IPG Photonics Corporation (IPGP, NASDAQ)
Industry: Semiconductor Equipment & Materials
Annual report, fiscal year 2013


IPG PHOTONICS CORPORATION

## 2013
ANNUAL REPORT



annual report

proxy statement

notice of annual meeting



## who we are

## IPG Photonics is the world leader in high-power fiber lasers and amplifiers.

Founded in 1990, IPG pioneered the development and commercialization of optical fiber-based lasers for use in diverse applications, primarily materials processing. We are headquartered in Oxford, Massachusetts with additional manufacturing facilities and offices throughout the world.

Fiber-based lasers are a new generation of lasers that combine the advantages of semiconductor diodes, such as long life and high efficiency, with the high amplification and precise beam qualities of specialty optical fibers to deliver superior performance, reliability and usability. Fiber lasers are displacing traditional lasers in many current applications and enabling new applications for lasers.

We are vertically integrated such that we design and manufacture most of our key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. The Company’s vertically integrated manufacturing provides significant competitive advantages and enhances its ability to meet customer requirements, manage costs and improve performance.

Our products play a growing role in manufacturing in many industries around the world. IPG Photonics' lasers are used to cut, weld, mark, clad, braze, drill, harden and strip metals, plastics and other materials. Fiber laser processing and fabrication is used in general manufacturing, and the automotive, heavy, aerospace, consumer, semiconductor and electronics industries.





## our strategy

Continue to leverage our technology to displace existing laser and non-laser technologies

Target new applications for fiber lasers

Expand our product portfolio & develop integrated laser systems business to address new applications

Lower costs through manufacturing improvements

Expand global reach to attract new customers

Manufacture simple, more usable lasers



## our financial highlights









## year ended december 31

<table><tr><td>(dollars in thousands, except per share data)</td><td>2009</td><td>2010</td><td>2011</td><td>2012</td><td>2013</td></tr><tr><td>net sales</td><td>$185,894</td><td>$299,256</td><td>$ 474,482</td><td>$562,528</td><td>$648,034</td></tr><tr><td>gross margin</td><td>34.6%</td><td>48.9%</td><td>54.2%</td><td>54.2%</td><td>52.5%</td></tr><tr><td>operating margin</td><td>4.9%</td><td>26.9%</td><td>37.0%</td><td>37.1%</td><td>33.7%</td></tr><tr><td>net income</td><td>5,419</td><td>53,991</td><td>117,759</td><td>145,004</td><td>155,780</td></tr><tr><td>attributable to IPG Photonics Corporation</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>diluted earnings per share</td><td>$ 0.12</td><td>$ 1.13</td><td>$ 2.41</td><td>$ 2.81</td><td>$ 2.97</td></tr><tr><td>working capital</td><td>144,083</td><td>218,031</td><td>340,745</td><td>539,504</td><td>686,264</td></tr><tr><td>total assets</td><td>312,636</td><td>441,855</td><td>608,132</td><td>895,498</td><td>1,061,216</td></tr><tr><td>IPG Photonics Corporation stockholder&#x27;s equity</td><td>256,430</td><td>316,600</td><td>443,323</td><td>742,927</td><td>927,969</td></tr><tr><td>net cash provided by operating activities</td><td>54,405</td><td>63,432</td><td>87,351</td><td>175,276</td><td>119,367</td></tr></table>




to my fellow
stockholders
2013 was another year of success for IPG Photonics. We continued to extend our competitive lead while capitalizing on the growing demand for fiber laser technology. Financially, we grew revenues in 2013 by 15%, gross margin was within our target

range at 53%, and we increased the bottom line by 7% even as we invested heavily to capitalize on future growth opportunities. During the year, we expanded our capacity to meet increased demand, and developed innovative new products, technologies and applications.

Our growth continues to be driven by the adoption of fiber laser technology across a wide variety of markets, geographies and applications. Fiber lasers provide substantially greater reliability, efficiency and cost benefits compared with legacy laser technology. We're capitalizing on the rapid adoption of fiber lasers as a result of our technology leadership, vertical integration, and manufacturing capacity. IPG's technology spans across a wide spectrum of optical components, including the fiber and the diodes that are core components of the laser, and now extends to the delivery and control of the laser beam that our equipment generates, including optical heads and complete systems. Vertical integration of diode and other key optical component production provides significant cost advantages as compared to other fiber and non-fiber laser technologies. And our ability to quickly scale manufacturing enables us to respond to customers with a range of fiber laser solutions for a growing number of applications.

To maintain our leadership position, we are investing in technology and product development as well as in manufacturing capacity. We made excellent progress with our product development initiatives in 2013 and will continue to innovate our fiber laser products and technology in 2014. Customer interest is keen for some of our newly launched products, including a new family of low-cost, compact and efficient UV lasers, a quasi-continuous-wave (QCW) laser with 12, 15 and 18-kilowatts in peak power, green continuous-wave and pulsed and ultrafast lasers. With these new lasers, we are expanding our available market in micro-processing applications for aerospace, semiconductors, LED, solar, thin-film processing, circuit boards and display. Some of these new products open IPG up to new applications,

including stripping and cleaning of different surfaces in the aerospace, shipyard, mold cleaning and repair markets; 3D digital cinema projection; entertainment; biomedical; and many others.

During the past year we passed a critical milestone in the development and introduction of laser-based processing systems – a new market for us. We introduced our product introductions will more broadly cover the optical spectrum, including near-and mid-infrared, and visible and ultraviolet wavelengths

a family of unique Laser Seam Steppers, which are now gaining traction as a replacement for resistance spot welding. We also developed powder cladding systems for turbine blade repair and have already shipped and installed in production several of these new systems.



Our product introductions in 2014 will more broadly cover the optical spectrum, including near- and mid-infrared, and visible and ultraviolet wavelengths, and will provide new alternatives to traditional laser and non-laser solutions. Of course, all of these new lasers are designed with industry-leading product performance, reliability and cost of investment and ownership for which IPG's fiber lasers have become known.

In addition to advancing our products and technology, we are investing in IPG's worldwide infrastructure and capacity to capitalize on customer demand trends. During the year we began moving into modern and expanded facilities in Russia that are being used for components, fiber laser and systems production, R&D and administration. We also expanded our Oxford, Massachusetts facility with
two new state-of-the-art buildings: one for tripling diode production and for manufacturing visible and UV lasers, as well as one for electronic and metal parts manufacturing. In addition, we opened an office in Taiwan to support existing customers and new opportunities, expanded our Shanghai presence with a new and larger office, and opened a new sales and service office in Poland to support growing demand in that geography. In 2014, we expect to invest in new geographies to leverage the growing materials processing markets.

There are a number of positive market trends that bode well for IPG both in the near and long term. For example, one application that presents exciting opportunities for growth is additive manufacturing, or 3-D printing. IPG lasers are used in additive manufacturing to produce a part from powders made of metals or other materials. We have been providing lasers for this application for several years and most of the key global manufacturers for metal additive manufacturing use IPG's fiber lasers. Now that demand in this area is accelerating, we see an excellent growth opportunity for IPG.

Another exciting trend is a progression in demand from manufacturers from relatively low output power lasers to higher power multiple kilowatt lasers for an increasing number of applications. This move is driven by the need
we are investing
in IPG's worldwide
infrastructure and
capacity to capitalize
on customer demand
trends
to process larger parts, cut thicker metals, mark different materials and increase process speeds with higher energies. During 2013, unit volume of lasers with outputs of greater than 500 watts increased by 53.5%, and dollar volume of such units increased by 31.9%, demonstrating the significant effect of this trend on our results. We also shipped the first 100 kilowatt fiber laser during 2013 representing a new record achievement for output power.

The progression to higher output powers will tend to increase average sales price per unit and raise the bar for our competition who will have to be able to demonstrate their ability to cost-effectively manufacture reliable and high performance lasers that are able to handle the increased power outputs demanded by customers.

2014 promises to be another successful year for IPG. We are optimistic that overall industrial output will be somewhat stronger in 2014 than 2013, and we expect to continue to see strong growth in our traditional material processing applications. In addition, positive market trends, such as the growth in the adoption of fiber lasers for cutting and welding, 3D printing and micro-processing, provide us with additional confidence in our near- and long-term growth potential. In 2014 we are focused on increasing revenues, maintaining margins within our target range, and attracting new OEM customers for existing and new applications.

On behalf of the IPG Photonics team, I would like to thank all of our stockholders for your continued support. We look forward to reporting our progress to you throughout the year.

Sincerely,



Valentin P. Gapontsev, Ph.D.

Chairman and Chief Executive Officer
April 15, 2014



Powered by TCPDF (www.tcpdf.org)



# UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

(Mark One)

Form 10-K

☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013

OR

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

Commission File Number: 001-33155

# IPG PHOTONICS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

04-3444218

(State or other jurisdiction of incorporation or organization)

(IRS Employer

50 Old Webster Road, Oxford, Massachusetts

Identification No.)

(Address of principal executive offices)

1,540

(Zip Code)

Registrant’s telephone number, including area code:

(508) 373-1100

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of Exchange on Which Registered

Common Stock, Par Value $0.0001 per share

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No ☑

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $1.4 billion, calculated based upon the closing price as reported by the Nasdaq Global Market on June 28, 2013. For purposes of this disclosure, shares of common stock held by persons who own 5% or more of the outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and Regulations of the Exchange Act. This determination of affiliate status is not necessarily conclusive.

As of February 25, 2014, 51,954,978 shares of the registrant’s common stock were outstanding.

## DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days of the end of the registrant’s fiscal year ended December 31, 2013 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.



Powered by TCPDF (www.tcpdf.org)



## TABLE OF CONTENTS

## PART I

ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 16
ITEM 1B. UNRESOLVED STAFF COMMENTS 28
ITEM 2. PROPERTIES 28
ITEM 3. LEGAL PROCEEDINGS 29
ITEM 4. MINE SAFETY DISCLOSURES 30

PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 30
ITEM 6. SELECTED FINANCIAL DATA 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 45
ITEM 9A. CONTROLS AND PROCEDURES 45
ITEM 9B. OTHER INFORMATION 47

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 48
ITEM 11. EXECUTIVE COMPENSATION 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 48
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 48

PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 48

SIGNATURES 48

INDEX TO FINANCIAL STATEMENTS F-1



This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of 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 Annual Report on Form 10-K except for historical information are forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to accurately predict and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. 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 (the “SEC”). 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.



## PART I

## ITEM 1. BUSINESS

## Our Company

IPG Photonics Corporation (“IPG”, the “Company”, the “Registrant”, “we”, “us” or “our”) is the leading developer and manufacturer of a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used for diverse applications, primarily in materials processing. Fiber lasers are a new generation of lasers that combine the advantages of semiconductor diodes, such as long life and high efficiency, with the high amplification and precise beam qualities of specialty optical fibers to deliver superior performance, reliability and usability.

Our diverse lines of low, mid and high-power lasers and amplifiers are used in materials processing, advanced, communications and medical applications. We sell our products globally to original equipment manufacturers (“OEMs”), system integrators and end users. We market our products internationally primarily through our direct sales force. We have sales offices in the United States, Germany, Russia, Italy, Turkey, the United Kingdom, France, Spain, Poland, China, Japan, South Korea, Singapore and India. Our major manufacturing facilities are located in the United States, Germany and Russia.

We are vertically integrated such that we design and manufacture most of the key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. We also manufacture complementary products used with our lasers including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers. In addition, we offer laser-based systems for certain markets and applications. Our vertically integrated operations allow us to reduce manufacturing costs, control quality, rapidly develop and integrate advanced products and protect our proprietary technology.

We are listed on the Nasdaq Global Market (ticker: IPGP). We began operations in 1990 and we were incorporated in Delaware in 1998. Our principal executive offices are located at 50 Old Webster Road, Oxford, Massachusetts 01540, and our telephone number is (508) 373-1100.

## Industry Background

## Conventional Laser Technologies

Since the laser was invented over 50 years ago, laser technology has revolutionized a broad range of applications and products in various industries, including general manufacturing, automotive, medical, research, consumer products, electronics, semiconductors and communications. Lasers provide flexible, non-contact and high-speed ways to process and treat various materials. They are widely used to transmit large volumes of data in optical communications systems, various medical applications and test and measurement systems. They are also incorporated into manufacturing, medical and other systems by OEMs, system integrators and end users. For a wide variety of applications, lasers provide superior performance and a more cost-effective solution than non-laser technologies.

