Ipg Photonics Corp DEFR14A, filed Apr 15, 2021

Ipg Photonics Corp (IPGP)

DEFR14A 2021-04-15

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IPG Photonics Corporation
2021 Annual Letter
Our 2020 results were affected by the COVID-19 outbreak as we faced unprecedented challenges in the operating environment due to the global pandemic’s impact on economic activity and the uncertainty that it created. As always, the well-being of our employees, their families, our customers, our partners and communities we operate in, remains our highest priority. In order to safeguard our people, we have employed additional distancing and cleaning measures in our facilities, sourced face masks for use in our production, introduced effective means for disinfection of air in our production areas and offices, and temporarily increased wages for our hourly employees who continued to work on site. With these tremendous team efforts, our operations continued uninterrupted and, with the exception of some delays in product shipments, the impact of COVID-19 on IPG operations has not been material.
While our revenue declined 9% in 2020, we finished the year on a strong note. Revenue improved sequentially each quarter after the trough in the first quarter of 2020 and fourth quarter revenue increased year over year as demand for our products rebounded. We benefited from our leading-edge products, technology differentiation, low-cost production capabilities and global footprint. While the operating environment remains uncertain, we were pleased to see a stronger industrial spending environment in the second half of the year. All of our major geographies showed improved trends as we progressed through the year and revenue in China, our largest end market, increased 2% in 2020 compared to the prior year. We finished the year with book-to-bill above one in the fourth quarter and a strong backlog of orders with firm shipment dates. In addition, it seems that there is some optimism for an improving investment cycle driven by equipment upgrades related to requirements for flexible processing, automation and energy efficiency. Our leading-edge fiber laser technology offers significant productivity gains, electrical efficiency and lower total cost of ownership over other lasers and non-laser tools.						We finished the year with book-to-bill above one in the fourth quarter
An increasing focus on the environmental impact of their activities and commitments to net zero emissions by large industrial manufacturers is creating additional opportunities for our lasers, as companies look for more productive, flexible, efficient, and cleaner tools with which to make their products. We believe that efficiency is likely to become a more meaningful driver in displacing traditional processes that are energy intensive such as plasma cutting and legacy welding processes, and that these trends bode well for our long-term growth. In addition, we are benefiting from capacity investments for products that have lower carbon emissions such as electric vehicles, associated electric vehicle battery production and renewable energy such as solar cell manufacturing. Research and development has been a driving force behind IPG's success since the company's inception. We spent over 10% of our total revenue on R&D in 2020 and had over 650 people in research and development, including many scientists and engineers, who continue to develop new leading-edge solutions for our customers, helping drive efficiency and productivity in their operations and making our fiber laser technology the tool of choice in mass production.
Product innovation remains core to IPG's success and will continue to drive growth for the company in the coming years. We have seen strong customer interest in our innovative leading-edge laser solutions. In 2020, emerging product sales contributed 25% of total revenue, up from 19% of total revenue in 2019. We were pleased with the performance of a number of products that are the key to the diversification of our revenue. Examples include, high power nanosecond pulsed lasers used for foil cutting and cleaning in electric vehicle battery processing as well as for ablation and cleaning. Additionally, sales of medical lasers and consumable medical fibers more than doubled in 2020. With record backlog, we expect sales of green lasers to continue to grow quickly as our green pulsed lasers are enabling significant improvements in solar cell efficiency. In addition, high power lasers for government applications performed well year over year. Despite the impact of the pandemic, ultraviolet and ultrafast pulsed lasers into emerging microprocessing applications showed strong growth for 2020. In addition, we saw strong demand for our Adjustable Mode Beam (AMB) lasers for electric vehicle battery welding.						Product innovation remains core to IPG's success


