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, manufacture and sell high-performance fiber lasers and diode lasers
that are used for diverse applications, primarily in materials processing. We
also manufacture and sell complementary products used with our lasers including
optical delivery cables, fiber couplers, beam switches, optical processing
heads, in-line sensors and chillers. In addition, we offer laser-based and
non-laser based systems for certain markets and applications. Our portfolio of
laser solutions is used in materials processing, medical and advanced
applications. We sell our products globally to original equipment manufacturers
("OEMs"), system integrators and end users. We market our products
internationally, primarily through our direct sales force. Our major
manufacturing facilities are located in the United States, Germany, Russia and
Belarus. We have sales and service offices and applications laboratories
worldwide.

We are vertically integrated such that we design and manufacture most of the key
components used in our finished products, from semiconductor diodes to optical
fiber preforms, finished fiber lasers and complementary products. Our vertically
integrated operations allow us to reduce manufacturing costs, control quality,
rapidly develop and integrate advanced products and protect our proprietary
technology.

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.



Russia-Ukraine Conflict. The Russia-Ukraine conflict and the sanctions imposed
in response to this crisis have significantly curtailed our ability to use our
manufacturing operations in Russia to supply other IPG operations outside of
Russia. The conflict and the risk of additional sanctions has also increased the
levels of uncertainty and risks facing the Company due to our manufacturing
operations in Belarus. Since the start of the conflict, we have been executing
on plans to reduce our reliance on our Russia and Belarus operations by adding
capacity in other countries, increasing inventories worldwide and qualifying
third-party suppliers. In 2022, we began hiring and training additional
employees, expanding capacity for increased production, and running additional
shifts in the U.S. and Germany and adding additional manufacturing capacity in
Italy and Poland.

In October 2022, the European Union introduced new sanctions that restrict our
ability to ship and receive components from our factory in Russia to the E.U.
beginning in January 2023. We believe the contingency measures outlined above
that we have already put in place mitigate substantially all the effects of the
recent sanctions on our ability to supply finished products to customers. If we
have not fully mitigated the effect of these and other trade restrictions, or if
new sanctions are adopted, our ability to supply finished products to customers
could be impacted. Although we believe our contingency plans mitigate the risk
of our ability to supply customers with finished product, these plans require
additional investments in facilities outside of Russia and Belarus in the near
term as well as additional ongoing operating costs, primarily associated with
the higher cost of labor outside of Russia and Belarus. While we have sufficient
financial resources to make these investments and expenditures, our gross
margins and financial results have been and will be adversely impacted by
increased operating costs associated with these transitions. Over time, we
intend to mitigate some of these increases by producing components in countries
with lower labor costs than the United States and Germany, with ongoing product
expense reduction initiatives, higher productivity from automation, improved
yields and product specifications. We are also continuing to review our
operations in Russia and Belarus. For additional information regarding the risks
and potential impacts of the Russia-Ukraine conflict, see "Risk Factors - The
ongoing conflict between Russia and Ukraine may adversely affect our business
and results of operations" in Item 1A of Part II of Form 10-K for the year ended
December 31, 2022.

Sales to third-parties in Russia were approximately 3% of our revenue in the
first quarter of 2023 and for the full year ended December 31, 2022. Our Russian
subsidiary has historically supplied finished goods for our China market.
Sanctions have limited our ability to provide components to Russia for the
completion of finished lasers. Although our Russian operation has built safety
stock in anticipation of this situation, we are also producing more finished
lasers for China at other IPG locations. The total value of product shipped to
the Chinese market from Russia was approximately $4.6 million for the three
months ended March 31, 2023 and $62 million for the full year ended December 31,
2022.
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Given the sanctions introduced by the European Union in October 2022, which
imposed further restrictions on our Russian operations, we evaluated the
recoverability of certain assets located in Russia during the fourth quarter of
2022 and incurred impairment charges that reduced the value of fixed assets,
inventory and other current assets. We also incurred restructuring charges in
2022. At March 31, 2023, we had working capital excluding cash and cash
equivalents of $22.2 million in Russia of which $22.4 million is inventory. We
had $67.5 million cash and cash equivalents in Russia. The net asset value of
our long lived assets was $2.8 million. In addition to the impairment charges
referenced above, the net value of assets in Russia has been reduced by $125.9
million due to the cumulative translation affect of the Russian ruble compared
to the U.S. dollar, which is included in the accumulated comprehensive loss
component of stockholders' equity. Depending upon the outcome of our review of
our Russian operations, the cumulative translation affect of foreign exchange
fluctuations that is currently included in accumulated comprehensive loss on our
consolidated balance sheets may be charged to our consolidated statements of
income.