Lasers emit an intense light beam that can be focused on a small area, causing metals and other materials to melt, vaporize or change their character. These properties are utilized in applications requiring very high-power densities, such as marking, engraving, printing, welding, cutting, drilling, cladding, ablation and other materials processing procedures. Lasers are well-suited for imaging and inspection applications, and the ability to confine laser light to narrow wavelengths makes them particularly effective in medical and sensing applications. A laser works by converting electrical energy to optical energy. In a laser, an energy source excites or pumps a lasing medium, which converts the energy from the source into an emission consisting of particles of light, called photons, at a particular wavelength.

Historically, carbon dioxide (“CO \( _{2} \) ”) gas lasers and crystal lasers have been the two principal laser types used in materials processing and many other applications. They are named for the materials used to create the lasing action. A CO \( _{2} \)  laser produces light by electrically stimulating a gas-filled tube and delivers the beam through free space using mirrors to provide direction. A crystal laser uses an arc lamp, pulsed flash lamp or diode stack or array to optically pump a special crystal. The most common crystal lasers use yttrium aluminum garnet (“YAG”) crystals infused with neodymium or ytterbium. Some crystal lasers also use mirrors in free space to deliver the beam or direct the beam through fiber optics.

## Introduction of Fiber Lasers

Fiber lasers use semiconductor diodes as the light source to pump specialty optical fibers, which are infused with rare earth ions. These fibers are called active fibers and are comparable in diameter to a human hair. The laser emission is created within optical fibers and delivered through a flexible optical fiber cable. As a result of their different design and components,



fiber lasers are more reliable, efficient, robust, compact and easier to operate than conventional lasers. In addition, fiber lasers free the end users from fine mechanical adjustments and the high maintenance costs that are typical for conventional lasers.

Although low-power fiber lasers have existed for approximately four decades, their increased recent adoption has been driven primarily by our improvements in their output power levels and cost as well as their superior performance compared with conventional lasers. We have successfully increased output power levels by developing improved optical components such as diodes and active fibers that have increased their power capacities and improved their performance. Fiber lasers now offer output powers that exceed those of conventional lasers in many categories. Also, semiconductor diodes historically have represented the majority of the cost of fiber lasers. In the past, the high cost of diodes meant that fiber lasers could not compete with conventional lasers on price and limited their use to high value-added applications. Over the last several years, however, our semiconductor diodes have become more affordable and reliable due, in part, to substantial advancements in semiconductor diode technology, packaging design and increased production volumes. As a result, the average cost per watt of output power has decreased dramatically over the last decade. Because of these improvements, our fiber lasers can now effectively compete with conventional lasers over a wide range of output powers and applications. As a pioneer in the development and commercialization of fiber lasers, we have contributed to many advancements in fiber laser technology and products.

## Advantages of Fiber Lasers over Conventional Lasers

We believe that fiber lasers provide a combination of benefits that include:

- Superior Performance. Fiber lasers provide uniform beam quality over the entire power range. In most conventional laser solutions, the beam quality is sensitive to output power, while in fiber lasers, the output beam is virtually non-divergent over a wide power range. A non-divergent beam enables higher levels of precision, increased power densities and the ability to deliver the beam over greater distances to where processing can be completed. The superior beam quality and greater intensity of a fiber laser’s beam allow tasks to be accomplished more rapidly, with lower-power units and with greater flexibility than comparable conventional lasers.

- Lower Cost. The purchase price for fiber lasers is generally lower than that of YAG lasers and of many CO \( _{2} \)  lasers. In addition, fiber lasers are less expensive to operate due to their lower energy usage, lower required maintenance costs and better processing speeds. Fiber lasers convert electrical energy to optical energy approximately 2 to 3 times more efficiently than diode-pumped YAG lasers, approximately 3 times more efficiently than conventional CO \( _{2} \)  lasers and approximately 15 to 30 times more efficiently than lamp-pumped YAG lasers. Because fiber lasers are much more energy-efficient and place lower levels of thermal stress on their internal components, they have substantially lower cooling requirements compared to those of conventional lasers, which also improves overall energy efficiency. Fiber lasers have lower to no maintenance costs due to the high performance and long life of our single-emitter diodes, fiber optics and other optical components, which can be used for up to 100,000 hours without replacement. The higher power density of the fiber laser beam also allows for higher processing speeds in many applications, which increases the operating efficiencies on a per-part basis.

- Ease of Use. Many features of fiber lasers make them easier to operate, maintain and integrate into laser-based systems as compared to conventional lasers, many of which require mirrors to direct the beam. There are no moving parts in fiber lasers so they do not require adjustments of internal components.

- Compact Size. Fiber lasers are typically smaller and lighter in weight than conventional lasers, saving valuable floor space. While conventional lasers are delicate due to the precise alignment of mirrors, fiber lasers are more durable and able to perform in variable environments.

- Choice of Wavelengths and Precise Control of Beam. The design of fiber lasers generally provides a broad range of wavelength choices, allowing users to select the precise wavelength that best matches their application and materials. Because the beam is delivered through fiber optics, it can be directed to the work area over longer distances without loss of beam quality.

Fiber amplifiers are similar in design to fiber lasers, use many of the same components, such as semiconductor diodes and specialty optical fibers, and provide many of the same advantages in the applications that require amplification.

Notwithstanding the benefits offered by fiber lasers, there remain applications and processes where conventional laser technologies may provide superior performance with respect to particular features. For example, crystal lasers can provide higher peak power pulses and fiber lasers cannot now generate the deep ultra-violet light that is used for photolithography in many semiconductor applications. In addition, CO \( _{2} \)  lasers operate at wavelengths that are optimal for use on many non-metallic materials, including organic materials like wood.



## Our Competitive Strengths

We believe that our key competitive strengths position us to take advantage of opportunities to displace traditional lasers and enable use of fiber lasers in new applications. Our key strengths and competitive advantages include:

World’s Leading Producer of Fiber Laser Technology. We are the world’s largest manufacturer of fiber lasers. As a pioneer and technology leader in fiber lasers, we have built leading positions in our various end markets with a large and diverse customer base. Based on our leadership positions, we are able to leverage our scale to reduce costs for our customers and drive the proliferation of fiber lasers in existing and new applications. We rely on several key proprietary technologies, including pumping technology, manufacturing of fiber to withstand the high output power of our lasers, gain blocks and optics that contribute to the superior performance and reliability of our products.

Vertically Integrated Development and Manufacturing. We develop and manufacture all of our key high-volume specialty components, including semiconductor diodes, active fibers, passive fibers and specialty optical components. We also produce beam switches, fiber delivery cables and certain optical processing heads developed especially for use with our lasers. We believe that our vertical integration and our high-volume production enhances our ability to meet customer requirements, reduce costs, accelerate and focus development, shorten lead times, limit the spread of trade secrets and provide competitive pricing advantages while maintaining high performance and quality standards.

Breadth and Depth of Expertise. We have extensive know-how in materials sciences, which enables us to make our specialty optical fibers, semiconductor diodes and other critical components. We also have experience in optical, electrical, mechanical and semiconductor engineering, which we use to develop and manufacture our proprietary components, products, accessories and systems. We also operate numerous application development centers worldwide which allow us to assist customers in improving their manufacturing using our deep experience with fiber lasers.

Diverse Customer Base, End Markets and Applications. Our diverse customer base, end markets and applications provide us with many growth opportunities. In 2013, we shipped more than 27,000 units to over 2,000 customers worldwide, with no single customer representing more than 11% of our sales. Our products are used in a wide variety of applications and end markets worldwide. Our principal end markets and representative applications within those markets include:



## Materials Processing

• Flat sheet, tube and 3D cutting

• Marking, engraving and printing
• Brazing and hardening

• 3D printing, selective laser melting and sintering

## General manufacturing

• High-strength steel cutting and welding
• Welding tailored metal blanks, frames, seats and transmissions
• Brazing and welding of auto frames
• Seam welding

## Automotive

• Hardening and welding pipes in nuclear, wind turbine and pipeline industries
• Welding and cutting thick plates for ships and rail cars
• Drilling for natural resources

## Heavy industry

## Aerospace

• Welding titanium air frames
• Cladding parts
• Percussion drilling of parts

## Consumer

• Cutting and marking parts for electronics and appliances
• Electronics and credit card marking
• Welding razor blades and batteries
• Stent and pacemaker manufacturing

## Semiconductor and electronics

• Computer disk manufacturing and texturing
• Photovoltaic manufacturing
• Memory repair and trim

## Advanced Applications

• Obstacle warning and light detecting and ranging
• Special projects and research
• Directed energy demonstrations
• Sensing and instrumentation

## Communications

• Broadband — fiber to premises
• Broadband — cable video signal transport
• Metro and long-haul wire-line DWDM transport

## Medical

• Skin rejuvenation and wrinkle removal
• General surgery and urology
• Dental

Broad Product Portfolio and Ability to Meet Customer Requirements. We offer a broad range of standard and custom fiber lasers and amplifiers, enabling deployment in a wide variety of applications and end markets. Our vertically integrated manufacturing, broad technology expertise and investment in inventory enable us to design, prototype and commence high-volume production of our products rapidly, allowing our customers to meet their time-to-market requirements.

## Our Strategy

Our objective is to maintain and extend our leadership position in our industry by pursuing the following key elements of our strategy:

Leverage Our Technology to Increase Sales. As fiber lasers become more widely accepted, we plan to leverage our position as the leader in fiber lasers and our applications expertise to develop solutions for customers and increase our position in the broader laser market. We believe that our fiber lasers will continue to displace traditional lasers in many existing applications due to their superior performance and value. Over the last few years, our high power lasers have become widely accepted in two- and three-dimension cutting, one of the largest laser materials processing applications. We plan to continue to leverage our fiber laser technology by pursuing large-scale laser applications where our fiber lasers offer improved customer value and performance. Some of the more significant applications we intend to target include: (i) additive manufacturing (also



called 3D printing) with higher power ytterbium lasers; and (ii) fine-processing, scribing and marking with high-power green lasers and ultra-violet (“UV”), lasers now under development.

Target New Applications for Lasers and Expand into Broader Markets. We intend to expand the use of fiber lasers into additional applications where faster or higher quality processing, higher power, portability, efficiency, size and flexible fiber cable delivery can lead customers to adopt fiber lasers instead of non-laser solutions. We believe that the advantages of fiber laser technology can overcome many of the limitations that have hindered the adoption of conventional lasers in broader industrial markets and processes. Using our manufacturing scale and technology innovations, we have been successful in reducing the cost of manufacturing with lasers, which we believe has made fiber lasers a more attractive manufacturing alternative as compared to conventional lasers and many non-laser methods. We target applications where higher power, portability, efficiency, size and flexible fiber cable delivery can lead customers to adopt fiber lasers instead of non-laser solutions. Certain industry trends such as the use of high-strength steel in automotive manufacturing and decreasing the weight of vehicles are driving the use of fiber lasers over other manufacturing methods such as stamping, non-laser welding and adhesives. Other trends, such as miniaturization of parts and electronics, contribute to the use of lasers because no other tools can work as precisely. We are working on developing new applications for fiber lasers through internal research and in partnership with customers and industrial institutes.

Expand Our Product Portfolio. We plan to continue to invest in research and development to add additional wavelengths, power levels and other parameters while also improving beam quality, as well as developing new product lines and laser-based systems. Using our core technologies and breadth of experience, we plan to expand the wavelengths at which our lasers operate. This includes UV lasers that can be used for fine-processing applications and as well as orange, red and high power green lasers for fine and micro processing and other novel applications. We are introducing and developing pulsed fiber lasers with ultra-short pulse durations (nanosecond, picosecond and femtosecond) with high peak powers and mid infra-red lasers. In 2013, we acquired a business that develops and produces high-power pulsed UV fiber lasers for micro-machining and fine processing applications. We will continue to expand sales of specialized laser-based systems to meet the specific needs of manufacturing end users whose requirements are not met by standard systems or in certain geographic areas where fiber laser systems are not currently available.

Lower Our Costs Through Manufacturing Improvements and Innovation. We plan to seek further improvements in component manufacturing processes and device assembly as well as innovation in components and device designs to improve performance and decrease the overall cost per watt for our products. As we increase our production volumes, we improve our internal manufacturing economies of scale and we believe we will be able to better negotiate price reductions with certain suppliers. We intend to leverage our technology and operations expertise to manufacture additional components in order to reduce costs, ensure component quality, ensure supply and improve product performance. In 2013, we produced more of our mechanical parts, manufactured more of our printed circuit board and power supplies we use and redesigned certain optical components to improve quality. We further decreased the manufacturing cost of our packaged diodes. In addition, we manufactured additional components that we had previously outsourced, such as mechanical cabinets, printed circuit boards, optical sub-assemblies, and we started to offer optical processing heads for use with our lasers. By reducing the cost per watt of our lasers and maintaining the lower operating cost of our products, we believe that we can increase laser use in applications in which conventional lasers could not be used economically.