We launched our unique and revolutionary handheld laser welding system. The initial customer response has been extremely positive and we booked some orders in the fourth quarter. We believe this innovative system has great potential for IPG as it replaces traditional welding products such as MIG and TIG used in metal fabrication. This product offers orders of magnitude higher welding quality and speed, much greater precision, flexibility, and ease of use to our customers around the world. In addition, for the first time, the product will simultaneously provide the highest quality pre-cleaning of the weld surface and after-cleaning of the weld. We believe there are thousands of customers in the US and tens of thousands worldwide that could be interested in this unique product.						We launched our unique and revolutionary handheld laser welding system
We finished the year with over $1 billion in net cash and ample liquidity. We have an extremely strong balance sheet that allows us to prioritize R&D investments and capital expenditures, focusing on long-term objectives, diversifying our business with new products, finding new markets and driving innovations to maintain and increase margins. In 2020, we spent $127 million on research and development and $88 million on capital expenditures for these purposes. In addition, we repurchased $38 million worth of stock to offset dilution from employee equity compensation. Our strong balance sheet, ample cash reserves and minimal debt provide us flexibility in responding to disruptions and uncertainty in the operating environment and allow us to emerge from these challenges a stronger company. I want to thank our talented employees for their hard work during a difficult year. I would also like to thank you, our stockholders, for your loyalty and support. As ever, I remain confident in IPG's ability to execute during this more challenging period and deliver on our mission to make our fiber laser technology the tool of choice in mass production.

VALENTIN P. GAPONTSEV, PH.D. Chairman and Chief Executive Officer April 1, 2021



DATE AND TIME May 25, 2021 10:00 AM (Eastern Time)	LOCATION IPG Photonics Corporation 50 Old Webster Road Oxford, Massachusetts 01540	WHO CAN VOTE Only stockholders of record at the close of business on April 1, 2021 may vote at the Annual Meeting



INTERNET Go to www.investorvote.com/ipgp or scan the QR code contained in the attached proxy card	TELEPHONE 1-800-652-VOTE (8683)	MAIL Mark, sign, date and promptly mail the enclosed proxy card in the postage-paid envelope



As permitted by the rules of the United States Securities and Exchange Commission (the “SEC”), we are making this Proxy Statement and Annual Report on Form 10-K available to stockholders electronically via the Internet at investor.ipgphotonics.com. On or about April 12, 2021, we will mail to most of our stockholders a notice (the “Notice”) containing instructions on how to access this Proxy Statement and our Annual Report and to vote via the Internet or by telephone. Other stockholders, in accordance with their prior requests, will receive e-mail notification of how to access our proxy materials and vote via the Internet or by telephone, or will be mailed paper copies of our proxy materials and a proxy card on or about April 12, 2021.



Proposal 1	Election of Nine Directors The Board recommends a vote FOR each director nominee named in this Proxy Statement.
		See page 11


AC Audit Committee	●	Chair
CC Compensation Committee	●	Member
NCGC Nominating and Corporate Governance Committee
IND Independent director under Nasdaq and SEC rules


DIRECTOR INDEPENDENCE	BALANCED TENURE	AGE	DIVERSITY


6/9 directors are independent**	10 years Average Tenure	63 years Average Age	22% Female



üNew policy to require external director candidate pool to include female and/or racially/ethnically diverse candidates adopted in October 2020 üStockholder proxy access right adopted in March 2019 ü Director majority voting policy adopted in October 2018 ü Ongoing Board refreshment: 2 female directors added in 2021; 3 new directors in 3 years ü Supermajority of independent directors and 100% independent Board committees	ü 67% of Board members were born outside of the U.S.A., bringing international perspectives ü 22% of Board members are women ü Lead independent director ü Single class of voting stock and no supermajority voting provisions ü Annual election of all directors ü Stockholder right to act by written consent E	ü 79% of director compensation at risk based upon stock performance ü Annual Board performance evaluations ü Robust director and executive officer stock ownership guidelines ü Anti-hedging policy applicable to all employees and directors ü Bylaw adopted in 2020 to ensure Board decision-making and continuity in event of director unavailability due to emergency, such as pandemic



