Ipg Photonics Corp PRE 14A, filed Mar 27, 2023

Ipg Photonics Corp (IPGP)

PRE 14A 2023-03-27

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2023 Annual Letter
I am pleased to see that our strategy to diversify revenue, which was reflected in strong growth of emerging growth products and applications helped to offset soft demand in general industrial markets in China and Europe. As we moved through 2022, we continued to see record sales in e-mobility, medical and welding, including handheld welding applications. While our total revenue declined 2% from the record revenue in the prior year, currency translation negatively impacted revenue by 5% due to the strong U.S. dollar. Emerging growth product sales and applications were 46% of our total revenue as we exited 2022, compared with 38% at the end of 2021. Demand for many of these products was driven by global investments in e-mobility and renewable energy. IPG is well positioned to benefit from accelerating global investment in electric vehicle battery capacity and our e-mobility sales contributed 20% of total revenue in 2022, up from 10% a year earlier. We believe that the battery capacity build-out will continue for several years. Our leading position in fiber lasers with a broad range of solutions including welding, cutting, cleaning and process monitoring enabled us to partner with and win business from leading global battery manufacturers. We continue to introduce new products and solutions with a focus on this growing market. We are particularly pleased with our growth in welding applications this year. Welding now accounts for close to 30% of our revenue and grew approximately 40% year over year, surpassing flat sheet cutting revenue for the year, which was a major milestone for us. This growth was driven by strong demand for our welding solutions in e-mobility and medical device manufacturing, continued adoption of laser welding in general industrial markets, growth in laser-based systems and continued roll-out of LightWELD. EV battery manufacturers have quickly adopted laser welding as it provides high-quality and high-speed welding with real-time process monitoring capabilities. The rest of the welding market is still early in the adoption of laser technologies, but we are seeing a more meaningful shift towards acceptance of lasers in recent years. We are also addressing the handheld welding market with LightWELD, which is gaining traction worldwide. LightWELD is easy to use and does not require extensive training, which can help to address a shortage of qualified welders. Finally, our medical business delivered record revenue in 2022, growing sales over 60% from record levels in the prior year. Growth in medical applications continues to be driven by higher adoption for our thulium lasers and disposable fibers, which are considered the gold standard for urology applications. Our consumable fiber business now accounts for a sizable portion of our medical market revenue and we expect it to increase further as we grow the installed base of the devices. We continue to expand medical sales internationally and are working on the next generation of these devices as well as new medical applications for our fiber lasers.


						We continued to see record sales in e-mobility, medical and welding

						Emerging growth product sales contributed 46% of our total revenue


NET SALES			OPERATING INCOME

			(1) In the fourth quarter of 2022, inventory related charges, impairment of long-lived assets in Russia and restructuring charges in Russia reduced operating income by $74, 79 and 10 million, respectively. (2) In the fourth quarter of 2022, gross margin was negatively impacted by $74 million of inventory related charges in Russia
Welding Revenue			Return of Capital to Stockholders
			$500M Repurchased 5.1 million shares


While we faced a number of challenges in 2022, we have successfully navigated through supply chain disruptions and sourcing restrictions related to our production in Russia and Belarus without any impact on our ability to supply our customers. We also made a decision to divest our telecom product lines and to exit the cinema business. We believe this will allow IPG to focus research and development ("R&D") and other resources on core growth opportunities such as e-mobility, welding and medical. Our strong cash flow generation and balance sheet allow us to support investments and capital expenditures for long-term growth opportunities and to weather resiliently short-term disruptions like we saw in 2022. We finished the year with approximately $1.2 billion net cash and ample liquidity. We allocated $116 million of our capital to R&D and $108 million to capital expenditures. At the same time, we were able to return $500 million to stockholders through share repurchases, which represented more than a half of our total share repurchases since 2016. IPG's performance in 2022 is a tribute to the dedicated team of employees and partners throughout the world. I would like to thank our dedicated team for implementing contingency planning, including increased production and safety stock of critical components, and qualifying many third-party components to ensure uninterrupted supply. We are proud of their efforts overcoming supply chain constraints and a complex regulatory environment to deliver products to our customers.


EUGENE SCHERBAKOV, PH.D. Chief Executive Officer [ ], 2023



DATE AND TIME May 23, 2023 10:00 a.m. (Eastern Time)	LOCATION IPG Photonics Corporation 377 Simarano Drive Marlborough, Massachusetts 01752	WHO CAN VOTE Only stockholders of record at the close of business on March 31, 2023 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 our Annual Report on Form 10-K available to stockholders electronically via the Internet at investor.ipgphotonics.com. On or about [ ], 2023, 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 notifications 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 [ ], 2023.