Expand Global Reach to Attract Customers Worldwide. The acceptance of fiber laser technology has expanded in both developed and emerging markets around the world. As a result, we have increased and will continue to increase our international sales and service locations to respond to our customers' needs. In 2013, we substantially expanded our facilities in Russia, including for systems and component manufacturing, and we opened a new sales and service office in Poland and a service office in Taiwan. We are considering establishing a presence in additional countries.

## Products

We design and manufacture a broad range of high-performance optical fiber-based lasers and amplifiers. We also make packaged diodes, direct diode lasers, laser systems, communications systems and materials processing laser systems that utilize our optical fiber-based products as well as other laser sources. Many of our products are designed to be used as general-purpose energy or light sources, making them useful in diverse applications and markets.

Our products are based on a common proprietary technology platform using many of the same core components, such as semiconductor diodes and specialty fibers, which we configure to our customers' specifications. Our engineers and scientists work closely with OEMs, system integrators and end users to develop and customize our products for their needs. Because of our flexible and modular product architecture, we offer products in different configurations according to the desired application, including modules, rack-mounted units and tabletop units. Our engineers and other technical experts work directly with the customer in our application and development centers to develop and configure the optimal solution for each



customer’s manufacturing requirements. We also manufacture certain complementary products that are used with our lasers, such as optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers.

## Lasers

Our laser products include low (1 to 99 watts), medium (100 to 999 watts) and high (1,000 watts and above) output power lasers from 0.3 to 4.5 microns in wavelength. These lasers either may be CW, QCW or pulsed. Our pulsed line includes nanosecond, picosecond and femtosecond lasers. We offer several different types of lasers, which are defined by the type of gain medium they use. These are ytterbium, erbium and thulium, as well as Raman and hybrid fiber-crystal lasers. We also sell fiber pigtailed packaged diodes and fiber coupled direct diode laser systems that use semiconductor diodes rather than optical fibers as their gain medium. In addition, we offer high-energy pulsed lasers, multi-wavelength lasers, tunable lasers, single-polarization and single-frequency lasers, as well as other versions of our products.

We believe that we produce the highest-power solid-state lasers in the industry. Our ytterbium fiber lasers reach power levels of up to 100,000 watts. We also make single-mode and low-mode output ytterbium fiber lasers with power levels of up to 10,000 watts and single-mode, erbium and thulium fiber lasers with power levels of up to 400 watts. Our compact, durable design and integrated fiber optic beam delivery allow us to offer versatile laser energy sources and simple laser integration for complex production processes without compromising quality, speed or power.

We also sell laser diode chips and packaged laser diodes operating at 8XX to 9XX nanometers. We sell our own family of high-power optical fiber delivery cables, fiber couplers, beam switches, chillers, scanners and other accessories for our fiber lasers. Recently, we introduced a line of optical processing heads for use with our fiber lasers.

IPG offers a retrofit service to replace  \( CO_{2} \)  and lamp-pumped YAG laser sources with fiber lasers in many welding, cutting, drilling and other systems, allowing customers to retain their existing laser systems. IPG also makes active and passive laser materials and tunable lasers in the middle-infrared region.

## Amplifiers

Our amplifier products range from milliwatts to up to 1,500 watts of output power from 1 to 2 microns in wavelength. We offer erbium-doped fiber amplifiers (“EDFAs”), Raman amplifiers and integrated communications systems that incorporate our amplifiers. These products are predominantly deployed in broadband networks such as fiber to the home (“FTTH”), fiber to the curb (“FTTC”), and passive optical networks (“PON”), and dense wavelength division multiplexing (“DWDM”), networks. We also offer ytterbium and thulium specialty fiber amplifiers and broadband light sources that are used in advanced applications. In addition, we sell single-frequency, linearly polarized and polarization-maintaining versions of our amplifier products. As with our fiber lasers, our fiber amplifiers offer some of the highest output power levels and highest number of optical outputs in the industry. We believe our line of fiber amplifiers offers the best commercially available output power and performance.

## Systems

Besides selling laser sources, we also offer integrated laser systems for particular geographic markets or custom-developed for a customer’s manufacturing requirements. Through our IPG Microsystems business, we offer industrial grade UV excimer, diode pumped solid state and picosecond laser micromachining systems and materials processing services. Key applications for these systems include advanced laser scribing and laser lift-off (“LLO”) of light-emitting diodes (“LEDs”), thin film solar scribing, semiconductor, micro-electro-mechanical systems (“MEMS”), research, biomedical and industrial micromachining. IPG Microsystems’ laser systems operate at wavelengths from 157nm to 1,064nm, and are important to a growing set of today’s industrial micromachining applications.

IPG also develops and sells specialized fiber laser systems for unique material processing applications as requested by customers desiring a complete laser-based solution, including remote welding, micro-welding and cutting. The platforms include multi-axis workstations for welding, flatbed cutters, and diode markers.

Other systems offerings include a welding seam stepper and picker, which is an automated and integrated fiber laser welding tool providing customers increased processing speeds, better quality and the elimination of certain clamping tools and laser safety enclosures. The seam stepper and picker, an alternative to resistance welding, are used in automotive assembly, appliance, rail cars and other sheet metal fabrication.

The following table lists our principal product lines that generated a substantial majority of our revenues in 2013, and the principal applications markets in which they are used:



<table><tr><td>Product Line</td><td>Principal Markets</td><td>Principal Applications</td></tr><tr><td>High-Power Ytterbium CW (1,000 - 100,000 Watts)</td><td>AutomotiveHeavy IndustryGeneral ManufacturingNatural ResourcesAerospace</td><td>• Cutting• Welding• Annealing• Drilling• Cladding• Brazing• Paint stripping</td></tr><tr><td>Mid-Power Ytterbium CW (100 - 999 Watts)</td><td>General ManufacturingConsumerMedical DevicesPrintingMicroelectronics</td><td>• Cutting• Welding• Scribbing• Engraving• Rapid prototyping</td></tr><tr><td>Pulsed Ytterbium (0.1 to 200 Watts)</td><td>General ManufacturingSemiconductorMedical DevicesConsumerMicroelectronicsPanel Displays</td><td>• Marking• Engraving• Scribbing• Drilling• Coating removal• Cutting</td></tr><tr><td>Pulsed and CW Green Lasers</td><td>SemiconductorSolarGeneral Manufacturing</td><td>• Annealing silicon wafers• Thin film ablation• Marking plastics</td></tr><tr><td>Quasi-CW Ytterbium (100 - 900 Watts)</td><td>Medical DeviceComputer ComponentsMicro-Processing</td><td>• Welding and micro-welding• Drilling• Cutting</td></tr><tr><td>Erbium Amplifiers</td><td>Broadband AccessCable TVDWDMInstrumentationScientific Research</td><td>• Telephony• Video on demand• High-speed internet• Ultra-long-haul transmission• Beam combining</td></tr></table>

Our products are used in a broad range of applications. The major application is materials processing, comprising approximately 94% of our sales in 2013. Our products also address other applications, including advanced applications (approximately 4% of sales), communications (approximately 1% of sales) and medical (approximately 1% of sales).

## Our Markets

## Materials Processing

The most significant materials processing applications for fiber lasers are cutting and welding and marking and engraving. Other applications include micro-processing, surface treatment, drilling, soldering, annealing, hardening, additive manufacturing and laser-assisted machining.

Cutting and Welding Applications. Laser-based cutting technology has several advantages compared to alternative technologies. Laser cutting is fast, flexible and highly precise and can be used to cut complex contours on flat, tubular or three-dimensional materials. The laser source can be programmed to process many different kinds of materials such as steel, aluminum, brass, copper, glass, ceramic and plastic at various thicknesses. Laser cutting technology is a non-contact process that is easy to integrate into an automated production line and is not subject to wear of the cutting medium. We sell low, mid and high-power ytterbium fiber lasers for laser cutting. High electrical efficiency, low maintenance and operating cost, high beam quality, wide operating power range, power stability and small spot size are some of the qualities offered by IPG fiber lasers for many cutting applications, which enable customers to cut a variety of materials faster.

Laser welding offers several important advantages compared to conventional welding technology as it is non-contact, easy to automate, provides high process speed and results in narrow-seamed, high-quality welds that generally require little or no post-processing machining. The high beam quality of our fiber lasers coupled with high CW power offer deep penetration welding as well as shallow conduction mode welding. In addition, fiber lasers can be focused to a small spot with extremely long focal lengths, enabling remote welding “on the fly,” a flexible method of three-dimensional welding in which the laser beam is positioned by a robot-guided scanner. Such remote welding stations equipped with fiber lasers are used for welding door panels and seat backs, the multiple welding of spot and lap welds over the entire auto body frame and welding “body-in-white,” which is welding pieces of metal with different thicknesses for automotive applications. Typically, mid to high-power ytterbium fiber lasers and long-pulse QCW ytterbium fiber lasers are used in welding applications. Our products are used also



for laser brazing of visible joints in automobiles such as tailgates, roof joints and columns. Brazing is a method of joining sheet metal by using a melted filler material similar to soldering but requiring higher temperatures.

Marking and Engraving. With the increasing need for source traceability, component identification and product tracking as a means of reducing product liability and preventing falsification, as well as the demand for modern robotic production systems, manufacturers increasingly demand marking systems capable of applying serialized alphanumeric, graphic or bar code identifications directly onto their manufactured components. Laser engraving is similar to marking but forms deeper grooves in the material. In contrast to conventional acid etching and ink-based technologies, lasers can mark a wide variety of metal and non-metal materials, such as ceramic, glass and plastic surfaces, at high speeds and without contact by changing the surface structure of the material or by engraving. Laser marking systems can be easily integrated into a customer's production process and do not subject the item being marked to mechanical stress. Our ytterbium pulsed fiber lasers are used for these applications.

In the semiconductor industry, lasers typically are used to mark wafers and integrated circuits. In the electronics industry, lasers typically are used to mark electrical components such as contactors, relays and printed circuit boards. Consumer electronic devices such as mobile phones, computers and handheld computers contain many parts that are laser-marked, including keyboards, logos and labels. With the increase in marking speed in the past few years, the cost of laser marking has decreased. In the photovoltaic or solar panel industry, pulsed lasers increasingly are used to remove materials and to scribe, or cut, solar cells. The high beam quality, increased peak output powers, flexible fiber delivery and competitive price of fiber lasers have accelerated the adoption of fiber lasers in these low-power applications.

Micro-Processing and Fine Processing. The trend toward miniaturization in numerous industries such as consumer electronics, as well as innovations in materials and structures, is driving end users to utilize lasers in processing and fabrication. The ability of lasers to cut, weld, drill, ablate, etch and add materials on a fine scale is enabling new technologies and products across many industries. Our low-power CW and QCW lasers are used to cut medical stents and weld medical batteries. In photovoltaic manufacturing, our lasers etch and perform edge isolation processes. The aerospace industry requires precise manufacturing of engine parts so that cooling is effective and aerospace manufacturers use lasers to conduct percussion drilling. Processing of plastics and semi-conductors require short pulse and high energy lasers, in the green, UV and mid infra-red wavelengths.

## Advanced Applications

Our fiber lasers and amplifiers are utilized by commercial firms and by academic and government institutions worldwide for manufacturing of commercial systems and for research in advanced technologies and products. These markets may use specialty products developed by us or commercial versions of our products.

Obstacle Warning and Mapping. Our products are used for obstacle warning and 3-dimensional mapping of earth surfaces.

Special Projects. Due to the high power, compactness, performance, ruggedness and electrical efficiency of our fiber lasers and amplifiers, we sell our commercial products for government research and projects. These include materials testing, ordnance destruction, coherent beam combining, directed energy demonstrations, advanced communications and research.

Research and Development. Our products are used in a variety of applications for research and development by scientists and industrial researchers, including atom trapping. In addition, our lasers and amplifiers are used to design, test and characterize components and systems in a variety of markets and applications.

Optical Pumping and Harmonic Generation. Several types of our lasers are used to optically pump other solid-state lasers and for harmonic generation and parametric converters to support research in sensing, medical and other scientific research in the infrared and visible wavelength domains. Our lasers are used as a power source for these other lasers. Green visible lasers are used to pump titanium sapphire lasers. Visible lasers can be used in optical displays, planetariums and light shows.