PRACTICES WE EMPLOY						PRACTICES WE AVOID

ü Align our officer pay with performance ü Balance annual and long-term incentives ü Use long-term incentives to link executive pay to company performance ü Cap incentive award payouts ü Maximize stockholder value while mitigating risk ü Independent compensation consultant ü Robust stock ownership requirements ü Clawbacks on executive compensation						û No guaranteed annual bonuses û No retirement benefits û No tax gross-ups û No significant perquisites û Prohibit hedging of Company stock û No severance for “cause” terminations û No single-trigger change in control provisions û No stock option repricing without stockholder approval û Pledging of Company stock is limited


• Annual cash incentive payouts are capped and have challenging performance goals linked to key financial performance metrics • Long-term equity incentives are aligned with long-term stockholder value creation • At-risk compensation based upon performance increased in 2020. Approximately 80% of NEO compensation (excluding the CEO) in 2020 was performance based • Executives exceed stock ownership guidelines, aligning with interests of stockholders						Say-on-pay approval during last stockholder vote in 2020



Proposal 2	Ratify Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for 2021 The Board recommends a vote FOR this proposal.
		See page 59


Company Overview


Performance Highlights


NET SALES			OPERATING INCOME


Voting Items


	Fees
Fee Category	2020		2019
Audit fees	$	2,247,738	$	2,440,990
Audit-related fees	—		—
Tax fees	145,000		90,000
All other fees	—		—
Total Fees	$	2,392,738	$	2,530,990


			Page
2021 ANNUAL LETTER			1
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS			3
PROXY STATEMENT SUMMARY			4

PROPOSAL 1: ELECTION OF NINE DIRECTORS			11

Director Qualifications			11
Director Nominees			13
Board Refreshment and Composition			22
Board Roles and Responsibilities			24
Board Structure			26
Standing Committees and Board Committee Membership			28
Board Practices, Policies and Processes			30
Director Compensation			33
Executive Compensation
Compensation Committee Report			36
Compensation Discussion and Analysis			37
20 20 Compensation of Named Executive Officers			39
Executive Compensation Tables			52

PROPOSAL 2 : RATIFY DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2021			59

Audit Committee Report			61
Common Stock Ownership			62
Questions and Answers About the Meeting and Voting			64
Additional Information			68



This Proxy Statement contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Proxy Statement 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. 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 the section titled “Risk Factors” and elsewhere in our Annual Report and other filings with the SEC. 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.



Proposal 1			Election of Nine Directors The Board of Directors recommends a vote FOR each director nominee named in this Proxy Statement.



The Board of Directors recommends that you vote FOR each director nominee named in this Proxy Statement.



DIRECTOR TENURE AND RETIREMENT AGE POLICIES • No Term Limits. • Our Board recognizes the importance of periodic Board refreshment and maintaining an appropriate balance of tenure, experience and perspectives on the Board. • We believe it is desirable to maintain a mix of longer-tenured, experienced directors with institutional memory and understanding of our business and culture and newer directors with fresh perspectives. However, we do not impose director tenure limits. • The Board believes that directors should not have an expectation of being re-nominated annually and that the NCGC’s assessment is a key component of its director nomination process. • In connection with the Board’s annual self-assessment and director nomination processes, the Board considers upcoming retirements, the average tenure and overall mix of individual director tenures of the Board, the overall mix of the skills, knowledge, experience and diversity, each individual director’s performance and contributions to the work of the Board and its committees, the personal circumstances and other time commitments of directors, along with other factors the Board deems appropriate. • The Board believes that, as an alternative to term limits, non-management directors should submit their resignation from the Board upon attaining the age of 72 and on each subsequent anniversary. The Board then considers the needs and circumstances confronting the Board and, upon recommendation of the NCGC, determines whether to accept or decline the resignation. • Our Board’s age resignation policy is intended to facilitate our Board’s recruitment of new directors with appropriate skills, experience and backgrounds and provides for an orderly transition of leadership on our Board.