We continue to manufacture laser cabinets and other mechanical components in
Belarus. Trade sanctions to date have not significantly affected our ability to
supply these items from Belarus to other manufacturing locations. The value of
the long lived assets in Belarus was $37.5 million at March 31, 2023, and we had
working capital excluding cash of $5.0 million in Belarus of which $4.5 million
is inventory. In addition, we had $4.0 million cash in Belarus.

COVID-19. Global demand trends have been impacted by the ongoing COVID-19
pandemic. While business conditions generally improved from the severe
contraction experienced in 2020, it is difficult to predict whether conditions
could change if there are additional restrictions imposed as a result of a
resurgence in COVID-19 infections. To date, we have been able to accommodate
these changes to our business operations and continue to meet customer demand.
If guidelines or mandates from relevant authorities becomes more restrictive due
to a resurgence of COVID-19 in a particular region, the effect on our operations
could be more significant.

Supply Chain. We and our customers are experiencing increased lead times and
costs for certain components purchased from third party suppliers; particularly
electronic components. We, our customers and our suppliers continue to face
constraints related to supply chain and logistics, including availability of
capacity, materials, air cargo space, sea containers and higher freight rates.
While supply chain and logistics constraints have moderated, they have not yet
fully returned to pre-pandemic conditions. Supply chain constraints have not
significantly affected our business but they have moderately increased our
freight costs, caused us to carry higher levels of safety stock for certain
inventory items, increased the cost of certain electronic components and caused
delays in recognizing revenue for certain custom processing systems in our
Genesis business due to delays in receiving components.

Net sales. Our net sales have historically fluctuated from quarter to quarter.
The increase or decrease in sales from a prior quarter can be affected by the
timing of orders received from customers, the timing of shipments, the mix of
OEM orders and one-time orders for products with large purchase prices,
competitive pressures, acquisitions, economic and political conditions in a
certain country or region and seasonal factors such as the purchasing patterns
and levels of activity throughout the year in the regions where we operate. Net
sales can be affected by the time taken to qualify our products for use in new
applications in the end markets that we serve. 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. The adoption of our products by a new
customer or qualification in a new application can lead to an increase in net
sales for a period, which may then slow until we penetrate new markets or obtain
new customers. Foreign exchange rates also affect our net sales, due to changes
in the U.S. dollar value of sales made in foreign currencies.

Our business depends substantially upon capital expenditures by end users,
particularly by manufacturers using our products for materials processing, which
includes general manufacturing, automotive including electric vehicles ("EV"),
other transportation, aerospace, heavy industry, consumer, semiconductor and
electronics. Approximately 90% of our revenues for both the first quarter of
2023 and the full 2022 fiscal year were from customers using our products for
materials processing. Although applications within materials processing are
broad, the capital equipment market in general is cyclical and historically has
experienced sudden and severe downturns. For the foreseeable future, our
operations will continue to depend upon capital expenditures by end users of
materials processing equipment and will be subject to the broader fluctuations
of capital equipment spending.

In response to inflation, some global central banks are adopting less
accommodative monetary policy and have or expect to increase benchmark interest
rates. An increase in interest rates could impact global demand and/or could
lead to a recession that may reduce the demand for our products. In addition, an
increase in interest rates would increase the cost of equipment financed with
leases or debt.

In recent years, our net sales and margins have been negatively impacted by
tariffs and trade policy. New tariffs and other changes in U.S. trade policy
could trigger retaliatory actions by affected countries, and certain foreign
governments.
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We are also susceptible to global or regional disruptions such as political
instability, geopolitical conflicts, acts of terrorism, significant fluctuations
in currency values, natural disasters, macroeconomic concerns and the impact of
the COVID-19 outbreak that affect the level of capital expenditures or global
commerce. With respect to the COVID-19 outbreak specifically, the possible
affect over the longer term remains uncertain and dependent on future
developments that cannot be accurately predicted at this time, such as the
severity and transmission rate of COVID-19 or new variants, the extent and
effectiveness of containment actions taken, the approval, effectiveness, timing
and widespread vaccination of the global population, and the impact of these and
other factors on our customer base and general commercial activity.

