019 in capital expenditures. Capital expenditures include investments in facilities and equipment to add capacity worldwide to support anticipated growth. In 2019, we expect capital expenditures to increase as a percentage of revenue to support the growth of our business. 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.

Financing activities. Net cash used in financing activities was $4.1 million for the six months ended June 30, 2019 as compared to net cash used of $42.2 million in 2018. The cash used in financing activities in 2019 was primarily related to the purchase of treasury stock of $2.3 million and $1.8 million of principal payments on our long-term borrowings. The cash used in financing activities in 2018 was primarily related to the purchase of treasury stock of $51.1 million, partially offset by proceeds of $10.6 million from the exercise of stock options net of amounts disbursed in relation to shares withheld to cover employee income taxes due upon the vesting and release of restricted stock units.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1, "Business" of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 and Item 1A, "Risk Factors" of Part II on Form 10-Q for the quarter ended June 30, 2019. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to rely on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Recent Accounting Pronouncements

See Note 2 in the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents and our debt and foreign exchange rate risk.

Interest rate risk. Certain interest rates are variable and fluctuate with current market conditions. Our investments have limited exposure to market risk. We maintain a portfolio of cash, cash equivalents and short-term investments, consisting primarily of bank deposits, money market funds, certificates of deposit, commercial paper, corporate bonds and government and agency securities. None of these investments have a maturity date in excess of one year. Because of the short-term nature of these instruments, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations. We also have long-term investments in auction rate securities with maturities greater than 5 years. Given the modest amount of our long-term investments of $0.9 million and the fact that we expect to hold these investments to maturity, we do not believe that a 10% change in market interest rates would have a material impact on our financial position or results of operations.

We are also exposed to market risk as a result of increases or decreases in the amount of interest expense we must pay on our bank debt and borrowings on our bank credit facilities. Our interest obligations on our long-term debt are fixed either by the underlying agreement or by means of an interest rate swap agreement. Although our U.S. revolving line of credit and our Euro credit facility have variable rates, we do not believe that a 10% change in market interest rates would have a material impact on our financial position or results of operations.

Exchange rates. Due to our international operations, a significant portion of our net sales, cost of sales and operating expenses are denominated in currencies other than the U.S. Dollar, principally the Euro, the Russian Ruble, the Chinese Yuan and the Japanese Yen. As a result, our international operations give rise to transactional market risk associated with exchange rate movements of the U.S. Dollar, the Euro, the Russian Ruble, the Chinese Yuan and the Japanese Yen. The loss on foreign exchange transactions totaled $5.1 million for the three months ended June 30, 2019 compared to a loss of $2.1 million for the three months ended June 30, 2018. Management attempts to minimize these exposures by partially or fully off-setting foreign currency denominated assets and liabilities at our subsidiaries that operate in different functional currencies. The effectiveness of this strategy can be limited by the volume of underlying transactions at various subsidiaries and by our ability to accelerate or delay inter-company cash settlements. As a result, we are unable to create a perfect offset of the foreign currency denominated assets and liabilities. At June 30, 2019, our material foreign currency exposure is net U.S. Dollar denominated assets at subsidiaries where the Euro or the Russian Ruble is the functional currency and U.S. Dollar denominated liabilities where the Chinese Yuan is the functional currency. The U.S. Dollar denominated assets are comprised of cash, third party receivables and inter-company receivables. The U.S. Dollar denominated liabilities are comprised of inter-company payables. A 5% change in the relative exchange rate of the U.S. Dollar to the Euro as of June 30, 2019 applied to the net U.S. Dollar asset balances, would result in a foreign exchange gain of $6.4 million if the U.S. Dollar appreciated and a $6.4 million foreign exchange loss if the U.S. Dollar depreciated. A 5% change in the relative exchange rate of the U.S. Dollar to the Chinese Yuan as of June 30, 2019 applied to the net U.S. Dollar liabilities balances, would result in a foreign exchange loss of $8.1 million if the U.S. Dollar appreciated and a $8.1 million foreign exchange gain if the U.S. Dollar depreciated.

In addition, we are exposed to foreign currency translation risk for those subsidiaries whose functional currency is not the U.S. Dollar as changes in the value of their functional currency relative to the U.S. Dollar can adversely affect the translated amounts of our revenue, expenses, net income, assets and liabilities. This can, in turn, affect the reported value and relative growth of sales and net income from one period to the next. In addition, changes in the translated value of assets and liabilities due to changes in functional currency exchange rates relative to the U.S. Dollar result in foreign currency translation adjustments that are a component of other comprehensive income or loss.

Foreign currency derivative instruments can also be used to hedge exposures and reduce the risks of certain foreign currency transactions; however, these instruments provide only limited protection and can carry significant cost. We have no foreign currency derivative instruments as of June 30, 2019. We will continue to analyze our exposure to currency exchange rate fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations. Exchange rate fluctuations may adversely affect our financial results in the future.

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ITEM 4. 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 Quarterly Report on Form 10-Q (the "Evaluation Date"). 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.

Changes in Internal Controls

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated 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.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are party to various legal proceedings and other disputes incidental to our business. There have been no material developments to those proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 1A. RISK FACTORS

The factors described below are the principal risks that could materially adversely affect our operating results and financial condition. Other factors may exist that we do not consider significant based on information that is currently available. In addition, new risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect us.

Downturns in the markets we serve, particularly materials processing, could have a material adverse effect on our sales and profitability.

Our business depends substantially upon capital expenditures by our customers, particularly by manufacturers in the materials processing market, which includes general manufacturing, automotive, aerospace, other transportation, heavy industry, electronics and photovoltaic industries. Approximately 94% of our revenues in 2018 were from customers in the materials processing market. Although applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market. For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession. For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in these industries or markets, which, in turn, depend upon the demand for their products or services. Decreased demand for products and services from customers for these applications during an economic downturn may lead to decreased demand for our products, which would reduce our sales and margins. We may not be able to respond by decreasing our expenses quickly enough or sufficiently, due in part, to our fixed overhead structure related to our vertically integrated operations and our commitments to continuing investment in research and development and infrastructure for long term growth.

Uncertainty and adverse changes in the general economic conditions of markets in which we participate negatively affect our business.

Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including the materials processing, telecommunications, advanced and medical markets and applications in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates of growth or contraction in the markets and applications we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures very difficult to make. A significant portion of our sales are to customers in China, which accounted for 43%, 44% and 36% in 2018, 2017 and 2016, respectively. A slowing of economic growth or recession, tariff-trade wars or other adverse economic developments or uncertainty in any of our key markets, including in China, would slow our growth rates or may result in a decrease in our sales. Adverse changes have occurred and may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, declines in stock markets, contraction of credit availability, declines in real estate values, or other factors affecting economic conditions generally. These changes may negatively affect the sales of our lasers and amplifiers, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, increase the risk of loss on investments, or increase costs associated with manufacturing and distributing products. An economic downturn could have a material adverse effect on our business, financial condition and results of operations.