Character and Integrity			Must be an individual of the highest character and integrity
Leadership Experience			Demonstrated excellence, leadership and significant experience in their field of endeavor
Financial Literacy and Commitment to Representing Stockholders			Ability to read and understand financial statement fundamentals and commitment to representing the long-term interests of the Company’s stockholders, while keeping in perspective the interests of the Company’s customers, employees and the public
Independence and Constructive Collegiality			Must have a demonstrated ability to think and act independently as well as the ability to work constructively in a collegial environment. Must satisfy independence criteria of the SEC and Nasdaq, where independence is desired
Age			A potential director (excluding any incumbent) cannot be aged less than 21 or greater than 72 years
Limit on Other Public Boards			Independent directors – 3 (or 4 with Board approval) CEO - 1



BOARD OVERSIGHT OF RISK The Board recognizes that effectively monitoring and managing risk are essential to the successful execution of the Company’s strategy. The Board has oversight for risk management at IPG with a focus on the most significant risks facing the Company, including strategic, operational, financial and compliance risks. Upon recommendation of the NCGC, the Board allocates risk oversight responsibility among the full Board, the independent directors acting as a group and the three standing committees of the Board as described below. Throughout the year, the Board, the independent directors and the committees to which the Board has delegated responsibility dedicate a portion of their meetings to review and discuss specific risk topics in greater detail.



AUDIT COMMITTEE The Audit Committee oversees the policies, processes and risk relating to the financial statements, financial reporting processes, auditing, cybersecurity and compliance risks. The Audit Committee discusses with management the Company’s risk assessment and risk management practices and, when reviewing and approving the annual audit plan for the Company’s internal audit function, prioritizes audit focus areas based on their potential risk.	COMPENSATION COMMITTEE The Compensation Committee oversees risk associated with management resources, including executive retention and non-CEO succession planning. It reviews the Company’s executive compensation practices, their effectiveness at linking executive pay to performance and aligning the interests of our executives and our stockholders, without encouraging excessive risk taking. The Compensation Committee annually reviews management’s assessment of compensation risk.	THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE The NCGC oversees risk related to the Company’s governance structure and processes, and risks arising from related person transactions. It reviews processes and risk related to Board succession planning, authority delegated to management and certain compliance risk.



FULL BOARD Our entire Board as a whole reviews risk management practices and a number of significant risks in the course of its reviews of corporate strategy, management reports and reports from outside experts and professional advisors.



INDEPENDENT DIRECTORS As a group, the independent directors oversee risks related to CEO succession planning.



MEMBERS			FUNCTIONS:
Thomas J. Seifert (Chair) Jeanmarie F. Desmond Gregory P. Dougherty Catherine P. Lego Meetings in 2020: 8			• Providing oversight of financial management, the internal auditor function and the independent auditor. • Providing oversight with respect to our internal controls including that management is maintaining an adequate system of internal control such that there is reasonable assurance that assets, systems and processes are safeguarded and that financial reports and certain other datasets are properly prepared; that there is consistent application of generally accepted accounting principles; and that there is compliance with management’s financial reporting policies and procedures. • Pre-approving audit and permissible non-audit services by our independent auditor, reviewing and discussing our annual and quarterly financial statements and related disclosures. • Meeting periodically with the independent auditor, management and internal auditor function (including in private sessions) to review their work and confirm that they are properly discharging their respective responsibilities. • Appointing the independent auditor. For more information on Audit Committee activities in 2020, see the Audit Committee Report on page 61 of this Proxy Statement and Proposal 2: Ratify Deloitte & Touche LLP as Our Independent Registered Public Accounting Firm for 2021 on page 59.



MEMBERS			FUNCTIONS:
Gregory P. Dougherty (Chair) Catherine P. Lego Eric Meurice John R. Peeler Meetings in 2020: 10			• Reviewing and recommending to the independent directors the CEO’s base salary and opportunities for annual and long-term compensation. • Reviewing and approving compensation recommendations by the CEO for the other executive officers, including base salaries, annual performance bonuses, long-term incentive awards, severance benefits, perquisites and employment agreements. • Setting our compensation philosophy and composition of the group of peer companies used for comparison of executive compensation. • Reviewing and recommending for approval by the Board the compensation for non-employee directors. • Administering the equity compensation plans under which we compensate our executive officers and other key employees. • Retaining an independent compensation consultant firm, Aon ("Aon"), for matters related to executive officer and director compensation, and outside legal counsel to provide advice on compensation-related matters. • Preparing the Compensation Committee Report included in this Proxy Statement on page 36 and overseeing management’s risk assessment of compensation for all employees and compensation-related risks as delegated by the Board.