Remote Sensing. Our products are used in light detection and ranging (“LIDAR”), a laser technique for remote sensing. Optical fiber can be used as a sensor for measuring changes in temperature, pressure and gas concentration in oil wells, atmospheric and pollution measurements and seismic exploration.

## Communications

We design and manufacture a DWDM transport system with varying output power and wavelengths and a full range of fiber amplifiers and Raman pump lasers that enhance data transmission in broadband access and DWDM optical networks. We



are leveraging our high-power diode and fiber technology through the qualification and sale of high-value integrated solutions for network suppliers.

DWDM. DWDM is a technology that expands the capacity of optical networks, allowing service providers to extend the life of existing fiber networks and reduce operating and capital costs by maximizing bandwidth capacity. We provide a broad range of high-power products for DWDM applications including EDFAs and Raman lasers. We provide a DWDM transport system that offers service providers and private network operators a simple, flexible, optical layer solution scalable to 80 channels that aggregates and multiplexes multiprotocol clients into optical transport network signals operating at 10, 40 and 100 gigabits per second per channel.

Broadband Access. The delivery to subscribers of television programming and Internet-based information and communication services is converging, driven by advances in Internet Protocol (“IP”) technology and by changes in the regulatory and competitive environment. Fiber optic lines now offer connection speeds of up to 10 gigabits per second to the subscriber, or 1,000 times faster than digital subscriber lines (“DSL”), or cable links. We offer a series of specialty multi-port EDFAs and cable television (“TV”) nodes and transmitters that support different types of passive optical network architectures, enabling high-speed data, voice, video on demand and high-definition TV. We provide an EDFA that supports up to 64 output ports, which allows service providers to support a high number of customers in a small space, reducing overall power consumption and network cost. End users for our products include communications network operators for video wavelength division multiplexing overlay solutions, operators of metro and long-haul networks for DWDM and amplification solutions, as well as cable and multiple system operators for optical amplification solutions.

## Medical

We sell our commercial fiber and diode lasers to OEMs that incorporate our products into their medical laser systems. CW erbium and thulium fiber lasers from 1 to 150 watts and diode laser systems can be used in various medical and biomedical applications. Aesthetic applications addressed by lasers include skin rejuvenation, skin resurfacing and stretch mark removal. Purchasers use our diode lasers in dental and skin tightening procedures. Surgical applications include prostate surgery. Fiber lasers have the ability to fine-tune optical penetration depth and absorption characteristics and can be used for ear, nose and throat, urology, gynecology and other surgical procedures.

## Technology

Our products are based on our proprietary technology platform that we have developed and refined since our formation. The following technologies are key elements in our products.

## Specialty Optical Fibers

We have extensive expertise in the disciplines and techniques that form the basis for the multi-clad active and passive optical fibers used in our products. Active optical fibers form the laser cavity or gain medium in which lasing or amplification of light occurs in our products. Passive optical fibers deliver the optical energy created in our products. Our active fibers consist of an inner core that is infused with the appropriate rare earth ion, such as ytterbium, erbium or thulium, and outer cores of undoped glass having different indices of refraction. We believe that our large portfolio of specialty active and passive optical fibers has a number of advantages as compared to other commercially available optical fibers. These advantages include higher concentrations of rare earth ions, fibers that will not degrade at the high power levels over the useful life of the product, high lasing efficiency, ability to achieve single-mode outputs at high powers, ability to withstand high optical energies and temperatures and scalable side-pumping capability.

## Semiconductor Diode Laser Processing and Packaging Technologies

Another key element of our technology platform is that we use multiple multi-mode, or broad area, single-emitter diodes rather than diode bars or stacks as a pump source. We believe that multi-mode single-emitter diodes are the most efficient and reliable pumping source presently available, surpassing diode bars and stacks in efficiency, brightness and reliability. Single-emitter diodes have substantially reduced cooling requirements and typically have estimated lifetimes of more than 100,000 hours at high operating currents, compared to typical lifetimes of up to 10,000 to 20,000 hours for diode bars.

We developed advanced molecular beam epitaxy techniques to grow alumina indium gallium arsenide wafers for our diodes. This method yields high-quality optoelectronic material for low-defect density and high uniformity of optoelectronic parameters. In addition, we have developed numerous proprietary wafer processes and testing and qualification procedures in order to create a high energy output in a reliable and high-power diode. We package our diodes in hermetically sealed pump modules in which the diodes are combined with an optical fiber output. Characteristics such as the ability of the package to dissipate heat produced by the diode and withstand vibration, shock, high temperature, humidity and other environmental conditions are critical to the reliability and efficiency of the products.



## Specialty Components and Combining Techniques

We developed a wide range of advanced optical components that are capable of handling high optical power levels and contribute to the superior performance, efficiency and reliability of our products. In addition to fibers and diodes, our optical component portfolio includes fiber gratings, couplers, isolators and combiners. We also developed special methods and expertise in splicing fibers together with low optical energy loss and on-line loss testing. We believe that our internal development and manufacturing of key optical components allows us to lower our manufacturing costs and improve product performance.

## Side Pumping of Fibers and Fiber Block Technologies

Our technology platform allows us to efficiently combine a large number of multi-mode single-emitter semiconductor diodes with our active optical fibers that are used in all of our products. A key element of this technology is that we pump our fiber lasers through the cladding surrounding the active core. We splice our specialty active optical fibers with other optical components and package them in a sealed box, which we call a fiber block. The fiber blocks are compact and eliminate the risk of contamination or misalignment due to mechanical vibrations and shocks as well as temperature or humidity variations. Our design is scalable and modular, permitting us to make products with high output power by coupling a large number of diodes with fiber blocks, which can be combined in parallel and serially.

## High-Stress Testing

We employ high-stress techniques in testing components and final products that help increase reliability and accelerate product development. For example, we test all of our diodes with high current and temperatures to accelerate aging. We also have built a large database of diode test results that allows us to predict the estimated lifetime of our diodes. This testing allows us to eliminate defective diodes prior to further assembly and thus increase reliability.

## Customers

We sell our products globally to OEMs, system integrators and end users in a wide range of diverse markets who have the in-house engineering capability to integrate our products into their own systems. We have thousands of customers worldwide. Our primary end market is materials processing, comprised of general manufacturing, automotive, heavy industry, aerospace, consumer products, medical device manufacturing, natural resources, photovoltaic semiconductor and electronics customers. We also sell our products to other end markets, including advanced applications (comprised of commercial companies, universities, research entities and government entities), communications (comprised of system integrators, utilities and municipalities) and medical (comprised of medical laser systems manufacturers and researchers). We believe that our customer, geographic and end-market diversification minimizes dependence on any single industry or group of customers.

The following table shows the allocation of our net sales (in thousands) among our principal markets:

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td colspan="2">% of Total</td><td colspan="2">% of Total</td><td colspan="2"></td></tr><tr><td>Materials Processing</td><td>$ 608,702</td><td>94.0%</td><td>$ 492,013</td><td>87.5%</td><td>$ 419,443</td><td>88.4%</td></tr><tr><td>Other applications:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Advanced Applications</td><td>26,190</td><td>4.0</td><td>43,052</td><td>7.6</td><td>25,918</td><td>5.5</td></tr><tr><td>Communications</td><td>9,135</td><td>1.4</td><td>21,706</td><td>3.9</td><td>20,368</td><td>4.3</td></tr><tr><td>Medical</td><td>4,007</td><td>0.6</td><td>5,757</td><td>1.0</td><td>8,753</td><td>1.8</td></tr><tr><td>Total other applications:</td><td>39,332</td><td>6.0</td><td>70,515</td><td>12.5</td><td>55,039</td><td>11.6</td></tr><tr><td>Total</td><td>$ 648,034</td><td>100.0%</td><td>$ 562,528</td><td>100.0%</td><td>$ 474,482</td><td>100.0%</td></tr></table>

One of our customers, Han's Laser, accounted for 11% of our net sales for the year ended December 31, 2013. No other customer accounted for 10% or more of our net sales for 2013. None of our customers accounted for 10% or more of our net sales for the years ended December 31, 2012 or 2011.



Our net sales (in thousands) were derived from customers in the following geographic regions:

<table><tr><td rowspan="2"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td></td><td colspan="2">% of Total</td><td colspan="2">% of Total</td><td colspan="2">% of Total</td></tr><tr><td>United States and other North America (1)</td><td>$ 116,935</td><td>18.0%</td><td>$ 108,316</td><td>19.3%</td><td>$ 86,181</td><td>18.2%</td></tr><tr><td>Europe:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Germany</td><td>65,147</td><td>10.1</td><td>89,848</td><td>16.0</td><td>76,279</td><td>16.1</td></tr><tr><td>Other including Eastern Europe/CIS</td><td>140,279</td><td>21.7</td><td>110,860</td><td>19.7</td><td>103,305</td><td>21.8</td></tr><tr><td>Asia and Australia:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Japan</td><td>67,981</td><td>10.5</td><td>69,576</td><td>12.4</td><td>63,261</td><td>13.3</td></tr><tr><td>China</td><td>192,134</td><td>29.7</td><td>138,782</td><td>24.7</td><td>104,560</td><td>22.0</td></tr><tr><td>Other</td><td>64,346</td><td>9.9</td><td>43,445</td><td>7.7</td><td>36,937</td><td>7.8</td></tr><tr><td>Rest of World</td><td>1,212</td><td>0.1</td><td>1,701</td><td>0.2</td><td>3,959</td><td>0.8</td></tr><tr><td>Total</td><td>$ 648,034</td><td>100.0%</td><td>$ 562,528</td><td>100.0%</td><td>$ 474,482</td><td>100.0%</td></tr></table>

(1) The substantial majority of sales in North America are to customers in the United States.

## Backlog

At December 31, 2013, our backlog of orders (generally scheduled for shipment within one year) was approximately $265.0 million compared to $203.0 million at December 31, 2012. At December 31, 2013, our backlog included $132.6 million of orders with firm shipment dates and $132.4 million of frame agreements that we expect to ship within one year, compared to $102.0 million of orders with firm shipment dates and $101.0 million of frame agreements at December 31, 2012. Frame agreements generally are agreements without committed shipment dates. Orders used to compute backlog are generally cancelable without substantial penalties. Historically, we have not experienced a significant cancellation rate. We manage the risk of cancellation by establishing the right to charge a cancellation fee that generally covers a portion of the purchase price, any materials and development costs incurred prior to the order being canceled. Our ability to enforce this right depends on many factors including, but not limited to, the customer’s requested length of delay, the number of other outstanding orders with the customer and our ability to quickly convert the canceled order to another sale.

We anticipate shipping a substantial majority of the present backlog during fiscal year 2014. However, our backlog at any given date is not necessarily indicative of actual sales for any future period.

## Sales, Marketing and Support

We market our products internationally primarily through our direct sales force. Our direct sales force sells to end users, OEMs and systems integrators. Once our fiber laser products are designed into an OEM system, the OEM’s sales force markets its systems, allowing us to take advantage of numerous OEMs sales forces, each typically having several sales persons in locations other than where our sales offices are located. We have sales offices in the countries in which we have major manufacturing: United States, Germany and Russia. We also have sales offices in the following countries: China, France, India, Italy, Japan, Poland, Singapore. South Korea, Spain, Turkey and the United Kingdom. We have materials processing application centers in the United States, Germany, Russia, China, Italy, Japan and South Korea, which we use to demonstrate our products and develop new applications. Our application centers are fundamental to developing new laser applications for customers and assisting them in integrating lasers into their production processes.

To a lesser extent, we market through agreements with independent sales representatives and distributors. Sales to foreign customers may be priced in non-U.S. currencies and are therefore subject to currency exchange fluctuations.

We maintain a customer support and field service staff in our major markets. We work closely with customers and independent representatives to service equipment and to train customers to use our products. We have expanded our support and field service, particularly in locations where customer concentration or volume requires local service capabilities. We repair products at our facilities or at customer sites.

We typically provide one to three-year parts and service warranties on our lasers and amplifiers. Most of our sales offices provide support to customers in their respective geographic areas. Warranty reserves have generally been sufficient to cover product warranty repair and replacement costs.



## Manufacturing

Vertical integration is one of our core business strategies through which we control our proprietary processes and technologies as well as the supply of key components and assemblies. We believe that our vertically integrated business model gives us the following advantages:

• maintaining a technological lead over competitors;

• reducing component and final product costs compared to market prices available to competitors;

• ensuring access to critical components, enabling us to better meet customer demands;

• controlling performance, quality and consistency;

• enabling rapid development and deployment of new products and technologies;

• short lead times for customer deliveries; and

• limiting the spread our trade secrets.