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

The secular shift to fiber laser technology in large materials processing
applications, such as cutting applications, had a positive effect on our sales
trends in the past such that our sales trends were often better than other
capital equipment manufacturers in both positive and negative economic cycles.
As the secular shift to fiber laser technology matures in such applications, our
sales trends are more susceptible to economic cycles which affect other capital
equipment manufacturers broadly and the machine tool and industrial laser
industries more specifically.

Gross margin. Our total gross margin in any period can be significantly affected
by a number of factors, including net sales, production volumes, competitive
factors, product mix, and by other factors such as changes in foreign exchange
rates relative to the U.S. dollar, tariffs and shipping costs. Many of these
factors are not under our control. The following are examples of factors
affecting gross margin:

•As our products mature, we can experience additional competition which tends to decrease average selling prices and affects gross margin;



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

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

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



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

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



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

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

We also regularly review our inventory for items that are slow-moving, have been
rendered obsolete or are determined to be excess. Any provision for such
slow-moving, obsolete or excess inventory affects our gross margins. For
example, we recorded provisions for slow-moving, obsolete or excess inventory
totaling $12.1 million and $10.8 million for the three months ended March 31,
2023 and 2022, respectively.

Selling and general and administrative expenses. In the past, we invested in
selling and general and administrative costs in order to support continued
growth in the Company. As the secular shift to fiber laser technology matures,
our sales growth becomes more susceptible to the cyclical trends typical of
capital equipment manufacturers. Accordingly, our future management of and
investments in selling and general and administrative expenses will also be
influenced by these trends, although we may still invest in selling or general
and administrative functions to support certain initiatives even in economic
down cycles. Certain general and administrative expenses are not related to the
level of sales and may vary quarter to quarter based primarily upon the level of
acquisitions, divestitures and litigation.

Research and development expenses. We plan to continue to invest in research and
development to improve our existing components and products and develop new
components, products, systems and applications technology. We believe that these
investments will sustain our position as a leader in the fiber laser industry
and will support development of new products that can address new markets and
growth opportunities. The amount of research and development expense we incur
may vary from period to period.

Goodwill and long-lived assets impairments. We review our intangible assets and
property, plant and equipment for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. Negative industry or
economic trends, including reduced estimates of future cash flows, disruptions
to our business, slower growth rates, lack of growth in our relevant business
units, differences in the estimated product acceptance rates, or market prices
below the carrying value of long-lived assets evaluated for sale could lead to
impairment charges against our long-lived assets, including goodwill and other
intangible assets. We are evaluating certain U.S.-based assets for sale,
including land and buildings. If the estimated sales value of any of these
assets is below carrying value, then we may need to record an asset impairment
charge when they are classified as held-for-sale. We have long-lived assets in
Belarus with a carrying value of $37.5 million. If sanctions increase or if the
geopolitical situation changes such that we can no longer use Belarus as a
source of supply for our laser cabinets and other mechanical components, we may
need to evaluate those assets for impairment, which may result in impairment
charges.