MEMBERS			FUNCTIONS:
Eric Meurice (Chair) Michael C. Child John R. Peeler Thomas J. Seifert Meetings in 2020: 5			• Overseeing matters of corporate governance, including the evaluation of the performance and practices of the Board. • Developing and recommending criteria for Board membership. • Reviewing possible candidates for the Board and recommending director nominees to the Board for approval. • Overseeing the process for the performance evaluations of the Board and its committees. • Engaging in Board succession planning to ensure boardroom skills are aligned with IPG’s long-term strategic plan. • Reviewing and recommending director orientation, stock ownership guidelines, delegation of authority to management, insider trading guidelines, and consider questions of possible conflict of interest, including related party transactions, as such questions arise. • Reviewing and recommending risk oversight responsibilities of the Board and its committees and of the independent directors as a group.


	Board of Directors	Audit	Compensation	Nominating and Corporate Governance
Meetings held in 2020	6	8	10	5
Written consents in 2020	3	0	0	0


	Amount
Board Retainer	$	40,000
Lead Independent Director Retainer	$	30,000
Audit Committee Retainers
Chair	$	25,000
Non-Chair	$	12,500
Compensation Committee Retainers
Chair	$	22,500
Non-Chair	$	10,000
Nominating and Corporate Governance Committee Retainers
Chair	$	17,500
Non-Chair	$	7,500
Annual Equity Award	$	250,000


Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)(1)	Total ($)
Michael C. Child	47,500	249,612	297,112
Gregory P. Dougherty	62,500	249,612	312,112
Catherine P. Lego	75,000	249,612	324,612
Eric Meurice	67,500	249,612	317,112
John R. Peeler	77,500	249,612	327,112
Thomas J. Seifert	72,500	249,612	322,112


Name	Unvested Restricted Stock Units (#)	Total Option Awards Held (#)
Michael C. Child	1,642	36,912
Gregory P. Dougherty	1,642	3,259
Catherine P. Lego	1,642	5,321
Eric Meurice	1,642	20,001
John R. Peeler	1,642	7,576
Thomas J. Seifert	1,642	1,113



1	2	3
The Compensation Committee engages independent compensation consultant to review compensation of non-employee directors as compared to peer group.	The Compensation Committee evaluates independent compensation consultant report, compensation trends and need to retain and attract high caliber non-employee directors consistent with comparable companies.	The Board considers changes to non-employee directors compensation program recommended by the Compensation Committee.


Stockholder Feedback
At our 2020 annual meeting of stockholders, our stockholders overwhelmingly approved our executive compensation structure in a “say-on-pay” advisory vote, with over 95% voting in favor of our executive compensation structure. As a result of the 2020 vote, the Compensation Committee determined not to change its pay philosophy or practices. At our annual meeting in 2017, our stockholders approved a proposal for “say-on-pay” advisory votes every three years and, therefore, we elected to submit the advisory “say-on-pay” proposal to our stockholders on a triennial basis. The next "say-on-pay" advisory vote will be in 2023.						Say-on-pay approval during last stockholder vote (2020)