Our vertically integrated manufacturing operations include optical preform making, specialty fiber drawing, semiconductor wafer growth, diode processing and packaging, specialty optical component manufacturing, fiber block and fiber module assembly for different power units, circuit board, software and electronics development and production, machining of metal parts and casings, final assembly, as well as testing, tool manufacturing and automated production systems that we use in our own manufacturing processes. Over the last several years, we added additional production capabilities, including four multi-wafer growth reactors, diode test stations, fiber pre-form and fiber drawing equipment and low, mid and high-power production and testing, in order to increase our capacity as well as reduce the risks associated with our production process.

We operate our own semiconductor foundry for the production of the multi-mode single-emitter diodes. Diodes are the pumps that are used as the light source in each device we make. We also process, package and extensively test all of our diodes. Because pump diodes represent a significant component cost of the final laser or amplifier, we have chosen to develop internal manufacturing capabilities for diodes. As a result of our high-volume production levels of pump diodes, proprietary processes and use of limited chip designs, we have been able to increase yields, lower component costs and assure high quality. We also design, manufacture and optimize many of our own test instruments, diode test racks, robotic and automated assembly tools and machines.

We developed these proprietary components, manufacturing tools, equipment and techniques over many years in an effort to address the major issues that had been inhibiting the development of fiber laser technology and to provide products that differentiate us from our competitors. We believe that the proprietary components, manufacturing tools, equipment, techniques and software utilized in all of our product lines provide extensive barriers to potential competitors. Generally, we do not sell our proprietary components to third parties in significant quantities. Using our technology platform, we configure standard products based upon each customer's specifications. Through our vertically integrated manufacturing operations, we believe that we can develop, test and produce new products and configurations with higher performance and reliability and in less time than by working with external vendors. We have developed proprietary testing methodologies that allow us to develop higher power components and products in short periods of time, enable us to introduce products to the market more quickly, capitalize on new opportunities and provide superior service to our customers.

Our in-house manufacturing generally includes only those operations and components that are critical to the protection of our intellectual property, the reduction of our costs or the achievement of performance and quality standards. We purchase from vendors common and specialized mechanical, electrical and optical parts and raw materials.

## Research and Development

We have extensive research and development experience in laser materials, fiber, optoelectronic and optomechanical components. We have assembled a team of scientists and engineers with specialized experience and extensive knowledge in fiber lasers and amplifiers, materials science, optics, critical components, testing and manufacturing process design.

We focus our research and development efforts on designing and introducing new and improved standard and customized products and complementary products, and the mass production of components for our products. In addition to our cladding-pumped specialty fiber platform, we have core competencies in high-power multi-mode and single-mode semiconductor laser diodes, diode packaging, specialty active and passive optical fibers, high-performance optical components, fiber gain blocks and fiber modules, as well as splicing and combining techniques and high-stress test methods. Our research and development efforts are aided by our vertical integration and our proprietary high-stress testing techniques that result in accelerated development cycles. The strategy of developing our proprietary components has allowed us to leverage our optical experience.



and large volume requirements to lower the cost of our products. We concentrate our research and development efforts on advancements in performance as well as capacity to hold and produce higher optical power levels.

Our research and development efforts are also directed at expanding our product line by increasing power levels, improving beam quality and electrical efficiency, decreasing the size of our products and lowering the cost per watt. We also are engaged in research projects to expand the spectral range of products that we offer, including the development of UV pulsed fiber lasers, ultra-fast pulsed fiber lasers, and a mid-infrared (“IR”) line of lasers from 2 to 5 microns, with a hybrid fiber and crystal laser design. Our team of experienced scientists and engineers works closely with many of our customers to develop and introduce custom products that address specific applications and performance requirements.

We incurred research and development costs of approximately $41.7 million, $31.4 million and $25.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. We expect to continue our commitment to research and development and to introduce new products, systems and complementary products that would allow us to maintain our competitive position. See Item 7, “Management’s Discussion and Analysis of Financial Condition of Results of Operations.”

## Intellectual Property

We seek to protect our proprietary technology primarily through the U.S. and foreign laws affording protection for trade secrets, and to seek U.S. and foreign patent, copyright and trademark protection of our products and processes where appropriate. Historically, we relied primarily on trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. We seek to protect our trade secrets and proprietary information, in part, by requiring our employees to enter into agreements providing for the maintenance of confidentiality and the assignment to us of rights to inventions that they make while we employ them. We also enter into non-disclosure agreements with our consultants and suppliers to protect confidential information delivered to them. We believe that our vertical integration, including our long experience in making a wide range of specialty and high-power capacity components, as well as our technology platform make it difficult for others to reverse engineer our products.

We have increased our efforts to expand our patent portfolio globally. As of February 28, 2014, we have over 160 patents issued and over 250 pending patent applications worldwide relating principally to optical fiber lasers, amplifiers, bulk optics, semiconductors, and laser and telecommunications systems. With respect to the United States, we were issued 11patents and we filed 19 applications on new subject matter in 2013. In February 2008, we purchased a portfolio of photonics patents from British Telecommunications plc in the fields of optical fiber lasers and amplifiers, semiconductor devices, integrated optics, fiber gratings, high-speed systems and optical networking. Intellectual property rights, including those that we own, those that we license and those of others, involve significant risks. See Item 1A, “Risk Factors-Our Inability to Protect Our Intellectual Property and Proprietary Technologies Could Result in the Unauthorized Use of Our Technologies by Third Parties, Hurt Our Competitive Position and Adversely Affect Our Operating Results.”

## Competition

Our markets are competitive and characterized by rapidly changing technology and continuously evolving customer requirements. We believe that the primary competitive factors in our markets are:

• product performance and reliability;

• quality and service support;

• price and value to the customer;

• ability to manufacture and deliver products on a timely basis;

• ability to achieve qualification for and integration into OEM systems;

• ability to meet customer specifications; and

• ability to respond quickly to market demand and technological developments.

We believe we compete favorably with respect to these criteria. In the materials processing market, the competition is fragmented and includes a large number of competitors. We compete with makers of high-power CO \( _{2} \) , YAG and disc lasers, including Fanuc, Rofin-Sinar Technologies, Inc. and Trumpf GmbH + Co. KG, makers of mid and low-power CO \( _{2} \) , solid-state lasers such as Coherent, Inc., GSI Group Inc., Newport Corporation and Rofin-Sinar Technologies, Inc., and direct diode lasers such as Laserline GmbH. We also compete with fiber laser makers, including Rofin-Sinar Technologies, Inc., Trumpf GmbH + Co. KG, GSI Group Inc., Coherent Inc., Hypertherm, Inc., Newport Corporation, The Furukawa Electric Co., Ltd., Keopsys SA, Mitsubishi Cable Industries, Ltd., Miyachi Unitek Corporation, Raycus Fiber Laser Technologies Co. Ltd., Maxphotonics Co., Ltd. and JDS Uniphase Corporation. Several competitors recently introduced fiber lasers or announced plans to introduce



fiber lasers that compete with our high-power products. We believe that we compete favorably with other makers of fiber lasers on price and value to customer, reliability, service and performance.

We also compete in the materials processing, advanced and medical applications markets with end users that produce their own solid-state and gas lasers as well as with manufacturers of non-laser methods and tools, such as resistance welding and cutting dies in the materials processing market and scalpels in the medical market.

Some of our competitors are larger than we are and have substantially greater financial, managerial and technical resources, more extensive distribution and service networks, greater sales and marketing capacity, and larger installed customer bases than we do.

## Employees

As of December 31, 2013, we had approximately 2,800 full-time employees, including 270 in research and development, 2,200 in manufacturing operations, 120 in sales, service and marketing, and 210 in general and administrative functions. Of our total full-time employees at our principal facilities, approximately 930 were in the United States, 770 were in Germany, 760 were in Russia and 100 were in China. We have never experienced a work stoppage and none of our employees is subject to a collective bargaining agreement. We believe that our current relations with our employees are good.

## Government Regulation

## Regulatory Compliance

The majority of our laser and amplifier products sold in the United States are classified as Class IV Laser Products under the applicable rules and regulations of the Center for Devices and Radiological Health (“CDRH”) of the U.S. Food and Drug Administration (“FDA”). The same classification system is applied in the European markets. Safety rules are formulated with “Deutsche Industrie Norm” (i.e., German Industrial Standards) or International Organization for Standardization (“ISO”) standards, which are internationally harmonized.

CDRH regulations generally require a self-certification procedure pursuant to which a manufacturer must submit a filing to the CDRH with respect to each product incorporating a laser device, make periodic reports of sales and purchases and comply with product labeling standards, product safety and design features and informational requirements. The CDRH is empowered to seek fines and other remedies for violations of their requirements. We believe that our products are in material compliance with applicable laws and regulations relating to the manufacture of laser devices.

## Environmental Regulation

Our operations are subject to 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 believe that our operations are in material compliance with applicable environmental protection laws and regulations. Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by federal and state laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage and the resources of our business.

## Availability of Reports

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available free of charge on our web site at www.ippghotonics.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”) (www.sec.gov). We will also provide electronic or paper copies of such reports free of charge, upon request made to our Corporate Secretary.

## ITEM 1A. RISK FACTORS

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



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

Our business depends substantially upon capital expenditures by our customers, particularly by manufacturers in the materials processing market, which includes general manufacturing, automotive, aerospace, other transportation, heavy industry, electronics and photovoltaic industries. Approximately 94% of our revenues in 2013 were from customers in the materials processing market. Although applications in this market are broad, sales for these applications are cyclical and have historically experienced sudden and severe downturns and periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products that we manufacture and market. For example, our sales decreased by 25% in the materials processing market in 2009 as a result of the global economic recession. For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in these industries or markets, which, in turn, depend upon the demand for their products or services. Decreased demand for products and services from customers for these applications during an economic downturn may lead to decreased demand for our products, which would reduce our sales and margins. We may not be able to respond by decreasing our expenses quickly enough, due in part, to our fixed overhead structure related to our vertically integrated operations and our commitments to continuing investment in research and development.

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

Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including the materials processing, telecommunications, advanced and medical markets and applications in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates of growth or contraction in the markets and applications we serve and demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures very difficult to make. Our sales have benefited in 2013, 2012 and 2011 from our increased sales of mid and high-power lasers to end users in China. A slowing of economic growth, or a recession in China, would slow our growth rates or may result in a decrease in our sales. Adverse changes have occurred and may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, declines in stock markets, contraction of credit availability, declines in real estate values, or other factors affecting economic conditions generally. These changes may negatively affect the sales of our lasers and amplifiers, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, increase the risk of loss on investments, or increase costs associated with manufacturing and distributing products. A prolonged economic downturn could have a material adverse effect on our business, financial condition and results of operations.

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

Our level of sales will depend on our ability to generate sales of fiber lasers in applications where conventional lasers, such as CO \( _{2} \)  and YAG lasers, have been used or in new and developing markets and applications for lasers where they have not been used previously. To date, a significant portion of our revenue growth has been derived from sales of fiber lasers primarily for applications where CO \( _{2} \)  and YAG lasers historically have been used. In order to maintain or increase market demand for our fiber laser products, we will need to devote substantial resources to:

• demonstrate the effectiveness of fiber lasers in new applications;

• extend our product line to address different applications than our current products;

• increase our direct and indirect sales efforts;

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

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

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



If fiber lasers do not achieve broader market acceptance or if market penetration occurs more slowly than we expect, sales and profitability may be negatively impacted.

Fiber lasers are relatively new when compared to conventional lasers and our future success depends on the development and broader acceptance of fiber lasers. Potential customers may be reluctant to adopt fiber lasers as an alternative to conventional lasers, such as CO \( _{2} \)  and YAG, and non-laser methods, such as mechanical tools. Such potential customers may have substantial investments and know-how related to their existing laser and non-laser technologies, and may perceive risks relating to the reliability, quality, usefulness and profitability of integrating of fiber lasers in their systems when compared to other laser or non-laser technologies available in the market or that they manufacture themselves. Many of our target markets, such as the automotive, machine tool and other manufacturing, communications and medical industries, have historically adopted new technologies slowly. These markets often require long test and qualification periods or lengthy government approval processes before adopting new technologies. As a result, we may expend significant resources and time to qualify our products for a new customer application, and we cannot assure that our products will be qualified or approved for such markets. If acceptance of fiber laser technology and of our fiber lasers in particular does not continue to grow within the markets that we serve, then the opportunities to maintain or increase our revenues and profitability may be severely limited.