Proposal 1	Election of Ten Directors The Board of Directors (the "Board") recommends a vote FOR each director nominee named in this Proxy Statement.
		See page 63


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


DIRECTOR INDEPENDENCE	BOARD REFRESHMENT	AGE	GENDER DIVERSITY


7/10 directors are independent*	8 years Average Tenure	62 years Average Age	30% Female



ü Separated roles of Chair and CEO in May 2021 ü Appointed first non-executive Chair of the Board in October 2021 ü Board policy requires external director candidate pool to include diversity of gender and/or race/ethnicity in 2020 ü Stockholder proxy access right adopted in March 2019 ü Director majority voting policy adopted in October 2018 ü Supermajority of independent directors and 100% independent Board committees	ü Continued Board refreshment: 3 female directors added in last 3 years; 6 new directors in 5 years ü 50% of Board members were born outside of the U.S.A., bringing international perspectives ü 30% of Board members are women 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	ü 80% 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 and pledging policy applicable to all employees and directors ü Adopted environmental, social and governance ("ESG") oversight framework to clearly allocate responsibilities among Board and standing committees in February 2022



Proposal 2	Advisory Vote to Approve Our Executive Compensation The Board recommends a vote FOR approval of our executive compensation.
		See page 64



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 SERP or pension û No excise tax gross-ups û No excessive perquisites û Prohibit hedging and pledging 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


Financial Performance Highlights


Voting Items


	Fees
Fee Category	2022		2021
Audit fees(1)	$	2,367,800	$	2,230,305
Audit-related fees(2)	—		—
Tax fees(3)	159,320		235,195
All other fees(4)	$	1,895	—
Total Fees	$	2,529,015	$	2,465,500



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 (the "Exchange Act"), 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 3	Advisory Vote on the Frequency of Our Advisory Votes on Executive Compensation The Board recommends that you vote for the Company to hold say-on-pay votes every ONE YEAR.
		See page 65


•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 •In 2022, approximately 88% and 78% of the total direct compensation of our CEO and other NEOs (average), respectively, was subject to performance conditions and/or stock price performance •Executives exceed stock ownership guidelines and cannot hedge or pledge Company stock, aligning with interests of stockholders •After considering the results of the most recent say-on-pay vote in 2020, the Compensation Committee determined to maintain its pay philosophy and practices.						Say-on-pay approval during last stockholder vote in 2020



Proposal 4	Amendments to the IPG Photonics Corporation 2006 Incentive Compensation Plan The Board recommends a vote FOR approval of amendments to our incentive plan.
		See page 66



Proposal 5	Amendments to IPG Photonics Corporation's Amended and Restated Certificate of Incorporation The Board recommends a vote FOR approval of amendments to our Amended and Restated Certificate of Incorporation (the "Charter").
		See page 75



Proposal 6	Ratify Deloitte & Touche LLP as Our Independent Registered Public Accounting Firm for 2023 The Board recommends a vote FOR approval of ratification of Deloitte & Touche LLP as our independent registered public accounting firm for 2023.
		See page 77


			Page
202 3 ANNUAL LETTER			1
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS			3
PROXY STATEMENT SUMMARY			5
CORPORATE GOVERNANCE
Board Roles and Responsibilities			14
Board Structure			17
Standing Committees and Board Committee Membership			19
Board Practices, Policies and Processes			21
DIRECTORS
Board Refreshment and Composition			25
Director Nominees			29
Director Qualifications			27
Director Compensation			39
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis			42
202 2 Compensation of Named Executive Officers			45
Compensation Committee Report			55
Executive Compensation Tables			56
PROPOSALS
PROPOSAL 1: ELECTION OF TEN DIRECTORS			63
PROPOSAL 2 : ADVISORY VOTE TO APPROVE OUR EXECUTIVE COMPENSATION			64
PROPOSAL 3 : A DVISORY V OTE ON THE F RE QUENCY OF ADVISORY VOTES ON EXECUTIVE COMPENSATION			65
PROPOSAL 4 : AMEND MENTS TO OUR 2006 INCENTIVE COMPENSATION PLAN			66
PROPOSAL 5 : AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION			75
PROPOSAL 6 : RATIFY DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2023			77
OTHER INFORMATION
Audit Committee Report			79
Common Stock Ownership			80
CEO Pay Ratio			82
Pay Versus Performance			83
Questions and Answers About the Meeting and Voting			87
Additional Information			91
APPENDIXES
Appendix A: Amended and Restated 2006 Incentive Compensation Plan			93
Appendix B: Amendment to our Amended and Restated Certificate of Incorporation			114