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

Foreign exchange. Because we are a U.S.-based company doing business globally,
we have both translational and transactional exposure to fluctuations in foreign
currency exchange rates. Changes in the relative exchange rate between the U.S.
dollar and the foreign currencies in which our subsidiaries operate directly
affects our sales, costs and earnings. Differences in the relative exchange
rates between where we sell our products and where we incur manufacturing and
other operating costs (primarily in the U.S., Germany, Russia and Belarus) also
affects our costs and earnings. Certain currencies experiencing significant
exchange rate fluctuations like the euro, the Russian ruble, and the Chinese
yuan have had and could have an additional significant impact on our sales,
costs and earnings. For the quarter ended March 31, 2023, the foreign exchange
gain created by depreciation of the Russian ruble and appreciation of the
Chinese yuan was partially offset by a foreign exchange loss created by the
appreciation of the euro as compared to the U.S. dollar. This is because our
European and Russian subsidiaries have certain net assets denominated in U.S.
dollars, and our Chinese subsidiary has certain net liabilities denominated in
U.S. dollars. 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.
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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 period to period. Net sales derived from our five largest customers
as a percentage of our net sales was 19% for the three months ended March 31,
2023 and 15%, and 19% for the full years 2022 and 2021, respectively. One of our
customers accounted for 16% and 14% of our net accounts receivable at March 31,
2023 and December 31, 2022, respectively. We seek to add new customers and to
expand our relationships with existing customers. We anticipate that the
composition of our significant customers will continue to change. We generally
do not enter into agreements with our customers obligating them to purchase a
fixed number or large volume of our products. 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 March 31, 2023 Compared to the Three Months Ended March 31, 2022



Net sales. Net sales decreased by $22.8 million, or 6.2%, to $347.2 million for
the three months ended March 31, 2023 from $370.0 million for the three months
ended March 31, 2022.

The table below sets forth sales by application:



                                                                    Three Months Ended March 31,
                                                           2023                                        2022                                   Change
                                                               (In thousands, except for percentages)
Sales by Application                                              % of Total                                 % of Total
Materials processing                      $   312,969                    90.1  %       $ 338,963                    91.6  %       $ (25,994)             (7.7) %
Other applications                             34,205                     9.9  %          31,016                     8.4  %           3,189              10.3  %
Total                                     $   347,174                   100.0  %       $ 369,979                   100.0  %       $ (22,805)             (6.2) %

The table below sets forth sales by type of product and other revenue:


                                                                   Three Months Ended March 31,
                                                          2023                                        2022                                   Change
                                                              (In thousands, except for percentages)
Sales by Product                                                 % of Total                                 % of Total
 High Power Continuous Wave ("CW")
Lasers                                   $   154,034                    44.4  %       $ 167,691                    45.3  %       $ (13,657)             (8.1) %
 Medium Power CW Lasers                       13,839                     4.0  %          23,668                     6.4  %          (9,829)            (41.5) %
 Pulsed Lasers                                56,147                    16.2  %          66,932                    18.1  %         (10,785)            (16.1) %
 Quasi-Continuous Wave ("QCW") Lasers         11,282                     3.2  %          12,780                     3.5  %          (1,498)            (11.7) %
 Laser and Non-Laser Systems                  41,384                    11.9  %          34,597                     9.4  %           6,787              19.6  %
 Other Revenue including Amplifiers,
Service, Parts, Accessories and Change
in Deferred Revenue                           70,488                    20.3  %          64,311                    17.3  %           6,177               9.6  %
Total                                    $   347,174                   100.0  %       $ 369,979                   100.0  %       $ (22,805)             (6.2) %


Materials processing

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

•High power CW laser sales decreased due to lower sales for cutting
applications, partially offset by an increase in sales for welding applications.
Within cutting applications, the decrease in sales was attributable to softer
demand in China. The increase in sales of high power CW lasers used in welding
applications was driven by higher sales supporting e-mobility applications,
including electric vehicles, battery manufacturing and electric motors.

•Medium power CW laser sales decreased due to lower demand for welding and cutting applications.



•Pulsed laser sales, including high power pulsed lasers, decreased due to lower
sales for cutting, marking and engraving applications, partially offset by an
increase in sales for green pulsed lasers used for solar cell manufacturing and
cleaning and stripping applications.
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•QCW laser sales decreased due to lower demand in fine processing for consumer electronics applications.

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

Other Applications



Sales from other applications increased due to increased demand for lasers used
in medical procedures and advanced applications, partially offset by a decrease
in telecom sales due to the divestiture of the telecommunications transmission
product line in the third quarter of 2022.

Cost of sales and gross margin. Cost of sales increased by $2.0 million, or
1.0%, to $200.2 million for the three months ended March 31, 2023 from $198.2
million for the three months ended March 31, 2022. Our gross margin decreased to
42.3% for the three months ended March 31, 2023 from 46.4% for the three months
ended March 31, 2022. The decrease in gross margin was driven by an increase in
costs of products sold from inventory, an increase in manufacturing costs, an
increase in provisions for excess and obsolete inventory and an increase in
shipping costs and tariffs as a percentage of sales, partially offset by higher
absorption of manufacturing expenses as a percentage of sales. The strong U.S.
dollar has negatively affected gross margin because a disproportionate amount of
our manufacturing costs are denominated in U.S. dollars as compared to our sales
which are predominantly in foreign currency.