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

We have a high fixed cost base due to our vertically integrated business model, including the fact that approximately 79% of our approximately 2,800 employees as of December 31, 2013 were employed in our manufacturing operations. We may not adjust these fixed costs quickly enough to adapt to rapidly changing market conditions. Our gross profit, in absolute dollars and as a percentage of net sales, is impacted by our sales volume, the corresponding absorption of fixed manufacturing overhead expenses and manufacturing yields. In addition, because we are a vertically integrated manufacturer and design and manufacture our key specialty components, insufficient demand for our products may subject us to the risks of high inventory carrying costs and increased inventory obsolescence. If our capacity and production levels are not properly sized in relation to expected demand, we may need to record write-downs for excess or obsolete inventory. Because we are vertically integrated, the rate at which we turn inventory has historically been low when compared to our cost of sales. We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales. As a result, we continue to expect to have a significant amount of working capital invested in inventory. Changes in our level of inventory lead to an increase in cash generated from our operations when inventory is sold or a decrease in cash generated from our operations at times when the amount of inventory increases.

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

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

To maintain our competitive position as the leading developer and manufacturer of fiber lasers and to meet anticipated demand for our products, we invest significantly in the expansion of our manufacturing and operations throughout the world and may do so in the future. We incurred in the past and will incur in the future significant costs associated with the acquisition, build-out and preparation of our facilities. We had capital expenditures of $70.9 million and $68.2 million in 2013 and 2012, respectively, and we expect to incur approximately $70 million in capital expenditures, excluding acquisitions, in 2014. In connection with these projects, we may incur cost overruns, construction delays, labor difficulties or regulatory issues which could cause our capital expenditures to be higher than what we currently anticipate, possibly by a material amount, which would in turn adversely impact our operating results. Moreover, we may experience higher costs due to yield loss, production inefficiencies and equipment problems until any operational issues associated with the opening of new manufacturing facilities are resolved.

The markets for our products are highly competitive and increased competition could increase our costs, reduce our sales or cause us to lose market share.

The industries in which we operate are characterized by significant price and technological competition. Our fiber laser and amplifier products compete with conventional laser technologies and amplifier products offered by several well-established companies, some of which are larger and have substantially greater financial, managerial and technical resources, more



extensive distribution and service networks, greater sales and marketing capacity, and larger installed customer bases than we do. Also, we compete with widely used non-laser production methods, such as water-jet cutting and resistance welding. We believe that competition will be particularly intense from makers of  \( CO_{2} \) , YAG, disc and direct diode lasers, as these makers of conventional solutions may lower prices to maintain current market share and have committed significant research and development resources to pursue opportunities related to these technologies.

In addition, we face competition from a growing number of fiber laser makers, including Rofin-Sinar Technologies, Inc., Trumpf GmbH + Co. KG, GSI Group Inc., Coherent Inc., Hypertherm, Inc., Newport Corporation, The Furukawa Electric Co., Ltd., Keopsys SA, Mitsubishi Cable Industries, Ltd., Miyachi Unitek Corporation, Raycus Fiber Laser Technologies Co. Ltd., Maxphotonics Co., Ltd. and JDS Uniphase Corporation. Competition from other fiber laser makers has increased and some have introduced fiber lasers or announced plans to introduce fiber lasers that compete with our products. We may not be able to successfully differentiate our current and proposed products from our competitors' products and current or prospective customers may not consider our products to be superior to competitors' products. To maintain our competitive position, we believe that we will be required to continue a high level of investment in research and development, application development and customer service and support, and to react to market pricing conditions. We may not have sufficient resources to continue to make these investments and we may not be able to make the technological advances or price adjustments necessary to maintain our competitive position. In addition, there are no assurances that our investments in research and development, application development and customer service and support will be successful. We also compete against our OEM customers' internal production of competitive laser and amplifier technologies.

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

Products in the laser and amplifier industries generally, and our products specifically, are experiencing and may in the future continue to experience a decline in average selling prices (“ASPs”) as a result of new product and technology introductions, increased competition and price pressures from significant customers. 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.

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

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

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

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

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

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

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

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

• the gain or loss of a key customer;

• product or customer mix;

• competitive pricing pressures;

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

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

• our ability to collect outstanding accounts receivable balances;



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

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

• foreign currency fluctuations; and

• our ability to control expenses.

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

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

We generally do not enter into long-term agreements with our customers obligating them to purchase our fiber lasers or amplifiers. Our business is characterized by short-term purchase orders and shipment schedules and, in some cases, orders may be canceled or delayed without significant penalty. As a result, it is difficult to forecast our revenues and to determine the appropriate levels of inventory required to meet future demand. In addition, due to the absence of long-term volume purchase agreements, we forecast our revenues and plan our production and inventory levels based upon the demand forecasts of our OEM customers, end users and distributors, which are highly unpredictable and can fluctuate substantially. This could lead to increased inventory levels and increased carrying costs and risk of excess or obsolete inventory due to unanticipated reductions in purchases by our customers. In addition, provisions have been recorded as a result of changes in market prices of certain components, the value of those inventories that was realizable through finished product sales due to declines in certain end-market demand and uncertainties related to the recoverability of the value of inventories due to technological and product changes, and excess quantities. In this regard, we recorded provisions for slow-moving, obsolete or excess inventory totaling $15.1 million, $8.2 million and $6.1 million in 2013, 2012 and 2011, respectively. If our OEM customers, end users or distributors fail to accurately forecast the demand for our products, fail to accurately forecast the timing of such demand, or are unable to consistently negotiate acceptable purchase order terms with customers, our results of operations may be adversely affected.

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

We currently have no binding commitments or agreements to make any acquisitions and have limited experience in making acquisitions. In the future, we may make acquisitions of and investments in new businesses, products, patents and technologies and expand into new geographic areas, or we may acquire operations, products or technologies that expand our current capabilities. Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs and reduce the value of the acquired company, asset or technology to us. For example, if we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms. Even if we are successful, we may not be able to integrate the acquired businesses, products, patents or technologies into our existing business and products. As a result of the rapid pace of technological change in our industry, we may misjudge the long-term potential of an acquired business, product, patent or technology, or the acquisition may not be complementary to our existing business. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management’s attention and require considerable cash outlays at the expense of our existing operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability and result in dilution to our existing and future stockholders.

We rely on the significant experience and specialized expertise of our senior management and scientific staff and if we are unable to retain these key employees and attract other highly skilled personnel necessary to grow our business successfully, our business and results of operations could suffer.

Our future success is substantially dependent on the continued service of our executive officers, particularly our founder and chief executive officer, Dr. Valentin P. Gapontsev, age 75, and the managing director of our German subsidiary IPG Laser



GmbH and Senior Vice-President, Europe, Dr. Eugene Scherbakov, age 66, our highly trained team of scientists, many of whom have numerous years of experience and specialized expertise in optical fibers, semiconductors and optical component technology, and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may leave, which could harm our business. The members of our scientific staff who are expected to make significant individual contributions to our business are also members of our executive management team as disclosed under Item 10, “Directors, Executive Officers and Corporate Governance” below. Furthermore, our business requires scientists and engineers with experience in several disciplines, including physics, optics, materials sciences, chemistry and electronics. We will need to continue to recruit and retain highly skilled scientists and engineers for certain functions. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled research and development, managerial, operations, sales, marketing and customer service personnel. If we fail to attract, integrate and retain the necessary personnel, our ability to extend and maintain our scientific expertise and grow our business could suffer significantly.

We are subject to litigation alleging that we are infringing third-party intellectual property rights. Intellectual property claims could result in costly litigation and harm our business.

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

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. In 2007, we settled two patent infringement lawsuits filed against us and in 2010 we settled another patent infringement lawsuit filed against us. Following a federal jury trial in 2011, we won a patent infringement lawsuit asserted by IMRA America, Inc. in 2006 alleging that certain products we produce infringe one U.S. patent allegedly owned by IMRA America. IMRA America has also informed us that it has patents and applications in the United States and in foreign jurisdictions directed to fiber lasers and fiber amplifiers, but has not asserted them against us. We are engaged in opposition proceedings in Japan and Germany with respect to two patents allegedly owned by IMRA America related to the patent IMRA America asserted against us in the United States. In Japan, the patent office invalidated two claims, and subsequently the Japanese IP High Court concluded that the remaining 49 claims of an IMRA America patent were invalid. IMRA is appealing the IP High Court decision. The German Patent and Trademark Office concluded that IMRA’s claims corresponding to its original patent request and several auxiliary requests were not patentable and found that claims relating to IMRA’s final auxiliary request were patentable. We are appealing a portion of this decision favorable to IMRA.

We were named a defendant in an action by a former consultant filed in August 2013 in the United States District Court for the District of Massachusetts. The plaintiff alleges in his complaint that we misappropriated certain trade secrets from him relating to beam couplers and beam switches in connection with a consulting relationship, that we engaged in unfair trade practices and that he should be identified as an inventor on a patent owned by us. He seeks damages in an unspecified amount, double damages for misappropriation of trade secrets, treble damages for unfair trade practices and correction of inventory on one patent. We have not answered the complaint. Although we intend to vigorously contest the claims against us, we cannot predict the outcome of the proceeding.

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

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

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

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



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

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

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

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

Given our reliance on trade secret laws, others may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we have made. Therefore, our intellectual property efforts may be insufficient to maintain our competitive advantage or to stop other parties from commercializing similar products or technologies. Many countries outside of the United States afford little or no protection to trade secrets and other intellectual property rights. Intellectual property litigation can be time-consuming and expensive, and there is no guarantee that we will have the resources to fully enforce our rights. If we are unable to prevent misappropriation or infringement of our intellectual property rights, or the independent development or design of similar technologies, our competitive position and operating results could suffer.

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

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

Also, we purchase certain raw materials used to manufacture our products and other components, such as semiconductor wafer substrates, diode packages, modulators, micro-optics, bulk optics and high-power beam delivery products, from single or limited-source suppliers. We typically purchase our components and materials through purchase orders or agreed-upon terms



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

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

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

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

We rely on a few customers for a significant portion of our sales. In the aggregate, our top five customers accounted for 21%, 16% and 17% of our consolidated net sales in 2013, 2012 and 2011, respectively. Our largest customer is located in China and accounted for 11%, 7% and 8% of sales in 2013, 2012 and 2011, respectively. We generally do not enter into agreements with our customers obligating them to purchase our fiber lasers or amplifiers. Our business is characterized by short-term purchase orders and shipment schedules. If any of our principal customers discontinues its relationship with us, replaces us as a vendor for certain products or suffers downturns in its business, our business and results of operations could be adversely affected.

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

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

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

We have significant facilities in and our products are sold in numerous countries. The United States, Germany, Japan, Russia, China, Italy and Korea are our principal markets. A substantial majority of our revenues are derived from customers, and we have substantial tangible assets, outside of the United States. We anticipate that foreign sales will continue to account



for a significant portion of our revenues in the foreseeable future. Our operations and sales in these markets are subject to risks inherent in international business activities, including:

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

• fluctuations in the values of foreign currencies;

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

- compliance with a wide variety of domestic and foreign laws and regulations and unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;

• certification requirements;

• environmental regulations;

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

• potentially adverse tax consequences;

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

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

• preference for locally produced products;

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

• seasonal reductions in business activities;

• fluctuations in freight rates and transportation disruptions;

• investment restrictions or requirements;

• repatriation restrictions or requirements; and

• export and import restrictions.

Political and economic instability and changes in governmental regulations could adversely affect both our ability to effectively operate our foreign sales offices and the ability of our foreign suppliers to supply us with required materials or services. Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We are subject to risks of doing business in Russia through our subsidiary, NTO IRE-Plus, which provides components and test equipment to us and sells finished fiber devices to customers in Russia and neighboring countries. Further, almost 30% of our sales are to customers in China. The results of our operations, business prospects and facilities in these two countries are subject to the economic and political environment in Russia and China. In recent years, both countries have undergone substantial political, economic and social change. As is typical of an emerging economy, neither China nor Russia possesses a well-developed business, financial, legal and regulatory infrastructure that would generally exist in a more mature free market economy. In addition, tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. The future economic direction of these two emerging market countries remains largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory and political developments. Our failure to manage the risks associated with our operations in Russia and China and our other existing and potential future international business operations could have a material adverse effect upon our results of operations.