The markets for our products are highly competitive and increased competition could result in reduced sales, reduced gross margins or the loss of market share.

The industries in which we operate are characterized by significant price and technological competition. We compete with makers of fiber lasers, solid-state lasers, direct diode lasers, high power CO2, YAG and disc lasers. These include public and private companies such as Coherent, Inc., Laserline GmbH, Lumentum Holdings Inc., Maxphotonics Co., Ltd., nLight, Inc., Raycus Fiber Laser Technologies Co. Ltd., and Trumpf GmbH + Co. KG, as well as other smaller competitors. Several of these are larger and have substantially greater financial, managerial and technical resources, more extensive distribution and

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service networks, greater sales and marketing capacity, and larger installed customer bases than we do. Also, we compete with widely used non-laser production methods, such as water-jet cutting and resistance welding. Our current or potential customers may determine to develop and produce products for their own use which are competitive to our products. Such vertical integration could reduce the market opportunity for our products. Many of our fiber laser competitors are increasing the output powers of their fiber lasers to compete with our products. We also compete in the materials processing, advanced and medical applications markets with end users that produce their own solid-state and gas lasers as well as with manufacturers of non-laser methods and tools, such as traditional non-laser welding and cutting dies in the materials processing market and scalpels in the medical market.

We may not be able to successfully differentiate our current and proposed products from our competitors' products and current or prospective customers may not consider our products to be superior to competitors' products. To maintain our competitive position, we believe that we will be required to continue a high level of investment in research and development, application development, manufacturing facilities and customer service and support, and to react to market pricing conditions. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins, loss of sales and loss of market share.

The laser and amplifier industries are experiencing declining average selling prices, which could cause our gross margins to decline and harm our operating results.

Our products are experiencing and may in the future continue to experience a significant decline in average selling prices ("ASPs") as a result of new product and technology introductions, increased competition and price pressures from significant customers. Newer market participants, particularly in China, have reduced and may continue to reduce, prices of competing products to gain market share. If the ASPs of our products decline further and we are unable to increase our unit volumes, introduce new or enhanced products with higher margins or reduce manufacturing costs to offset anticipated decreases in the prices of our existing products, our operating results may be adversely affected. In addition, because of our significant fixed costs, we are limited in our ability to reduce total costs quickly in response to any revenue shortfalls. Because of these factors, we have experienced and we may experience in the future material adverse fluctuations in our operating results on a quarterly or annual basis if the ASPs of our products continue to decline.

Our sales growth depends upon our ability to penetrate new applications and end markets for fiber lasers and increase our market share in existing applications.

Our level of sales will depend on our ability to generate sales of fiber lasers in new and developing markets and applications for lasers where they have not been used previously and in applications in which other lasers, such as CO2 and YAG lasers have been used. To date, a significant portion of our revenue growth has been derived from sales of fiber lasers primarily for applications where CO2 and YAG lasers historically have been used. We have made significant sales into the cutting, welding and marking and engraving applications, three large applications where other laser technologies are used. As fiber lasers reach higher levels of penetration in core materials processing applications, the development of new applications, end markets and products outside our core applications becomes more important to our growth. In order to maintain or increase market demand for our fiber laser products, we will need to devote substantial resources to:

•demonstrate the effectiveness of fiber lasers in new applications for materials processing, medical, communications or other applications such as cinema and projection;

•successfully develop new product lines, such as UV, visible and ultrafast fiber lasers, that extend our product line to address different applications than our current products;

•increase our direct and indirect sales efforts;

•effectively service and support our installed product base on a global basis;

•effectively meet growing competition and pricing pressures; and

•continue to reduce our manufacturing costs and enhance our competitive position.

Potential customers may have substantial investments and know-how related to their existing laser and non-laser technologies. They may perceive risks relating to the reliability, quality, usefulness and profitability of integrating of fiber lasers in their systems when compared to other laser or non-laser technologies available in the market or that they manufacture themselves. Despite fiber lasers having better performance and prices compared to other lasers or tools, OEM customers may be reluctant to switch incumbent suppliers or we may miss the design cycles of our customers. Many of our target markets, such as the automotive, machine tool and other manufacturing, communications and medical industries, have historically adopted new technologies slowly. These markets often require long test and qualification periods or lengthy government approval processes before adopting new technologies.

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If we are unable to implement our strategy to develop new applications and end markets for our products or develop new products, our revenues, operating results and financial condition could be adversely affected. We cannot assure you that we will be able to successfully implement our business strategy in part or whole. In addition, any newly developed or enhanced products may not achieve market acceptance or may be rendered obsolete or less competitive by the introduction of new products by other companies.

Our vertically integrated business results in high levels of fixed costs and inventory levels that may adversely impact our gross profits and our operating results in the event that demand for our products declines or we maintain excess inventory levels.

We have a high fixed cost base due to our vertically integrated business model, including the fact that approximately 77% of our approximately 6,220 employees as of December 31, 2018 were employed in our manufacturing operations. We may not adjust these fixed costs quickly enough or sufficiently to adapt to rapidly changing market conditions. Our gross profit, in absolute dollars and as a percentage of net sales, is impacted by our sales volume, the corresponding absorption of fixed manufacturing overhead expenses and manufacturing yields. In addition, because we are a vertically integrated manufacturer and design and manufacture our key specialty components, insufficient demand for our products may subject us to the risks of high inventory carrying costs and increased inventory obsolescence. If our capacity and production levels are not properly sized in relation to expected demand, we may need to record write-downs for excess or obsolete inventory. Because we are vertically integrated, the rate at which we turn inventory has historically been low when compared to our cost of sales. We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales. As a result, we expect to have a significant amount of working capital invested in inventory. Changes in our level of inventory lead to an increase in cash generated from our operations when inventory is sold or a decrease in cash generated from our operations at times when the amount of inventory increases.

Our manufacturing capacity and operations may not be appropriate for future levels of demand and may adversely affect our gross margins.

We have added and are continuing to add substantial manufacturing capacity at our facilities in the United States, Germany, Russia and Belarus. A significant portion of our manufacturing facilities and production equipment, such as our semiconductor production and processing equipment, diode packaging equipment and diode burn-in stations, are special-purpose in nature and cannot be adapted easily to make other products. If the demand for fiber lasers or amplifiers does not increase or if our revenue decreases from current levels, we may have significant excess manufacturing capacity and under-absorption of our fixed costs, which could in turn adversely affect our gross margins and profitability.