Sales and marketing expense. Sales and marketing expense increased by $0.7
million, or 3.4%, to $21.1 million for the three months ended March 31, 2023
compared with $20.4 million for the three months ended March 31, 2022. The
increase is due to personnel and related costs, off set by lower trade fairs and
exhibits and lower depreciation and amortization expenses. As a percentage of
sales, sales and marketing expense increased to 6.1% from 5.5% for the three
months ended March 31, 2023 and 2022, respectively.

Research and development expense. Research and development expense decreased by
$10.7 million, or 31.9%, to $22.8 million for the three months ended March 31,
2023, compared to $33.5 million for the three months ended March 31, 2022.
Decreases in personnel and related costs, expense for materials used for
research and development projects and amortization of production licenses are
primarily the result of the divestiture of our telecommunications transmission
product line in the third quarter of 2022. Further, depreciation expenses
decreases are primarily the result of the Russia long-lived asset impairment in
2022. As a percentage of sales, research and development expense decreased to
6.6% for the three months ended March 31, 2023 from 9.1% for the three months
ended March 31, 2022.

General and administrative expense. General and administrative expense decreased
by $0.6 million, or 2.0%, to $30.1 million for the three months ended March 31,
2023 from $30.7 million for the three months ended March 31, 2022. This change
was primarily a result of lower depreciation expenses which were driven by
impairment of Russian long-lived assets and the sale of our corporate aircraft
in the fourth quarter of 2022, partially offset by increases in personnel and
related costs. As a percentage of sales, general and administrative expense
increased to 8.7% from 8.3% for the three months ended March 31, 2023 and 2022,
respectively.

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 0.89, Russian ruble 86, Japanese yen
116 and Chinese yuan 6.35, respectively, we estimate that net sales for the
three months ended March 31, 2023 would have been $15.3 million higher, gross
profit would have been $8.2 million higher and total operating expenses would
have been $0.2 million higher.

Other restructuring charges Other restructuring charges of $0.2 million were
related to personnel related restructuring charges and other post employment
benefits in Russia. Refer to above "Factors and Trends That Affect Our
Operations and Financial Results", section Russia-Ukraine Conflict for further
detail.

Gain on foreign exchange. We benefited from a foreign exchange transaction gain
of $2.7 million for the three months ended March 31, 2023 as compared to a $5.8
million gain for the three months ended March 31, 2022. Our European and Russian
subsidiaries have certain net assets denominated in U.S. dollars, and our
Chinese subsidiary has certain net liabilities denominated in U.S. dollars. The
foreign exchange gain for the three months ended March 31, 2023 was primarily
attributable to gains from the depreciation of Russian ruble and the
appreciation of Chinese yuan, partially offset by loss from the appreciation of
the euro as compared to the U.S. dollar.

Interest income (expense), net. Interest income, net was $7.5 million for the
three months ended March 31, 2023 as compared to interest expense, net of $0.1
million for three months ended March 31, 2022. The change in interest income
(expense), net, was due to an increase in yields on cash equivalents and short
term investments.
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Provision for income taxes. Provision for income taxes was $23.2 million for the
three months ended March 31, 2023 compared to $23.2 million for the three months
ended March 31, 2022, representing an effective tax rate of 27.8% and 25.0% for
the three months ended March 31, 2023 and 2022, respectively. The increase in
the effective tax rate in 2023 was primarily due to the impact of discrete
items. Both the 2023 and 2022 discrete items included a detriment related to tax
deductions for equity-based compensation that were less than the compensation
expense recognized for books. However, the 2022 discrete tax detriment from
equity-based compensation was offset by reductions in tax liability as a result
of changes in position agreed to with tax authorities for prior year audits.