We are subject to many laws governing our international operations, including those that prohibit improper payments to government officials, including but not limited to the U.S. Foreign Corrupt Practices Act and the anti-corruption laws of the countries in which we operate. Violations of these laws, which are complex and often difficult to interpret and apply, could result in significant criminal penalties or sanctions that could materially adversely affect our business, financial condition, operating results and cash flows.



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

We conduct our business and incur costs in the local currency of most countries in which we operate. In 2013, our net sales outside the United States represented a substantial majority of our total sales. We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it operates. Changes in exchange rates can also affect our results of operations by changing the U.S. dollar value of sales and expenses denominated in foreign currencies. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency transaction or translation risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers, which may have an adverse effect on our financial condition, cash flows and profitability.

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

As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. Significant judgment is required to determine worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries or states with differing tax rates, transfer pricing rules, changes in the valuation of our deferred tax assets and liabilities, or changes in the tax laws. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. From time to time the United States, foreign and state governments make substantive changes to tax rules and the application of rules to companies, including various announcements from the United States government potentially impacting our ability to defer taxes on international earnings. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our operating results and financial condition.

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

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

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

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

Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters.

Federal securities laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations such as NASDAQ and the NYSE, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law violations and other laws such as anti-bribery laws. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. Complying with evolving interpretations of new or changed legal requirements



may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from revenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed.

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

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

Difficulties with our information technology systems could harm our business and results of operation. If our network security measures are breached and unauthorized access is obtained to our technology or data or customer data, we may incur significant legal and financial exposure and liabilities.

Like many multinational corporations, we maintain several information technology systems, including software products licensed from third parties. These systems vary from country to country. Any system, network or Internet failures, misuse by system users, the hacking into or disruption caused by the unauthorized access by third parties or loss of license rights could disrupt our ability to timely and accurately manufacture and ship products or to report our financial information in compliance with the timelines mandated by the SEC. Any such failure, misuse, hacking, disruptions or loss would likely cause a diversion of management’s attention from the underlying business and could harm our operations. In addition, a significant failure of our various information technology systems could adversely affect our ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

As part of our day-to-day business, we store our data and certain data about our customers in our information technology system. While our system is designed with access security, if a third party gains unauthorized access to our data or technology, including information regarding our customers, such security breach could expose us to a risk of loss of this information, loss of business, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, employee information or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.

We are subject to export control regulations that could restrict our ability to increase our international sales and may adversely affect our business.

A significant part of our business involves the export of our products to other countries. The U.S. government has in place a number of laws and regulations that control the export, re-export or transfer of U.S.-origin products, software and technology. The governments of other countries in which we do business have similar regulations regarding products, software and technology originating in those countries. These laws and regulations may require that we obtain a license before we can export, re-export or transfer certain products, software or technology. The requirement to obtain a license could put us at a competitive disadvantage by restricting our ability to sell products to customers in certain countries or by giving rise to delays or expenses related to obtaining a license. In applying for a license and responding to questions from licensing authorities, we have experienced and, in the future, may experience delays in obtaining export licenses based on issues solely within the control of the applicable government agency. Under the discretion of the issuing government agency, an export license may permit the export of one unit to a single customer or multiple units to one or more customers. Licenses may also include conditions that limit the use, resale, transfer, re-export, modification, disassembly, or transfer of a product, software or technology after it is exported without first obtaining permission from the relevant government agency. Failure to comply with these laws and regulations could result in government sanctions, including substantial monetary penalties, denial of export privileges, debarment from government contracts and a loss of revenues. Delays in obtaining or failure to obtain required



export licenses may require us to defer shipments for substantial periods or cancel orders. Any of these circumstances could adversely affect our operations and, as a result, our financial results could suffer.

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

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

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

We occasionally borrow under our existing credit facilities to fund operations, including working capital investments. Our major credit lines in the United States and Germany expire in June 2015 and June 2014, respectively. In the past, market disruptions experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development. These disruptions may include turmoil in the financial services industry, unprecedented volatility in the markets where our outstanding securities trade, and general economic downturns in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.

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

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

Sales of a substantial number of shares of common stock, or the perception that sales could occur, could adversely affect the market price of our common stock. As of December 31, 2013, we had 51,930,978 shares of common stock outstanding and 2,699,897 shares subject to outstanding options. We have registered all shares of common stock that we may issue under our stock option plans and our employee stock ownership plan. In addition, all of the unregistered shares of our common stock are now eligible for sale under Rule 144 or Rule 701 under the Securities Act. As these shares are issued, they may be freely sold in the public market subject, in the case of any awards under our stock-based compensation plans, to applicable vesting requirements.

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



Dr. Valentin P. Gapontsev, our Chairman and Chief Executive Officer, and three trusts he created collectively control approximately 34% of our voting power and have a significant influence on the outcome of director elections and other matters requiring stockholder approval, including a change in corporate control.

Dr. Valentin P. Gapontsev, our Chairman and Chief Executive Officer, and IP Fibre Devices (UK) Ltd. (IPFD), of which Dr. Gapontsev is the managing director, together with three trusts he created beneficially own approximately 34% of our common stock. Trustees of the trusts are officers or employees of the Company.

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

• election of our directors;

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

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

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

Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control of our company, even if a change in control would be beneficial to our stockholders.

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

• authorizing the issuance of “blank check” preferred stock;

• establishing a classified board;

• providing that directors may only be removed for cause;

• prohibiting stockholder action by written consent;

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

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

• supermajority stockholder approval to change these provisions.

Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with our company or obtaining control of our company. Specifically, Section 203 of the Delaware General Corporation Law, which will apply to our company following such time as Dr. Gapontsev (together with his affiliates and associates) ceases to beneficially own 25% or more of the total voting power of our outstanding shares, may prohibit business combinations with stockholders owning 15% or more of our outstanding voting stock.

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

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

## ITEM 1B. UNRESOLVED STAFF COMMENTS

None.



## ITEM 2. PROPERTIES

Our main facilities at December 31, 2013 include the following:

<table><tr><td>Location</td><td>Owned or Leased</td><td>Lease Expiration</td><td>Approximate Size (sq. ft.)</td><td>Primary Activity</td></tr><tr><td>Oxford, Massachusetts</td><td>Owned</td><td>—</td><td>365,000</td><td>Diodes, components, complete device manufacturing, administration</td></tr><tr><td>Burbach, Germany</td><td>Owned</td><td>—</td><td>251,000</td><td>Optical fiber, components, final assembly, complete device manufacturing, administration</td></tr><tr><td>Fryazino, Russia</td><td>Leased</td><td>July 2016</td><td>79,000</td><td>Components, complete device</td></tr><tr><td></td><td>Owned</td><td></td><td>260,000</td><td>Manufacturing, administration</td></tr><tr><td>Manchester, New Hampshire</td><td>Leased</td><td>December 2016</td><td>63,000</td><td>Components, complete device manufacturing, administration</td></tr><tr><td>Mountain View, California</td><td>Leased</td><td>February 2014</td><td>10,000</td><td>Components, complete device manufacturing, administration</td></tr><tr><td>Beijing, China</td><td>Owned</td><td>—</td><td>35,000</td><td>Administration, service</td></tr><tr><td></td><td>Leased</td><td>January 2019</td><td>23,800</td><td>Service</td></tr><tr><td></td><td>Leased</td><td>March 2014</td><td>12,800</td><td>Administration, service</td></tr><tr><td>Shanghai, China</td><td>Leased</td><td>April 2016</td><td>19,250</td><td>Administration, service</td></tr><tr><td>Cerro Maggiore, Italy</td><td>Owned</td><td>—</td><td>33,000</td><td>Complete device manufacturing, administration</td></tr><tr><td>Daejeon, South Korea</td><td>Owned</td><td>—</td><td>24,000</td><td>Administration, service</td></tr><tr><td>Novi, Michigan</td><td>Owned</td><td>—</td><td>16,000</td><td>Administration, service</td></tr><tr><td>Yokohama, Japan</td><td>Owned</td><td>—</td><td>11,000</td><td>Administration, service</td></tr><tr><td>Chubu, Japan</td><td>Owned</td><td>—</td><td>10,000</td><td>Administration, service</td></tr><tr><td colspan="3">Total sq.ft. occupied:</td><td>1,212,850</td><td></td></tr></table>

We maintain our corporate headquarters in Oxford, Massachusetts, and conduct our major research and development activities in Oxford, Massachusetts, Burbach, Germany and Fryazino, Russia. We operate four manufacturing facilities for lasers, amplifiers and components, which are located in the United States, Germany, Russia and Italy. We also manufacture laser systems in the United States, Germany, Russia and India. We are committed to meeting internationally recognized manufacturing standards. Our facilities in the United States and Germany are ISO 9001 certified and we have ISO certification in Russia for specific products. In addition, research and development are also conducted at our facilities in Manchester, New Hampshire, Birmingham, Alabama, Mountain View, California and Marlborough, Massachusetts. We have sales personnel at each of our manufacturing facilities, and at offices in Novi, Michigan; Santa Clara, California; London, England; Illkirch, France; Bangalore, India; Beijing, China; Istanbul; Turkey; Singapore; Barcelona, Spain and Gliwice, Poland.

We plan to continue our expansion of our operations in Russia, Germany and the United States to meet the demand for our products and our sales and support needs. We believe that we will be able to obtain additional land or commercial space as needed. The additional expansion for Russia, Germany and the United States will provide an approximately additional 228,000 square feet, 25,000 square feet, and 34,000 square feet (excludes building and land purchases in 2014 for our California and Alabama locations), respectively once these additions are completed and occupied. With the amount occupied as of December 31, 2013, once all expansions are completed in 2014, we will have approximately 1.5 million square feet of occupied space to continue to execute on our planned strategies.

## ITEM 3. LEGAL PROCEEDINGS

From time to time, we are party to various legal claims and legal proceedings and other disputes incidental to our business, such as employment, intellectual property or product issues. In an action by a former consultant filed August 2013 in the United States District Court for the District of Massachusetts, the Company was named a defendant. The plaintiff alleges in his complaint that the Company misappropriated certain trade secrets from him relating to beam couplers and beam switches in connection with a consulting relationship, that the Company engaged in unfair trade practices and that he should be identified as an inventor on a patent owned by the Company. He seeks damages in an unspecified amount, double damages for misappropriation of trade secrets, treble damages for unfair trade practices and correction of inventory on one patent. Although we intend to vigorously contest the claims against us, we cannot predict the outcome of the proceeding.



For a discussion of the risks associated with intellectual property legal proceedings and other disputes, see Item 1A. "Risk Factors — We are subject to litigation alleging that we are infringing third-party intellectual property rights. Intellectual property claims could result in costly litigation and harm our business."

## ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

## PART II

## ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

## Price Range of Common Stock

Our common stock is quoted on the Nasdaq Global Market under the symbol “IPGP”. The following table sets forth the quarterly high and low sale prices of our common stock as reported on the Nasdaq Global Market.

<table><tr><td rowspan="2"></td><td colspan="3">Common Stock Price Range</td></tr><tr><td colspan="2">High</td><td>Low</td></tr><tr><td>First Quarter ended March 31, 2012</td><td>$     61.18</td><td>$     34.67</td><td></td></tr><tr><td>Second Quarter ended June 30, 2012</td><td>$     57.51</td><td>$     37.58</td><td></td></tr><tr><td>Third Quarter ended September 30, 2012</td><td>$     65.77</td><td>$     39.19</td><td></td></tr><tr><td>Fourth Quarter ended December 31, 2012</td><td>$     67.00</td><td>$     51.34</td><td></td></tr><tr><td>First Quarter ended March 31, 2013</td><td>$     70.11</td><td>$     56.89</td><td></td></tr><tr><td>Second Quarter ended June 30, 2013</td><td>$     67.24</td><td>$     54.32</td><td></td></tr><tr><td>Third Quarter ended September 30, 2013</td><td>$     67.81</td><td>$     53.28</td><td></td></tr><tr><td>Fourth Quarter ended December 31, 2013</td><td>$     79.00</td><td>$     56.44</td><td></td></tr></table>

As of February 25, 2014, there were 51,954,978 shares of our common stock outstanding held by approximately 46 holders of record, which does not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.

## Stock Price Performance Graph

The following Stock Price Performance Graph and related information includes comparisons required by the SEC. The graph does not constitute “soliciting material” and should not be deemed “filed” or incorporated by reference into any other filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference into such filing.

The following graph presents the cumulative shareholder returns for our Common Stock compared with the NASDAQ Composite Index and the S&P Technology Sector Index. We selected these comparative groups due to industry similarities and the fact that they contain several direct competitors.