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, cybersecurity and compliance risks. In its analysis, the Board rates risks against several criteria including materiality, probability and the speed at which the risk can impact IPG, from short to long-term. The risks are scored and those with the highest ratings are overseen by the Board and its committees, along with mitigation efforts. The scorings may change year to year based upon internal or exogenous factors. After review and recommendation by the Nominating and Corporate Governance Committee (the "NCGC"), the Board allocates risk oversight responsibility among the full Board, the independent directors acting as a group and the three standing Board committees as described below. In its review of risks, the Board and its committees may seek the advice of outside advisors or experts depending upon the particular risk. Throughout the year, the Board, the independent directors and the Board committees 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 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.	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. It considers and recommends allocation of risk oversight, including business, ESG and other risks, to the Board.



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 and CEO compensation.



MEMBERS			FUNCTIONS:
Jeanmarie Desmond (Chair) Gregory Beecher Gregory Dougherty Agnes Tang Meetings in 2022: 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 2022, see the Audit Committee Report on page 79 of this Proxy Statement and Proposal 6: Ratify Deloitte & Touche LLP as Our Independent Registered Public Accounting Firm for 2023 on page 77.



MEMBERS			FUNCTIONS:
Gregory Dougherty (Chair) Jeanmarie Desmond Eric Meurice John Peeler Meetings in 2022: 7			•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, other key employees and directors. •Retaining an independent compensation consultant firm 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 55 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) Gregory Beecher Michael Child John Peeler Meetings in 2022: 6			•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 policy, and consider questions of possible conflict of interest, including related party transactions, as such questions arise. •Reviewing and recommending risk oversight responsibilities, including ESG matters, 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 2022	11	8	7	6
Written consents in 2022	4	0	1	0



DIRECTOR TENURE AND RETIREMENT AGE POLICIES •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 NCGC 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 reject 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, while also taking into consideration the importance of institutional knowledge and unique perspectives.



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 less than 21 or greater than 72 years of age (unless a waiver of the requirement is obtained)
Limit on Other Public Boards			Independent directors – 3 (or 4 with Board approval) CEO - 1


	Amount
Board Retainer	$	40,000
Non-Executive Chair Retainer	$	70,000
Audit Committee Retainers
Chair	$	25,000
Non-Chair	$	12,500
Compensation Committee Retainers
Chair	$	22,500
Non-Chair	$	10,000
NCGC 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 Child	47,500	249,998	297,498
Jeanmarie Desmond	52,500	249,998	302,498
Gregory Dougherty	76,875	249,998	326,873
Eric Meurice	67,500	249,998	317,498
Natalia Pavlova	40,000	249,998	289,998
John Peeler	127,500	249,998	377,498
Thomas Seifert	72,500	249,998	322,498
Agnes Tang	30,329	249,975	280,304


Name	Unvested Restricted Stock Units (#)	Total Option Awards Held (#)
Michael Child	2,631	17,078
Jeanmarie Desmond	2,631	—
Gregory Dougherty	2,631	3,259
Eric Meurice	2,631	20,001
Natalia Pavlova	2,631	—
John Peeler	2,631	7,576
Thomas Seifert	2,631	1,113
Agnes Tang	2,475	—



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


EUGENE SCHERBAKOV, PH.D.			Chief Executive Officer
TIMOTHY P.V. MAMMEN			Senior Vice President and Chief Financial Officer
ANGELO P. LOPRESTI			Senior Vice President, General Counsel and Secretary
ALEXANDER OVTCHINNIKOV, PH.D.			Senior Vice President, Chief Technology Officer
FELIX STUKALIN			Senior Vice President, Chief Operating Officer



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. 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: Over half of NEO pay consists of long-term incentives. ü Cap Incentive Award Payouts: Annual Incentive Plan ("AIP") award payouts and certain long-term incentive awards are capped. ü Maximize Stockholder Value While Mitigating Risk: Service-based equity awards vest over three 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 SERP or Pension: We have no supplemental executive retirement plans (SERPs) or defined benefit pension plans. û No Excise Tax Gross-Ups: We do not provide excise tax gross reimbursements for change in control payouts. û No Excessive Perquisites: We provide limited perquisites to our NEOs. û Hedging and Pledging 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.


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. After considering the results 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 an advisory "say-on-frequency" proposal to hold “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. Proposals 2 and 3 described herein are the "say-on-pay" advisory vote and advisory "say-on-frequency" vote.						Say-on-pay approval during last stockholder vote (2020)