IPG Photonics (IPGP) Risk Analysis

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.

We design, manufacture and commercialize fiber laser systems and related accessories for specific medical applications. Through IPG Medical Corporation, we are the legal manufacturer of certain of these products and hold FDA clearances for their marketing and sale in the United States. As the legal manufacturer, we are responsible for regulatory obligations across the product lifecycle, including establishment registration and device listing, compliance with applicable pre- and post-market requirements, submission of medical device reports for certain malfunctions and adverse events, and initiating corrections or recalls where necessary. We have distribution partners that market and distribute certain of these products on our behalf. We also continue to sell our commercial fiber and diode laser modules, subassemblies and systems to OEMs that incorporate them into their medical products. As a medical device manufacturer, we and certain of our facilities, as well as critical suppliers, are required to comply with the FDA's Quality System Regulation and those of other countries ("QSR"), which sets forth minimum standards for the procedures, execution and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of the products we sell in the medical industry, and related regulations, including Medical Device Reporting ("MDR") requirements regarding the reporting of certain malfunctions and adverse events potentially associated with our products. The FDA and other regulatory agencies may evaluate our compliance with the QSR, MDR and other regulations, among other ways, through periodic announced or unannounced inspections which could disrupt our operations and interrupt our manufacturing and sales. If in conducting an inspection of our manufacturing facilities, or the manufacturing facilities of any of our third-party component manufacturers or critical suppliers, an investigator from the FDA or another regulatory agency observes conditions or practices believed to violate the QSR, MDR or other applicable regulatory requirements, the investigator may document their observations on a Form FDA 483 which may be issued at the conclusion of the inspection. A manufacturer that receives an FDA 483 may respond in writing and explain or describe any corrective actions taken or planned to address the inspectional observations. The FDA will typically review the facility's written response and may re-inspect or otherwise follow-up to determine the facility's compliance with the QSR, MDR and other applicable regulatory requirements. Failure to take adequate and timely corrective actions to remedy objectionable conditions listed on an FDA 483 could result in the FDA taking administrative or enforcement actions. Among these may be the FDA's issuance of a Warning Letter to a manufacturer, which informs it that the FDA considers the observed violations to be of "regulatory significance" that, if not corrected, could result in further enforcement action. On November 4, 2025, the FDA issued an inspectional observation on Form FDA 483 at the conclusion of an on-site Electronic Product Radiation Control inspection at IPG Medical Corporation ("IPGM"). IPGM submitted a written response to the FDA on November 14, 2025 addressing the inspectional observation. A FDA Form 483 is not a final agency determination. IPGM has received no further communication from the FDA regarding this matter, and there is no specific date or deadline by which the FDA is required to respond or make a determination. We cannot predict the timing or outcome of the FDA's review, and there can be no assurance that the matter will be resolved without additional inquiry, corrective actions, or enforcement measures that could adversely affect our business. FDA enforcement actions, which include the FDA's issuance of a Warning Letter, seizure, injunction, criminal prosecution, and civil penalties, could result in total or partial suspension of a facility's production and/or distribution, product recalls, fines, suspension or delay of the FDA's review of product applications, and/or the FDA's issuance of adverse publicity. Thus, an adverse inspection could force a shutdown of our manufacturing operations for products servicing the medical industry or a recall of such products. Enforcement actions could also delay FDA clearance or approval of our products for use in the medical industry.

We have added manufacturing capacity at our facilities in the United States, Germany, Italy and Poland. Expansion of capacity was required to offset the loss of capacity at the factories we operated in Russia and Belarus due to sanctions. In connection with expansion projects, we may incur cost overruns, construction delays, project cancellations 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. If our sales do 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 has adversely impacted and could adversely affect our gross margins and profitability. 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. We may experience higher costs due to yield loss, production inefficiencies, equipment problems and lower margins until any operational issues associated with the opening of new manufacturing facilities are resolved.

Our products are experiencing and may in the future continue to experience a significant decline in average selling prices ("ASPs") as a result of increased competition, pressure to reduce prices from significant customers and new product and technology introductions. 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.

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. 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. 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. We have defended against several patent infringement claims in the past and we engage in patent office opposition proceedings internationally for patents owned by others. In December 2024, affiliates of Trumpf SE & Co. KG filed two different patent lawsuits in two different Unified Patent Courts ("UPC") located in Germany against IPG Laser GmbH & Co. KG, our German subsidiary, alleging infringement of two patents granted by the European Patent Office by our adjustable mode beam lasers. These lasers are used in certain welding and cutting applications. The patents asserted cover Germany, where we manufacture lasers, and other large countries in Europe. Hearings were held in January 2026 and we await the decisions of the two UPC panels on February 24 and March 16, 2026. There can be no assurance that the outcome of either case will be favorable to the Company, and an adverse finding that the Company infringed one or more of the patents-in-suit could have a material adverse effect on the Company and its business. The patents also have counterparts in the U.S., China and elsewhere, and there can be no assurance that Trumpf will not assert such patents in other jurisdictions. There can be no assurance that we will be able to resolve any claims or other allegations made or asserted against us without them having a material impact on our results of operations. 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. The UPC, in which we currently have two pending litigations, is a relatively new patent court in Europe, and its procedures, jurisprudence and available remedies continue to evolve, creating additional uncertainty regarding patent interpretation, the application of prior European patent precedents, and the timing, scope, and outcome of proceedings. 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, or could decrease our revenues or profits or increase our costs. Plaintiffs in intellectual property cases often seek, and sometimes obtain, injunctive relief. Intellectual property litigation commenced against us, including the Trumpf litigation, could force us to take actions that could be harmful to our business, 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; and - attempt to license the relevant intellectual property which may not be available on reasonable terms. Further, we could incur increased engineering, qualification, logistics and customer transition costs in connection with patent litigation outcomes or risk mitigation. Even if sales are not enjoined by a court, customer uncertainty could delay orders, pressure pricing, or affect design-wins, and mitigation measures may be costly, time-consuming and not fully effective. 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. Adverse judgments and court remedies in the Trumpf litigation or similar proceedings could also increase indemnification claims from OEM customers or prompt follow-on assertions by other patent holders.

The United States, Germany, the European Union, China, Japan, South Korea and many other foreign governments impose tariffs and duties on the import of products, including some of those which we sell. In recent years, the U.S. instituted changes in trade policies that included the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the United States, including, in particular, on Russian and Chinese-made 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. On February 20, 2026, the U.S. Supreme Court rendered a decision invalidating tariffs imposed under the International Emergency Economic Powers Act. This decision introduces uncertainty regarding potential refund processes and future trade policy actions. Policy changes and proposals could require time-consuming and expensive alterations to our business operations and may result in greater restrictions and economic uncertainty and 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 74% 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 optical and electronic products and components), may impose 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.

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. 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. There can be no assurance that violations of 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.

Given the global nature of our business, we have both domestic and international investments. At December 31, 2025, 78% of our cash, cash equivalents and marketable securities were in the United States and 22% 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.