To maintain our competitive position as the leading developer and manufacturer of fiber lasers and to meet anticipated demand for our products, we invest significantly in the expansion of our manufacturing and operations throughout the world and may do so in the future. We incurred in the past and will incur in the future significant costs associated with the acquisition, build-out and preparation of our facilities. We had capital expenditures of $160.3 million and $126.5 million in 2018 and 2017, respectively, and we expect to incur approximately $170 million to $180 million in capital expenditures, excluding acquisitions, in 2019. In connection with these projects, we may incur cost overruns, construction delays, labor difficulties or regulatory issues which could cause our capital expenditures to be higher than what we currently anticipate, possibly by a material amount, which would in turn adversely impact our operating results. Moreover, we may experience higher costs due to yield loss, production inefficiencies and equipment problems until any operational issues associated with the opening of new manufacturing facilities are resolved.

A few customers account for a significant portion of our sales, and if we lose any of these customers or they significantly curtail their purchases of our products, our results of operations could be adversely affected.

We rely on a few customers for a significant portion of our sales. In the aggregate, our top five customers accounted for 26%, 28% and 22% of our consolidated net sales in 2018, 2017 and 2016, respectively. Our largest customer is located in China and accounted for 12%, 13% and 9% of sales in 2018, 2017 and 2016, respectively. A few of our larger customers are making fiber lasers or announced plans to develop fiber lasers. We generally do not enter into agreements with our customers obligating them to purchase our fiber lasers or amplifiers. Our business is characterized by short-term purchase orders and shipment schedules. If any of our principal customers discontinues its relationship with us, replaces us as a vendor for certain products or suffers downturns in its business, our business and results of operations could be adversely affected.

Foreign currency risk may negatively affect our net sales, cost of sales and operating margins and could result in exchange losses.

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We conduct our business and incur costs in the local currency of most countries in which we operate. In 2018, our net sales outside the United States represented a substantial majority of our total sales. We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it operates or holds assets or liabilities in currencies different than their functional currency. Changes in exchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or increase the manufacturing cost of our products, which may have an adverse effect on our financial condition, cash flows and profitability.

Our inability to manage risks associated with our international customers and operations could adversely affect our business.

We have significant facilities in and our products are sold in numerous countries. Our principal markets include China, the United States, Germany, Turkey, Switzerland, Italy, Japan, Korea and Russia. A substantial majority of our revenues are derived from customers outside the United States. In addition we have substantial tangible assets outside of the United States. We anticipate that foreign sales will continue to account for a significant portion of our revenues in the foreseeable future. Our operations and sales in these markets are subject to risks inherent in international business activities, including:

•fluctuations in the values of foreign currencies;

•general economic uncertainties in the macroeconomic and local economic communities in which we our customers operate or serve;

•impact of government economic policies on macroeconomic conditions, including recently instituted changes in trade policies by the U.S. and any corresponding retaliatory actions by affected countries, including China;

•longer accounts receivable collection periods and less developed credit assessment and collection procedures;

•changes in a specific country's or region's economic conditions, such as recession;

•compliance with a wide variety of domestic and foreign laws and regulations, unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, tariffs, quotas, export controls, export licenses, trade sanctions and other trade barriers, and any corresponding retaliatory actions by affected countries, including China and Russia;

•certification requirements;

•environmental regulations;

•less effective protection of intellectual property rights in some countries;

•potentially adverse tax consequences;

•different capital expenditure and budget cycles for our customers, which affect the timing of their spending;

•political, legal and economic instability, foreign conflicts, labor unrest and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers, manufacturers and subcontractors are located;

•preference for locally produced products;

•difficulties and costs of staffing and managing international operations across different geographic areas and cultures;

•seasonal reductions in business activities;

•fluctuations in freight rates and transportation disruptions;

•investment restrictions or requirements;

•repatriation restrictions or requirements;

•export and import restrictions; and

•limitations on the ability of our employees to travel without restriction to certain countries in which we operate.

Political, economic and monetary instability and changes in governmental regulations or policies, including trade tariffs and protectionism, could adversely affect both our ability to effectively operate our foreign sales offices and the ability of our foreign suppliers to supply us with required materials or services. Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from

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alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We are subject to risks of doing business in Russia through our subsidiary, NTO IRE-Polus, which provides components and test equipment to us and sells finished fiber devices to customers in Russia and neighboring countries as well as finished lasers to China. Further, approximately 43% of our sales in 2018 were to customers in China. We are also investing in manufacturing facilities in Belarus. The results of our operations, business prospects and facilities in these three countries are subject to the economic and political environment in Russia, China and Belarus. In recent years, these countries have undergone substantial political, economic and social change. As is typical of an emerging economy, none of these three countries possess a well-developed business, financial, legal and regulatory infrastructure that would generally exist in a more mature free market economy. In addition, tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. The future economic direction of these two emerging market countries remains largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory and political developments. Our failure to manage the risks associated with our operations in Russia, China and Belarus and our other existing and potential future international business operations could have a material adverse effect upon our results of operations.

We must comply with and could be impacted by various export controls and trade and economic sanctions laws and regulations that are fluid and may change due to diplomatic and political considerations outside of our control.

Our business activities are subject to various export controls and trade and economic sanctions laws and regulations, including, without limitation, the U.S. Commerce Department’s Export Administration Regulations, the U.S. Treasury Department’s Office of Foreign Assets Control’s trade and economic sanctions programs, and the U.S. Department of State’s Nonproliferation Sanctions, which we collectively refer to as Trade Controls.

We have a large manufacturing facility and research and development operations in Russia which supplies components to our U.S. and German manufacturing facilities and finished lasers to our subsidiary in China. In addition, we supply components from our U.S. and German manufacturing facilities to our Russian facility. Should there be any disruption of our supplies from or to our Russian operations, or should the United States, the European Union or Russia implement new or broad-based Trade Controls, our production and/or deliveries as well as results of operations would be affected. Although we have implemented compliance measures designed to prevent transactions prohibited by current or future Trade Controls, our failure to successfully comply with applicable Trade Controls may expose us to negative legal and business consequences, including civil or criminal penalties, government investigations, and reputational harm.

In addition, Trade Controls and their implementation are fluid and may change due to diplomatic and political considerations outside of our control. Such changes, including the potential expansion of sanctions and sanctions designations, as well as public statements by government officials, could be significant, require us to take certain actions to be in compliance, adversely affect prevailing market prices of our common stock, have a reputational impact, or otherwise have a material adverse impact on us, our business, and our ability to raise capital.

We have experienced, and expect to experience in the future, fluctuations in our quarterly operating results. These fluctuations may increase the volatility of our stock price and may be difficult to predict.