PRACTICES WE EMPLOY						PRACTICES WE AVOID
ü Align our NEO Pay with Performance: Strong links of compensation to Company performance and stockholder returns for annual and long-term incentives. Annual bonus tied to revenue and net income and long-term incentives include performance-based stock units which are earned based upon IPG’s total stockholder return relative to a stock market index and the ratio of operating cash flow to adjusted net income. ü Balance Annual and Long-Term Incentives: Incentive programs provide an appropriate balance of annual and long-term incentives and include multiple measures of performance. ü Use Long-Term Incentives to Link Executive Pay to Company Performance: Approximately 64% of NEO (other than the CEO) pay consists of long-term incentives linked to increasing our stock price. CEO receives no equity. ü Cap Incentive Award Payouts: Annual incentive plan award payouts and certain long-term incentive awards are capped. ü Maximize Stockholder Value While Mitigating Risk: Service-based equity awards vest over four years. This incentivizes long-term growth and discourages short-term risk taking. ü Independent Compensation Consultant: The Compensation Committee retains a compensation consultant, who is independent and without conflicts of interest with the Company. ü Robust Stock Ownership Requirements: Officers and directors are subject to stock ownership guidelines to further align their interests with stockholder interests. Our NEOs substantially exceed the ownership guidelines. ü Clawbacks on Executive Compensation: We maintain a compensation recovery policy covering cash and equity.						û No Guaranteed Annual Bonuses: Our annual incentive compensation plan is performance-based and does not include any minimum payout levels. û No Retirement Benefits: We have no supplemental executive retirement plans (SERPs) or defined benefit pension plans. û No Tax Gross-Ups: We do not provide tax gross reimbursements for change in control payouts or executive perquisites. û No Significant Perquisites: We provide limited perquisites to our NEOs. û Hedging of Company Stock is Prohibited. û No Severance For “Cause” Terminations. û No Single-Trigger Change in Control Provisions. Equity awards for NEOs generally require a “double-trigger” of both a change-in-control and termination of employment for both cash and equity compensation acceleration. û No Stock Option Repricing without Stockholder Approval. Our equity plans prohibit repricing underwater stock options. û Pledging of Company stock is limited.


Compensation Element		Objective
Base Salary		• Provide a competitive fixed component of cash compensation to attract and retain talented and experienced executives with the knowledge and skills necessary to achieve the Company’s strategic business objectives • The Compensation Committee uses the services of an independent compensation consultant to assess the base salaries as compared to a competitive target range of the Company’s peer group • The Compensation Committee considers these factors when setting base salaries of the NEOs: scope of the NEO's responsibilities, contributions, skills, knowledge, experience, seniority and annual and long-term Company performance
CEO*	OTHER NEOs

*CEO receives no equity awards
Annual Incentive Plan		• Offer a variable cash compensation opportunity that may be earned based upon the level of achievement of challenging corporate goals, with an additional compensation opportunity based upon individual performance • Foster a shared commitment among executives through establishment of uniform Company financial goals • Award payouts are subject to a cap of 225% of target in a performance period
CEO	OTHER NEOs

Long-Term Incentives		• Align interests of our NEOs (other than our CEO, who does not receive long-term incentive awards) and stockholders by motivating executive officers to increase long-term stockholder value • Service-based equity awards consist of RSUs. They offer certainty and long-term retention while providing additional compensation opportunity based upon increased stock price levels • PSUs provide an additional incentive to our NEOs (other than the CEO) based on performance. 50% (at target) of PSUs are based on the Company's total stockholder return relative to a stock market index of companies in similar industries and 50% (at target) are based upon the ratio of operating cash flow to adjusted net income, measuring the Company's performance over three years • Enhance retention with vesting over four years for RSUs and three years for PSUs
OTHER NEOs

Performance-based Equity Award	Service-based Equity Award

401(k) Retirement Savings Plan		• Provides participants the opportunity to defer a portion of their compensation and receive a company match of 50% of deferrals subject to a maximum of 6% of eligible compensation • The plan is available to all eligible U.S. employees
Pension Plan		• We provide no pension plan or deferred compensation plan
Perquisites		• Perquisites are limited


Named Executive Officer	Target as a % of Base Salary(1)	Target Award(1)	Financial Performance			Individual Performance Maximum	Actual Award
			Threshold	Target	Maximum
Valentin P. Gapontsev	110%	$1,023				$256	$935
Eugene A. Scherbakov	100%	$679				$154	$574
Timothy P.V. Mammen	80%	$385				$96	$376
Angelo P. Lopresti	80%	$354				$88	$323
Alexander Ovtchinnikov	80%	$351				$88	$320