Net income attributable to IPG Photonics Corporation. Net income attributable to
IPG Photonics Corporation decreased by $9.5 million to $60.1 million for the
three months ended March 31, 2023 compared to $69.6 million for the three months
ended March 31, 2022. Net income attributable to IPG Photonics Corporation as a
percentage of our net sales decreased by 1.5 percentage points to 17.3% for the
three months ended March 31, 2023 from 18.8% for the three months ended March
31, 2022 due to the factors described above.

Liquidity and Capital Resources



We believe that our existing cash and cash equivalents, short-term investments,
our cash flows from operations and our existing lines of credit provide us with
the financial flexibility to meet our liquidity and capital needs. We expect to
continue making investments in capital expenditures, to assess acquisition
opportunities and to repurchase shares of our stock in accordance with our
repurchase program. The extent and timing of such expenditures may vary from
period to period. Our future long-term capital requirements will depend on many
factors including our level of sales, the impact of the economic environment on
our growth, the timing and extent of spending to support development efforts,
expansion of global sales and marketing activities, government regulation
including trade sanctions, the timing and introductions of new products, the
need to ensure access to adequate manufacturing capacity and the continuing
market acceptance of our products. In the near term, we will incur capital
expenditures related to the expansion of capacity outside of Russia because of
the reduction in manufacturing activity at our Russian factory due to
sanctions.. As of March 31, 2023, we had no off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future material effect on
our consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.

Included in cash and cash equivalents are $67.5 million of cash and cash
equivalents located in Russia, and $4.0 million of cash and cash equivalents
located in Belarus, as of March 31, 2023. Cash and cash equivalents in Russia
are subject to capital controls that prevent repatriation by dividend or
distribution of capital. There are currently no restrictions on our ability to
use cash and cash equivalents in Russia for operating purposes including
converting cash to foreign currency for the payment of goods received from
vendors outside of Russia. The Russian operations are self-funding.
Approximately 6% of our consolidated working capital including cash, cash
equivalents and short-term investments is located in Russia. We are making no
new investments in Russia.

The following table presents our principal sources of liquidity:



                                                                    March 31,           December 31,
                                                                       2023                 2022
                                                                             (In thousands)
Cash and cash equivalents                                          $ 521,137          $     698,209
Short-term investments                                               548,473                479,374
Unused credit lines and overdraft facilities                         126,894                125,965

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

                                                         596,455                534,045


Short-term investments at March 31, 2023 consist of liquid investments including
commercial paper, corporate bonds, U.S. Treasury and agency obligations and term
deposits with original maturities of greater than three months but less than one
year. See Note 3, "Fair Value Measurements" in the notes to the condensed
consolidated financial statements for further information about our short-term
investments.
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The following table details our line-of-credit facilities and long-term note as
of March 31, 2023:

         Description                  Total Facility/ Note               Interest Rate                 Maturity                  Security
U.S. Revolving Line of Credit             $75.0 million             BSBY plus 0.8% to 1.2%,           April 2025                Unsecured
(1)                                                                    depending on our
                                                                          performance
Euro Credit Facility                    Euro 50.0 million              ESTR plus 0.8% or              July 2023                 Unsecured,
(Germany) (2)                            ($54.4 million)              Euribor plus 0.65%                                   guaranteed by parent
                                                                                                                            company and German
                                                                                                                                subsidiary
Other Euro Facility (3)                 Euro 1.5 million                     5.60%                    June 2023               Common pool of
                                         ($1.6 million)                                                                     assets of Italian
                                                                                                                                subsidiary
Long-term Unsecured Note (4)              $15.7 million               1.20%

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


(1) This facility is available to certain foreign subsidiaries in their
respective local currencies. At March 31, 2023, there were no amounts drawn on
this line; however, there were $2.5 million of guarantees issued against the
line which reduces total availability.
(2) This facility is also available to certain foreign subsidiaries in their
respective local currencies. At March 31, 2023, there were no drawings on this
facility; however, there were $1.7 million of guarantees issued against the line
which reduces total availability.
(3) At March 31, 2023, there were no drawings.
(4) At maturity, the outstanding note balance will be $15.4 million.