We have experienced, and expect to continue to experience, fluctuations in our quarterly operating results. We believe that fluctuations in quarterly results may cause the market price of our common stock to fluctuate, perhaps substantially. Factors which may have an influence on our operating results in a particular quarter include:

•general economic conditions and uncertainties in the macroeconomic and local economies in which we or our customers operate and serve;

•the increase, decrease, cancellation or rescheduling of significant customer orders;

•compliance with applicable import/export regulations, tariffs and trade barriers, including recently instituted or proposed changes in trade policies by the U.S. and any corresponding retaliatory actions by affected countries, in particular with respect to China;

•the timing of revenue recognition based on the installation or acceptance of certain products shipped to our customers;

•seasonality attributable to different purchasing patterns and levels of activity throughout the year in the areas where we operate;

•the timing of customer qualification of our products and commencement of volume sales of systems that include our products;

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•our ability to obtain export licenses for our products on a timely basis or at all;

•the rate at which our present and future customers and end users adopt our technologies;

•the gain or loss of a key customer;

•product or customer mix;

•competitive pricing pressures and new market entrants;

•our ability to design, manufacture and introduce new products on a cost-effective and timely basis;

•our ability to manage our inventory levels and any provisions for excess or obsolete inventory;

•our ability to collect outstanding accounts receivable balances;

•incurring expenses to develop and improve application and support capabilities, the benefits of which may not be realized until future periods, if at all;

•incurring expenses related to impairment of values for goodwill, intangibles and other long-lived assets;

•different capital expenditure and budget cycles for our customers, which affect the timing of their spending;

•our ability to successfully and fully integrate acquisitions into our operation and management;

•expenses associated with acquisition-related activities;

•foreign currency fluctuations; and

•our ability to control expenses.

These factors make it difficult for us to accurately predict our operating results. In addition, our ability to accurately predict our operating results is complicated by the fact that many of our products have long sales cycles, some lasting as long as twelve months or more. Once a sale is made, our delivery schedule typically ranges from four weeks to four months, and therefore our sales will often reflect orders shipped in the same quarter that they are received and will not enhance our ability to predict our results for future quarters. In addition, long sales cycles may cause us to incur significant expenses without offsetting revenues since customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. Accordingly, our results of operations are subject to significant fluctuations from quarter to quarter, and we may not be able to accurately predict when these fluctuations will occur.

Because we lack long-term purchase commitments from our customers, our sales can be difficult to predict, which could lead to excess or obsolete inventory and adversely affect our operating results.

We generally do not enter into long-term agreements with our customers obligating them to purchase our fiber lasers or amplifiers. Our business is characterized by short-term purchase orders and shipment schedules and, in some cases, orders may be canceled or delayed without significant penalty. As a result, it is difficult to forecast our revenues and to determine the appropriate levels of inventory required to meet future demand. In addition, due to the absence of long-term volume purchase agreements, we forecast our revenues and plan our production and inventory levels based upon the demand forecasts of our OEM customers, end users and distributors, which are highly unpredictable and can fluctuate substantially. This could lead to increased inventory levels and increased carrying costs and risk of excess or obsolete inventory due to unanticipated reductions in purchases by our customers. In addition, provisions have been recorded as a result of changes in market prices of certain components, the value of those inventories that was realizable through finished product sales due to declines in certain end market demand and uncertainties related to the recoverability of the value of inventories due to technological and product changes, and excess quantities. In this regard, we recorded provisions for slow-moving, obsolete or excess inventory totaling $13.0 million, $16.9 million and $22.8 million in 2018, 2017 and 2016, respectively. If our OEM customers, end users or distributors fail to accurately forecast the demand for our products, fail to accurately forecast the timing of such demand, or are unable to consistently negotiate acceptable purchase order terms with customers, our results of operations may be adversely affected.

We are highly dependent on the significant experience and specialized expertise of our CEO, COO and other senior management and scientific staff. The unavailability or loss of one or more of these key employees or our failure to attract other highly skilled personnel necessary to compete successfully could harm our business and results of operations.

Our future success is substantially dependent on the continued service and performance of our executive officers, particularly our founder and chief executive officer, Dr. Valentin P. Gapontsev, age 80, and our chief operating officer, Dr. Eugene Scherbakov, age 72. They play key roles setting our strategic direction, directing the development of new technologies and maintaining our culture. The unavailability of either key executive could have a material impact on our

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business. Although the board engages in executive succession planning, our inability to effectively and immediately transition knowledge or responsibilities to their successors in the event of an unexpected absence or departure could harm our business and disrupt our operations. We also rely on our highly trained team of scientists, many of whom have numerous years of experience and specialized expertise in optical fibers, semiconductors and optical component technology, and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may depart for a variety of reasons, which could harm our business. The members of our scientific staff who are expected to make significant individual contributions to our business are also members of our executive management team. We will need to continue to recruit and retain highly skilled scientists and engineers for certain functions. Competition for qualified personnel in our industry is intense, particularly for physicists, software engineers and other technical staff. If we fail to attract, integrate and retain the necessary personnel, it could delay the development or introduction of new products, negatively impact our ability to market, sell or support our products, and significantly harm our business.

We pursue acquisitions and investments in new businesses, products, patents or technologies. These involve risks which could disrupt our business and may harm our financial results and condition.

We make acquisitions of and investments in new businesses, products, patents and technologies and expand into new geographic areas, or we may acquire operations, products or technologies that expand our current capabilities. Although we have pursued acquisitions small in size in the past, we may pursue larger transactions in the future. Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs, reduce consolidated margins, cause us to incur impairment charges and reduce the value of the acquired company, asset or technology to us. For example, if we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms. Even if we are successful, we may not be able to complete the transaction after signing definitive agreements, integrate the acquired businesses, business cultures, products, patents or technologies into our existing business and products, or retain key employees. As a result of the rapid pace of technological change in our industry, we may misjudge the long-term potential of an acquired business, product, patent or technology, or the acquisition may not be complementary to our existing business. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management's attention, require considerable cash outlays at the expense of our existing operations, incur unanticipated costs or liabilities, including the costs associated with improving the internal controls of the acquired company. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability and result in dilution to our existing and future stockholders.

We may incur impairments to goodwill or long-lived assets, which would negatively affect our results of operations.

We review our long-lived assets, including goodwill and intangible assets identified in business combinations and other intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Negative industry or economic trends, including reduced estimates of future cash flows, disruptions to our business, slower growth rates, lack of growth in our relevant business units or differences in the estimated product acceptance rates could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets.

Our valuation methodology for assessing impairment requires management to make significant judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance at many points during the analysis. Also, the process of evaluating the potential impairment of goodwill is subjective. We operate in a highly competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill in one or more of our business units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

In the past, we were subject to litigation alleging that we infringed third-party intellectual property rights. Intellectual property claims could result in costly litigation and harm our business.

In recent years, there has been significant litigation involving intellectual property rights in many technology-based industries, including our own. We face risks and uncertainties in connection with such litigation, including the risk that patents issued to others may harm our ability to do business; that there could be existing patents of which we are unaware that could be pertinent to our business; and that it is not possible for us to know whether there are patent applications pending that our products might infringe upon, since patent applications often are not disclosed until a patent is issued or published. Moreover, the frequency with which new patents are granted and the diversity of jurisdictions in which they are granted make it impractical and expensive for us to monitor all patents that may be relevant to our business.

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From time to time, we have been notified of allegations and claims that we may be infringing patents or intellectual property rights owned by third parties. For instance, we were named a defendant in an action filed November 2015 in the United States District Court for the Eastern District of Texas for patent infringement relating to an apparatus for coupling radiation beams into optical waveguides. This matter was settled. Following a federal jury trial in 2011, we won a patent infringement lawsuit asserted by IMRA America, Inc. IMRA America has also informed us that it has patents and applications directed to fiber lasers and fiber amplifiers, but has not asserted them against us. We were previously engaged in opposition proceedings in Japan and Germany with respect to several related IMRA patents.

There can be no assurance that we will be able to dispose without a material effect any claims or other allegations made or asserted in the future. The outcome of any litigation is uncertain. Even if we ultimately are successful on the merits of any such litigation or re-examination, legal and administrative proceedings related to intellectual property are typically expensive and time-consuming, generate negative publicity and divert financial and managerial resources. Some litigants may have greater financial resources than we have and may be able to sustain the costs of complex intellectual property litigation more easily than we can.

If we do not prevail in any intellectual property litigation brought against us, it could affect our ability to sell our products and materially harm our business, financial condition and results of operations. These developments could adversely affect our ability to compete for customers and increase our revenues. Plaintiffs in intellectual property cases often seek, and sometimes obtain, injunctive relief. Intellectual property litigation commenced against us could force us to take actions that could be harmful to our business, competitive position, results of operations and financial condition, including the following:

•stop selling our products or using the technology that contains the allegedly infringing intellectual property;

•pay actual monetary damages, royalties, lost profits or increased damages and the plaintiff's attorneys' fees, which individually or in the aggregate may be substantial; and

•attempt to obtain a license to use the relevant intellectual property, which may not be available on reasonable terms or at all.

In addition, intellectual property lawsuits can be brought by third parties against OEMs and end users that incorporate our products into their systems or processes. In some cases, we indemnify OEMs against third-party infringement claims relating to our products and we often make representations affirming, among other things, that our products do not infringe the intellectual property rights of others. As a result, we may incur liabilities in connection with lawsuits against our customers. Any such lawsuits, whether or not they have merit, could be time-consuming to defend, damage our reputation or result in substantial and unanticipated costs.

Our inability to protect our intellectual property and proprietary technologies could result in the unauthorized use of our technologies by third parties, hurt our competitive position and adversely affect our operating results.

We rely on patents, trade secret laws, contractual agreements, technical know-how and other unpatented proprietary information to protect our products, product development and manufacturing activities from unauthorized copying by third parties. Our patents do not cover all of our technologies, systems, products and product components and may not prevent third parties from unauthorized copying of our technologies, products and product components. We seek to protect our proprietary technology under laws affording protection for trade secrets. We also seek to protect our trade secrets and proprietary information, in part, by requiring employees to enter into agreements providing for the maintenance of confidentiality and the assignment of rights to inventions made by them while employed by us. We have significant international operations and we are subject to foreign laws which differ in many respects from U.S. laws. Policing unauthorized use of our trade secret technologies throughout the world and proving misappropriation of our technologies are particularly difficult, especially due to the number of our employees and operations in numerous foreign countries. The steps that we take to acquire ownership of our employees' inventions and trade secrets in foreign countries may not have been effective under all such local laws, which could expose us to potential claims or the inability to protect intellectual property developed by our employees. Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may adversely affect our ability to enforce our trade secret and intellectual property positions. Costly and time-consuming litigation could be necessary to determine the scope of our confidential information and trade secret protection. We also enter into confidentiality agreements with our consultants and other suppliers to protect our confidential information that we deliver to them. However, there can be no assurance that our confidentiality agreements will not be breached, that we will be able to effectively enforce them or that we will have adequate remedies for any breach.

Given our reliance on trade secret laws, others may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we have made. Therefore, our intellectual property efforts may be insufficient to maintain our competitive advantage or to stop other parties from commercializing similar products or technologies. Many countries outside of the United States afford little or no protection to trade secrets and other intellectual property rights. Intellectual property litigation can be time-consuming and expensive, and there is no guarantee that we will

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have the resources to fully enforce our rights. If we are unable to prevent misappropriation or infringement of our intellectual property rights, or the independent development or design of similar technologies, our competitive position and operating results could suffer.

We depend upon internal production and on outside single or limited-source suppliers for many of our key components and raw materials, including cutting-edge optics and materials. Any interruption in the supply of these key components and raw materials could adversely affect our results of operations.

We rely exclusively on our own production capabilities to manufacture certain of our key components, such as semiconductor diodes, specialty optical fibers and optical components. We do not have redundant production lines for some of our components, such as our diodes, specialty optical fibers and some other components, which are made at a single manufacturing facility. These are not readily available from other sources at our current costs. If our manufacturing activities were obstructed or hampered significantly, it could take a considerable length of time, or it could increase our costs, for us to resume manufacturing or find alternative sources of supply. Many of the tools and equipment we use are custom-designed, and it could take a significant period of time to repair or replace them. Our three major manufacturing facilities are located in Oxford, Massachusetts; Burbach, Germany; and Fryazino, Russia. We are building additional manufacturing in Belarus. Despite our efforts to mitigate the impact of any flood, fire, natural disaster, political unrest, act of terrorism, war, outbreak of disease or other similar event, our business could be adversely affected to the extent that we do not have redundant production capabilities if any of our major manufacturing facilities or equipment should become inoperable, inaccessible, damaged or destroyed.

Also, we purchase certain raw materials used to manufacture our products and other components, such as semiconductor wafer substrates, diode packages, modulators, micro-optics, bulk optics and high power beam delivery products, from single or limited-source suppliers. We typically purchase our components and materials through purchase orders or agreed-upon terms and conditions and we do not have guaranteed supply arrangements with many of these suppliers. These suppliers are relatively small private companies that may discontinue their operations at any time and may be particularly susceptible to prevailing economic conditions. Some of our suppliers are also our competitors. Some of our suppliers may not be able to meet demand from our growing business or because of global demand for their components. As a result, we experienced and may in the future experience longer lead times or delays in fulfillment of our orders. Furthermore, other than our current suppliers, there are a limited number of entities from whom we could obtain these supplies. We do not anticipate that we would be able to purchase these components or raw materials that we require in a short period of time or at the same cost from other sources in commercial quantities or that have our required performance specifications. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, could adversely affect our business. If our suppliers face financial or other difficulties, if our suppliers do not maintain sufficient inventory on hand or if there are significant changes in demand for the components and materials we obtain from them, they could limit the availability of these components and materials to us, which in turn could adversely affect our business.