Our largest committed credit lines are with Bank of America N.A. and Deutsche
Bank AG in the amounts of $75.0 million and $54.4 million (or €50.0 million as
described above), respectively, and neither of them is syndicated. The banks
have made amendments of our credit agreements to modify LIBOR and EONIA
reference rates as these rates are phased out as borrowing reference rates. We
do not plan to amend our long-term unsecured note as it matures prior to the
final phase-out of LIBOR.

We are required to meet certain financial covenants associated with our
U.S. revolving line of credit and long-term debt facility. These covenants,
tested quarterly, include an interest coverage ratio and a funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
The interest coverage covenant requires that we maintain a trailing twelve-month
ratio of EBITDA to interest on all obligations that is at least 3.0:1.0. The
funded debt to EBITDA covenant requires that the sum of all indebtedness for
borrowed money on a consolidated basis be less than three times our trailing
twelve months EBITDA. Funded debt is decreased by our cash and available
marketable securities not classified as long-term investments in the U.S.A. in
excess of $50 million up to a maximum of $500 million. We were in compliance
with all such financial covenants as of and for the three months ended March 31,
2023.

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.

See Note 9, "Financing Arrangements" in the notes to the condensed consolidated financial statements for further information about our facilities and term debt.


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The following table presents cash flow activities:



                                                                          Three Months Ended March 31,
                                                                             2023              2022
                                                                                 (In thousands)
Cash provided by operating activities                                    $  37,280          $ 16,423
Cash (used in) provided by investing activities                            (96,018)            2,470
Cash used in financing activities

(117,236) (80,445)




Operating activities. Net cash provided by operating activities increased by
$20.9 million to $37.3 million for the three months ended March 31, 2023 from
$16.4 million for the three months ended March 31, 2022, primarily due to a
decrease in cash used by working capital. Our largest working capital items
typically are inventory and accounts receivable. Items such as accounts payable
to third parties, prepaid expenses and other current assets and accrued expenses
and other liabilities are not as significant as our working capital investment
in accounts receivable and inventory because of the amount of value added within
IPG due to our vertically integrated structure. Accruals and payables for
personnel costs including bonuses and income and other taxes payable are largely
dependent on the timing of payments for those items. The increase in cash flow
from operating activities in 2023 primarily resulted from:

•a decrease in cash used by inventory, as the company is moderating additions to
safety stocks for supply chain disruptions related to third party electronic
parts and components internally manufactured by our factory in Russia;
•a decrease in cash used by accrued expenses due to lower bonus payments;
•a decrease in cash used by income and other taxes payable driven by the timing
of estimated tax payments made and refunds received from filing tax returns; and
•a decrease in cash used by accounts payable due to timing of payments.

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



•a decrease in cash provided by net income after adjusting for non-cash
operating activities;
•an increase in cash used by accounts receivable due to timing of collection;
and
•an increase in cash used by prepaid expenses and other assets.

Investing activities. Net cash used in investing activities was $96.0 million
for the three months ended March 31, 2023 as compared to cash provided by
investing activities of $2.5 million in 2022. The cash used in investing
activities in 2023 related to $64.3 million of net purchases of short-term
investments and $33.4 million of cash used for capital expenditures. The cash
provided by investing activities in 2022 related to $30.4 million of net
proceeds of short-term investments, partially offset by $25.2 million of cash
used for property, plant and equipment.

In 2023, we expect to invest approximately $140 million to $160 million in
capital expenditures, excluding acquisitions. Capital expenditures include
investments in property, facilities and equipment to add capacity worldwide to
support anticipated revenue growth, increase vertical integration, increase
redundant manufacturing capacity for critical components and enhance research
and development capabilities. 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 once a project has been started.

Financing activities. Net cash used in financing activities was $117.2 million
for the three months ended March 31, 2023 as compared to net cash used of $80.4
million in 2022. The cash used in financing activities in 2023 primarily related
to the purchase of treasury stock of $113.1 million and the net cash outflow of
$3.8 million from the issuance of common stock under the employee stock purchase
plan and 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. The cash used in financing activities in 2022
primarily related to the purchase of treasury stock of $78.8 million.

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
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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" and Item 1A,
"Risk Factors" of Part I of the Form 10-K filed with the SEC for the year ended
December 31, 2022 (the "Annual Report") and in Item 1A, "Risk Factors" of Part
II of this Quarterly Report. 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

None.

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