We depend on our OEM customers and system integrators to incorporate our products into their systems.

Our sales depend in part on our ability to maintain existing and secure new OEM customers. Our revenues also depend in part upon the ability of our current and potential OEM customers and system integrators to incorporate our laser and amplifier products. The commercial success of these systems depends to a substantial degree on the efforts of these OEM customers and system integrators to develop and market products that incorporate our technologies. Relationships and experience with traditional laser makers, limited marketing resources, reluctance to invest in research and development and other factors affecting these OEM customers and third-party system integrators could have a substantial impact upon our financial results. If OEM customers or integrators are not able to adapt existing tools or develop new systems to take advantage of the features and benefits of fiber lasers or if they perceive us to be an actual or potential competitor, then the opportunities to increase our revenues and profitability may be severely limited or delayed. In addition, some of our OEM customers are developing their own fiber laser sources. If they are successful, this may reduce our sales to these customers. Furthermore, if our OEM customers or third-party system integrators experience financial or other difficulties that adversely affect their operations, our financial condition or results of operations may also be adversely affected.

Changes in tax rates, tax liabilities or tax accounting rules could affect future results.

As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. Significant judgment is required to determine worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries or states with differing tax rates, transfer pricing rules, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service ("IRS") and other tax authorities. From time to time the United States, foreign and

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state governments make substantive changes to tax rules and the application of rules to companies, including various announcements from the United States government potentially impacting our ability to defer taxes on international earnings. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our operating results and financial condition.

Failure to effectively maintain and expand our direct field service and support organization could have an adverse effect on our business.

It is important for us to provide rapid, responsive service directly to our customers throughout the world and to maintain and expand our own personnel resources to provide these services. Any actual or perceived lack of direct field service in the locations where we sell or try to sell our products may negatively impact our sales efforts and, consequently, our revenues. This requires us to recruit and train additional qualified field service and support personnel as well as maintain effective and highly trained organizations that can provide service to our customers in various countries. We may not be able to attract and train additional qualified personnel to expand our direct support operations successfully. We may not be able to find and engage additional qualified third-party resources to supplement and enhance our direct support operations. Further, we may incur significant costs in providing these direct field and support services. Failure to implement and manage our direct support operation effectively could adversely affect our relationships with our customers, and our operating results may suffer.

Our products could contain defects, which may reduce sales of those products, harm market acceptance of our fiber laser products or result in claims against us.

The manufacture of our fiber lasers and amplifiers involves highly complex and precise processes. Despite testing by us and our customers, errors have been found, and may be found in the future, in our products. These defects may cause us to incur significant warranty, support and repair costs, incur additional costs related to a recall, divert the attention of our engineering personnel from our product development efforts and harm our relationships with our customers. These problems could result in, among other things, loss of revenues or a delay in revenue recognition, loss of market share, harm to our reputation or a delay or loss of market acceptance of our fiber laser products. Defects, integration issues or other performance problems in our fiber laser and amplifier products could also result in personal injury or financial or other damages to our customers, which in turn could damage market acceptance of our products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, could be time-consuming and costly to defend.

We may experience lower than expected manufacturing yields, which would adversely affect our gross margins.

The manufacture of semiconductor diodes and the packaging of them is a highly complex process. Manufacturers often encounter difficulties in achieving acceptable product yields from diode and packaging operations. We have from time to time experienced lower than anticipated manufacturing yields for our diodes and packaged diodes. This occurs during the production of new designs and the installation and start-up of new process technologies and new equipment. If we do not achieve planned yields, our product costs could increase resulting in lower gross margins, and key component availability would decrease.

Failure to maintain effective internal controls may cause a loss of investor confidence in the reliability of our financial statements or to cause us to delay filing our periodic reports with the SEC and adversely affect our stock price.

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. We have experienced rapid growth and have extensive and complex international manufacturing and sales and service locations which may make us more vulnerable to weaknesses in our internal controls. Although we test our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements or a delay in our ability to timely file our periodic reports with the SEC, which ultimately could negatively impact our stock price.

Our information systems are subject to cyber-attacks, interruptions and failures. If unauthorized access is obtained to our information systems, we may incur significant legal and financial exposure and liabilities.

Like many multinational corporations, we maintain several information technology systems, including software products licensed from third parties. These systems vary from country to country. Any system, network or internet failures, misuse by

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system users, the hacking into or disruption caused by the unauthorized access by third parties or loss of license rights could disrupt our ability to timely and accurately manufacture and ship products or to report our financial information in compliance with the timelines mandated by the SEC. Any such failure, misuse, hacking, disruptions or loss would likely cause a diversion of management's attention from the underlying business and could harm our operations. In addition, a significant failure of our various information technology systems could adversely affect our ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 under the updated framework issued in 2013.

As part of our day-to-day business, we store our data and certain data about our customers, employees and service providers in our information technology system. While our system is designed with access security, if a third party gains unauthorized access to our data or technology, including information regarding our customers, employees and service providers, such security breach could expose us to a risk of loss of this information, loss of business, litigation and possible liability. Our security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, employee information or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate or detect these techniques or to implement adequate preventative measures. Any unauthorized access could result in a loss of confidence by our customers, damage our reputation, disrupt our business, result in a misappropriation of our assets (including cash), lead to legal liability and negatively impact our future sales. Additionally, such actions could result in significant costs associated with loss of our intellectual property, impairment of our ability to conduct our operations, rebuilding our network and systems, prosecuting and defending litigation, responding to regulatory inquiries or actions, paying damages or taking other remedial steps. In addition, we may incur significant costs designed to prevent or mitigate the damage related to cybersecurity incidents. For instance, we may retain additional employees or consultants, implement new policies and procedures, and install information technology to detect and prevent identity theft, data breaches, or system disruptions. We would incur any such costs with the intent that proactively preventing a cybersecurity incident ultimately helps to mitigate potential cybersecurity liability.

The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, a cessation of service, and a loss of existing or potential customers, impeding our sales, manufacturing, distribution, and other critical functions.

We may face particular privacy, data security and data protection risks due to laws and regulations regulating the protection or security of personal and other sensitive data.

We may face particular privacy, data security and data protection risks due to laws and regulations regulating the protection or security of personal and other sensitive data, including in particular several laws and regulations that have recently been enacted or adopted or are likely to be enacted or adopted in the future. For instance, effective May 25, 2018, the European General Data Protection Regulation (“GDPR”) imposes additional obligations and risk upon our business and increases substantially the penalties to which we could be subject in the event of any non-compliance. GDPR requires companies to satisfy new requirements regarding the handling of personal data (generally, of EU residents), including its use, protection and the rights of affected persons regarding their data. Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue. In addition, several other jurisdictions around the world have recently enacted privacy laws or regulations similar to GDPR. For instance, California enacted the California Consumer Privacy Act (“CCPA”), which is effective January 1, 2020 and which gives consumers many of the same rights as those available under GDPR. Several laws similar to the CCPA have been proposed in the United States at both the federal and state level. GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business. We are evaluating its processes and taking measures to ensure compliance with all applicable privacy and data protection-related laws and regulations. Due to the lack of experience with the interpretation and enforcement of many of these laws and regulations, some measures initially might not satisfy standard or best practices that will be established in the coming years.

We are subject to government regulations, including tariffs, duties and export control regulations, that could restrict our international sales and negatively affect our business.

A significant part of our business involves the export and import of components and products among many countries, including the U.S., Germany, Russia and China. The U.S. government has in place a number of laws and regulations that control the export, re-export or transfer of U.S.-origin products, software and technology. The governments of other countries in which we do business have similar regulations regarding products, software and technology originating in those countries.

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These laws and regulations may require that we obtain a license before we can export, re-export or transfer certain products, software or technology. The requirement to obtain a license could put us at a competitive disadvantage by restricting our ability to sell products to customers in certain countries or by giving rise to delays or expenses related to obtaining a license. In applying for a license and responding to questions from licensing authorities, we have experienced and, in the future, may experience delays in obtaining export licenses based on issues solely within the control of the applicable government agency. Under the discretion of the issuing government agency, an export license may permit the export of one unit to a single customer or multiple units to one or more customers. Licenses may also include conditions that limit the use, resale, transfer, re-export, modification, disassembly, or transfer of a product, software or technology after it is exported without first obtaining permission from the relevant government agency. Failure to comply with these laws and regulations could result in government sanctions, including substantial monetary penalties, denial of export privileges, debarment from government contracts and a loss of revenues. Delays in obtaining or failure to obtain required export licenses may require us to defer shipments for substantial periods or cancel orders. Any of these circumstances could adversely affect our operations and, as a result, our financial results could suffer.

In January 2018, the U.S. Treasury Department presented the U.S. Congress with a report on “oligarchs” as required under the Countering America’s Adversaries through Sanctions Act of 2017 ("CAATSA"). Our founder, CEO and Chairman is one of nearly 100 persons on the list of “oligarchs” on the basis of his reported net worth and birth in Russia. Uncertainties and reputational damage from his naming in the Treasury report, the imposition of trade sanctions and/or future legislation relying on the Treasury Department’s list of so-called “oligarchs” could negatively affect our business, financial condition and results of operation.

The United States, Germany, the European Union, China, Japan, South Korea and many other foreign governments impose tariffs and duties on the import and export of products, including some of those which we sell. The U.S. has recently instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the United States, including, in particular, on Chinese goods, economic sanctions on individuals, corporations or countries and other government regulations affecting trade between the United States and other countries where we conduct our business. For example, in September 2018, the Office of the U.S. Trade Representative announced that the current U.S. administration would impose a 10% tariff on approximately $200 billion worth of imports from China into the United States, effective September 24, 2018, which is expected to increase to 25% in the first half of 2019. We have recently seen a drop in demand for our Chinese customers, particularly in the materials processing market. As a result, some of our customers are reevaluating expansion plans and delaying and, in limited cases, canceling orders.

These policy changes and proposals could require time-consuming and expensive alterations to our business operations and may result in greater restrictions and economic disincentives on international trade, which could negatively impact our competitiveness in jurisdictions around the world as well as lead to an increase in costs in our supply chain. We are a multinational corporation, with manufacturing located both in the United States and internationally and with approximately 85% of our net sales arising from foreign customers. As such, we may be more susceptible to negative impacts from these tariffs or change in trade policies than other less internationally focused enterprises. In addition, new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments, including the Chinese government (which has imposed retaliatory tariffs on a range of U.S. goods including certain photonics products), have instituted or are considering imposing trade sanctions on certain U.S. manufactured goods. Such changes by the United States and other countries have the potential to adversely impact U.S. and worldwide economic conditions, our industry and the global demand for our products, and as a result, could negatively affect our business, financial condition and results of operations.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, operating results and financial condition.

Some of our operations use substances regulated under various federal, state, local and international laws governing the environment, including those relating to the storage, use, discharge, disposal, product composition and labeling of, and human exposure to, hazardous and toxic materials. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses in order to remain in compliance with such laws and regulations. At this time, we do not believe the costs to maintain compliance with current environmental laws to be material. Although we do not currently anticipate that such costs will become material, if such costs were to become material in the future, whether due to unanticipated changes in environmental laws, unanticipated changes in our operations or other unanticipated changes, we may be required to dedicate additional staff or financial resources in order to maintain compliance. There can be no assurance that violations of

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environmental laws or regulations will not occur in the future as a result of the lack of, or failure to obtain, permits, human error, accident, equipment failure or other causes.

We are exposed to credit risk and fluctuations in the market values of our cash, cash equivalents and marketable securities.

Given the global nature of our business, we have both domestic and international investments. At December 31, 2018, 71% of our cash, cash equivalents and marketable securities were in the United States and 29% were outside the United States. Credit ratings and pricing of our investments can be negatively affected by liquidity, credit deterioration, prevailing interest rates, financial results, economic risk, political risk, sovereign risk or other factors. Also, our investments may be negatively affected by events that impact the banks or depositories that hold our investments. As a result, the value and liquidity of our cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although we have not realized any significant losses on our cash, cash equivalents and marketable securities, future fluctuations in their value could result in a significant realized loss.

Our ability to access financial markets to raise capital or finance a portion of our working capital requirements and support our liquidity needs may be adversely affected by factors beyond our control and could negatively impact our ability to finance our operations, meet certain obligations, implement our operating strategy or complete acquisitions.

We occasionally borrow under our existing credit facilities to fund operations, including working capital investments. Our major credit lines in the United States and Germany expire in April 2020 and July 2020, respectively. In the past, market disruptions experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development. These disruptions may include turmoil in the financial services industry, unprecedented volatility in the markets where our outstanding securities trade, and general economic downturns in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.

We also may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

Substantial sales of our common stock, including shares issued upon the exercise of currently outstanding options, restricted stock units and performance stock units could cause our stock price to decline.

Sales of a substantial number of shares of common stock, or the perception that sales could occur, could adversely affect the market price of our common stock. As of June 30, 2019, we had 53,182,910 shares of common stock outstanding and 2,391,750 shares subject to outstanding options, restricted stock units and performance stock units. We have registered all shares of common stock that we may issue under our stock option plans and our employee stock ownership plan. In addition, all of the unregistered shares of our common stock are now eligible for sale under Rule 144 or Rule 701 under the Securities Act. As these shares are issued, they may be freely sold in the public market subject, in the case of any awards under our stock-based compensation plans, to applicable vesting requirements.

We currently have the ability to file a registration statement and immediately offer and sell common stock, preferred stock, warrants, debt and convertible securities because of our current status a well-known seasoned issuer. In the future, we may issue additional options, warrants or other securities convertible into our common stock. Sales of substantial amounts of shares of our common stock or other securities under any future registration statement that we may file covering newly issued shares or shares held by affiliates or others could lower the market price of our common stock and impair our ability to raise capital through the sale of equity securities.

Dr. Valentin P. Gapontsev, our Chairman and Chief Executive Officer, and three trusts he created collectively control approximately 31% of our voting power and have a significant influence on the outcome of director elections and other matters requiring stockholder approval, including a change in corporate control.

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Dr. Valentin P. Gapontsev, our Chairman and Chief Executive Officer, and IP Fibre Devices (UK) Ltd., of which Dr. Gapontsev is the managing director, together with three trusts he created beneficially own approximately 31% of our common stock. Trustees of the trusts are officers or employees of the Company.

Dr. Gapontsev and the trusts have a significant influence on the outcome of matters requiring stockholder approval, including:

•election of our directors;

•amendment of our certificate of incorporation or by-laws; and

•approval of mergers, consolidations or the sale of all or substantially all of our assets.

Dr. Gapontsev and the trusts may vote their shares of our common stock in ways that are adverse to the interests of other holders of our common stock. These significant ownership interests could delay, prevent or cause a change in control of the Company, any of which could adversely affect the market price of our common stock.

Provisions in our charter documents and Delaware law, and our severance arrangements, could prevent or delay a change in control of our company, even if a change in control would be beneficial to our stockholders.

Provisions of our certificate of incorporation and by-laws, including certain provisions that will take effect when Dr. Valentin P. Gapontsev (together with his affiliates and associates) ceases to beneficially own an aggregate of 25% or more of our outstanding voting securities, may discourage, delay or prevent a merger, acquisition or change of control, even if it would be beneficial to our stockholders. The existence of these provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:

•authorizing the issuance of "blank check" preferred stock;

•establishing a classified board;

•providing that directors may only be removed for cause;

•prohibiting stockholder action by written consent;

•limiting the persons who may call a special meeting of stockholders;

•establishing advance notice requirements for nominations for election to the board of directors and for proposing matters to be submitted to a stockholder vote; and

•supermajority stockholder approval to change these provisions.

Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with the Company or obtaining control of our company. Specifically, Section 203 of the Delaware General Corporation Law, which will apply to the Company following such time as Dr. Gapontsev (together with his affiliates and associates) ceases to beneficially own 25% or more of the total voting power of our outstanding shares, may prohibit business combinations with stockholders owning 15% or more of our outstanding voting stock. The terms of our agreements with executives include change-of-control severance provisions which provide for the payment of cash following a termination of employment following a change of control. These provisions may discourage, delay or prevent a merger or acquisition, make a merger or acquisition more costly for a potential acquirer, or make removal of incumbent directors or officers more difficult.

If securities analysts stop publishing research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us. If one or more of these analysts who cover us downgrade our stock, our stock price would likely decline. Further, if one or more of these analysts cease coverage of the Company, we could lose visibility in the market, which in turn could cause our stock price to decline.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table reflects issuer purchases of equity securities for three months ended June 30, 2019:


Date	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs




April 1, 2019 — April 30, 2019	—	(2)	—		—	125,000
May 1, 2019 — May 31, 2019	376	(1), (2)	149.17		—	125,000
June 1, 2019 — June 30, 2019	16,376	(1), (2), (3)	147.76		—	122,716



Total	16,752		$	147.79	—	$	122,716

(1) In 2012, our Board of Directors approved "withhold to cover" as a tax payment method for vesting of restricted stock awards for certain employees. Pursuant to the "withhold to cover" method, we withheld from such employees the shares noted in the table above to cover tax withholding related to the vesting of their awards. For the three months ended June 30, 2019 a total of 376 shares were withheld at an average price of $149.17.

(2) On February 12, 2019, we announced that our Board of Directors authorized a new anti-dilutive stock repurchase program (the "2019 Program") following the completion of our $125 million repurchase program authorized in July 2018. Under the 2019 Program, We are authorized to repurchase shares of common stock in an amount not to exceed the lesser of (a) the number of shares issued to employees and directors under the Company's various employee and director equity compensation and employee stock purchase plans from January 1, 2019 through December 31, 2020 and (b) $125 million, exclusive of any fees, commissions or other expenses. Share repurchases may be made periodically in open-market transactions using the Company's working capital, and are subject to market conditions, legal requirements and other factors. The 2019 Program authorization does not obligate us to repurchase any dollar amount or number of our shares, and repurchases may be commenced or suspended from time to time without prior notice. We repurchased 15,380 shares in the second quarter of 2019 under the 2019 Program.

(3) We repurchased 996 shares in a private transaction that were not part of a publicly announced repurchase plan. We made the repurchase because of local legal requirements in respect of shares previously granted to a non-management employee of one of our foreign subsidiaries. The purchase price was the closing market price on the date of the repurchase.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a) Exhibits


Exhibit No.						Description


10.1						IPG Photonics Corporation 2008 Employee Stock Purchase Plan as A mended and R estated E ffective December 1, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K file with the Commission on June 3, 2019)
31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32						Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350
101.INS						Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						XBRL Taxonomy Extension Schema
101.CAL						XBRL Taxonomy Extension Calculation Linkbase
101.LAB						XBRL Taxonomy Extension Label Linkbase
101.PRE						XBRL Taxonomy Extension Presentation Linkbase
101.DEF						XBRL Taxonomy Extension Definition Linkbase

SIGNATURES

Pursuant to the requirements 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.

IPG PHOTONICS CORPORATION

Date: August 6, 2019

By:

/s/ Valentin P. Gapontsev

Valentin P. Gapontsev

Chairman and Chief Executive Officer
(Principal Executive Officer)

Date: August 6, 2019

By:

/s/ Timothy P.V. Mammen

Timothy P.V. Mammen

Senior Vice President and Chief Financial Officer
(Principal Financial Officer)