<table><tr><td rowspan="2"></td><td colspan="7">5-Year Cumulative Total Return</td></tr><tr><td>12/31/2008</td><td>12/31/2009</td><td>12/31/2010</td><td>12/31/2011</td><td>12/31/2012</td><td>12/31/2013</td><td></td></tr><tr><td>IPG Photonics Corporation</td><td>$ 100.00</td><td>$ 126.93</td><td>$ 239.91</td><td>$ 256.98</td><td>$ 505.69</td><td>$ 588.85</td><td></td></tr><tr><td>Nasdaq Composite (U.S. &amp; Foreign)</td><td>$ 100.00</td><td>$ 143.89</td><td>$ 168.22</td><td>$ 165.19</td><td>$ 191.47</td><td>$ 264.84</td><td></td></tr><tr><td>S&amp;P 500 Technology Sector Index</td><td>$ 100.00</td><td>$ 148.38</td><td>$ 162.58</td><td>$ 164.64</td><td>$ 186.27</td><td>$ 230.40</td><td></td></tr></table>

The above graph represents and compares the value, through December 31, 2013, of a hypothetical investment of $100 made at the closing price on December 31, 2008 in each of (i) our common stock, (ii) the NASDAQ Composite Stock Index and (iii) the S&P 500 Technology Sector Index, in each case assuming the reinvestment of dividends. The stock price performance shown in this graph is not necessarily indicative of, and not is intended to suggest, future stock price performance.

## Dividends

We declared and paid a special cash dividend on our capital stock in December 2012 of $33.4 million or $0.65 per share. We anticipate that we will retain future earnings to support operations, fund acquisitions and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account any business conditions, any contractual and legal restrictions on our payment of dividends, and our financial condition, operating results, cash needs, growth plans and other factors. In addition, current agreements with certain of our lenders contain, and future loan agreements may contain, restrictive covenants that generally prohibit us from paying cash dividends, making any distribution on any class of stock or making stock repurchases.

## Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

There have been no sales of unregistered securities during the past three years.



<table><tr><td>Date</td><td>Total Number of Shares (or Units) Purchased</td><td>Average Price Paid per Share (or Unit)</td><td>Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs</td><td>Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs</td></tr><tr><td>January 1, 2013 — January 31, 2013</td><td>— (1)</td><td>$ —</td><td>$ —</td><td>$ —</td></tr><tr><td>February 1, 2013 — February 28, 2013</td><td>— (1)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>March 1, 2013 — March 31, 2013</td><td>48 (1)</td><td>60.11</td><td>—</td><td>—</td></tr><tr><td>April 1, 2013 — April 30, 2013</td><td>55 (1)</td><td>66.41</td><td>—</td><td>—</td></tr><tr><td>May 1, 2013 — May 31, 2013</td><td>— (1)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>June 1, 2013 — June 30, 2013</td><td>89 (1)</td><td>59.30</td><td>—</td><td>—</td></tr><tr><td>July 1, 2013 — July 31, 2013</td><td>55 (1)</td><td>60.73</td><td>—</td><td>—</td></tr><tr><td>August 1, 2013 — August 31, 2013</td><td>— (1)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>September 1, 2013 — September 30, 2013</td><td>75 (1)</td><td>53.76</td><td>—</td><td>—</td></tr><tr><td>October 1, 2013 — October 31, 2013</td><td>55 (1)</td><td>56.35</td><td>—</td><td>—</td></tr><tr><td>November 1, 2013 — November 30, 2013</td><td>— (1)</td><td>—</td><td>—</td><td>—</td></tr><tr><td>December 1, 2013 — December 31, 2013</td><td>77 (1)</td><td>72.52</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>454</td><td>$ 61.39</td><td>$ —</td><td>$ —</td></tr></table>

(1) In 2012, our Board of Directors approved “withhold to cover” as a tax payment method for vesting of restricted stock awards for certain employees. Pursuant to the “withhold to cover” method, we withheld from such employees the shares noted in the table above to cover tax withholding related to the vesting of their awards. The average prices listed in the above table are averages of the fair market prices at which we valued shares withheld for purposes of calculating the number of shares to be withheld in 2013.

## Information Regarding Equity Compensation Plans

The following table sets forth information with respect to securities authorized for issuance under our equity compensation plans as of December 31, 2013:

Equity Compensation Plan Information

<table><tr><td>Plan Category</td><td>Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)</td><td>Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)</td><td>Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)</td></tr><tr><td>Equity Compensation Plans Approved by Security Holders</td><td>2,699,897</td><td>38.00</td><td>5,949,410</td></tr><tr><td>Equity Compensation Plans Not Approved by Security Holders</td><td>—</td><td></td><td>—</td></tr><tr><td>Total</td><td>2,699,897</td><td></td><td>5,949,410</td></tr></table>

## ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and related notes and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The data as of December 31, 2013 and 2012, and for the years ended December 31, 2013, 2012 and 2011, is derived from our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The data as of December 31, 2011, 2010 and 2009, and for the years ended December 31, 2010 and 2009, is derived from our audited consolidated financial statements and related notes not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the



<table><tr><td rowspan="3"></td><td colspan="5">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td colspan="5">(In thousands, except per share data)</td></tr><tr><td>Consolidated Statement of Income Data:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 648,034</td><td>$ 562,528</td><td>$ 474,482</td><td>$ 299,256</td><td>$ 185,894</td></tr><tr><td>Cost of sales</td><td>308,136</td><td>257,801</td><td>217,227</td><td>152,798</td><td>121,626</td></tr><tr><td>Gross profit</td><td>339,898</td><td>304,727</td><td>257,255</td><td>146,458</td><td>64,268</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Sales and marketing</td><td>26,692</td><td>23,845</td><td>21,731</td><td>19,100</td><td>15,157</td></tr><tr><td>Research and development</td><td>41,660</td><td>31,401</td><td>25,422</td><td>19,160</td><td>18,543</td></tr><tr><td>General and administrative</td><td>50,863</td><td>39,231</td><td>37,442</td><td>28,645</td><td>20,489</td></tr><tr><td>Loss (gain) on foreign exchange</td><td>2,536</td><td>1,362</td><td>(2,862)</td><td>(848)</td><td>1,022</td></tr><tr><td>Total operating expenses</td><td>121,751</td><td>95,839</td><td>81,733</td><td>66,057</td><td>55,211</td></tr><tr><td>Operating income</td><td>218,147</td><td>208,888</td><td>175,522</td><td>80,401</td><td>9,057</td></tr><tr><td>Interest (expense) income, net</td><td>(1)</td><td>319</td><td>(681)</td><td>(1,188)</td><td>(1,252)</td></tr><tr><td>Other income (expense), net</td><td>155</td><td>8</td><td>(257)</td><td>39</td><td>(36)</td></tr><tr><td>Income before provision for income taxes</td><td>218,301</td><td>209,215</td><td>174,584</td><td>79,252</td><td>7,769</td></tr><tr><td>Provision for income taxes</td><td>(62,521)</td><td>(61,471)</td><td>(53,575)</td><td>(24,900)</td><td>(2,485)</td></tr><tr><td>Net income</td><td>155,780</td><td>147,744</td><td>121,009</td><td>54,352</td><td>5,284</td></tr><tr><td>Less: Net income (loss) attributable to noncontrolling interests</td><td>—</td><td>2,740</td><td>3,250</td><td>361</td><td>(135)</td></tr><tr><td>Net income attributable to IPG Photonics</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Corporation</td><td>155,780</td><td>145,004</td><td>117,759</td><td>53,991</td><td>5,419</td></tr><tr><td>Net income attributable to common shareholders</td><td>$ 155,780</td><td>$ 145,004</td><td>$ 117,759</td><td>$ 53,991</td><td>$ 5,419</td></tr><tr><td>Net income per share:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 3.02</td><td>$ 2.87</td><td>$ 2.48</td><td>$ 1.16</td><td>$ 0.12</td></tr><tr><td>Diluted</td><td>$ 2.97</td><td>$ 2.81</td><td>$ 2.41</td><td>$ 1.13</td><td>$ 0.12</td></tr><tr><td>Weighted-average shares outstanding:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>51,548</td><td>50,477</td><td>47,365</td><td>46,424</td><td>45,489</td></tr><tr><td>Diluted</td><td>52,375</td><td>51,536</td><td>48,685</td><td>47,594</td><td>46,595</td></tr><tr><td>Dividends per common share</td><td>$ —</td><td>$ 0.65</td><td>$ —</td><td>$ —</td><td>$ —</td></tr></table>

<table><tr><td rowspan="3"></td><td colspan="5">As of December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td colspan="5">(In thousands)</td></tr><tr><td>Consolidated Balance Sheet Data:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 448,776</td><td>$ 384,053</td><td>$ 180,234</td><td>$ 147,860</td><td>$ 82,920</td></tr><tr><td>Short-term investments</td><td>—</td><td>—</td><td>25,451</td><td>—</td><td>—</td></tr><tr><td>Working capital, excluding cash and cash equivalents and short-term investments</td><td>237,488</td><td>155,451</td><td>135,060</td><td>70,171</td><td>61,163</td></tr><tr><td>Total assets</td><td>1,061,216</td><td>895,498</td><td>608,132</td><td>441,855</td><td>312,636</td></tr><tr><td>Revolving line-of-credit facilities</td><td>3,296</td><td>2,442</td><td>7,057</td><td>6,841</td><td>6,007</td></tr><tr><td>Long-term debt, including current portion</td><td>12,666</td><td>15,519</td><td>17,339</td><td>16,977</td><td>18,000</td></tr><tr><td>Redeemable noncontrolling interests</td><td>—</td><td>—</td><td>46,123</td><td>24,903</td><td>—</td></tr><tr><td>IPG Photonics Corporation stockholders&#x27; equity</td><td>927,969</td><td>742,927</td><td>443,323</td><td>316,600</td><td>256,430</td></tr></table>

## ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6, “Selected Financial Data” and our consolidated financial statements and related notes included in this Annual



Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed under Item 1A, “Risk Factors.”

## Overview

We develop and manufacture a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used in numerous applications, primarily in materials processing. We sell our products globally to original equipment manufacturers ("OEMs"), system integrators and end users. We market our products internationally primarily through our direct sales force.

We are vertically integrated such that we design and manufacture most of our key components used in our finished products, from semiconductor diodes to optical fiber preforms, finished fiber lasers and amplifiers. We also manufacture certain complementary products used with our lasers, including optical delivery cables, fiber couplers, beam switches, optical processing heads and chillers. In addition, we offer laser-based systems for certain markets and applications.

## Description of Our Net Sales, Costs and Expenses

Net sales. We derive net sales primarily from the sale of fiber lasers and amplifiers. We also sell diode lasers, communications systems, laser systems and complementary products. We sell our products through our direct sales organization and our network of distributors and sales representatives, as well as system integrators. We sell our products to OEMs that supply materials processing laser systems, communications systems and medical laser systems to end users. We also sell our products to end users that build their own systems which incorporate our products or use our products as an energy or light source. Our scientists and engineers work closely with OEMs, systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications. Our sales cycle varies substantially, ranging from a period of a few weeks to as long as one year or more, but is typically several months.

Sales of our products generally are recognized upon shipment, provided that no obligations remain and collection of the receivable is reasonably assured. Our sales typically are made on a purchase order basis rather than through long-term purchase commitments.

We develop our products to standard specifications and use a common set of components within our product architectures. Our major products are based upon a common technology platform. We continually enhance these and other products by improving their components and developing new components and new product designs.

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

Cost of sales. Our cost of sales consists primarily of the cost of raw materials and components, direct labor expenses and manufacturing overhead. We are vertically integrated and currently manufacture all critical components for our products as well as assemble finished products. We believe our vertical integration allows us to increase efficiencies, leverage our scale and lower our cost of sales. Cost of sales also includes personnel costs and overhead related to our manufacturing and engineering operations, related occupancy and equipment costs, shipping costs and reserves for inventory obsolescence and for warranty obligations. Inventories are written off and charged to cost of sales when identified as excess or obsolete.

Due to our vertical integration strategy and ongoing investment in plant and machinery, we maintain a relatively high fixed manufacturing overhead. We may not adjust these fixed costs quickly enough to adapt to rapidly changing market conditions. Our gross margin is therefore significantly affected by our sales volume and the corresponding utilization of capacity and absorption of fixed manufacturing overhead expenses.

Sales and marketing. Our sales and marketing expense consists primarily of costs related to compensation, trade shows, professional and technical conferences, travel, facilities, depreciation of equipment used for demonstration purposes and other marketing costs.

Research and development. Our research and development expense consists primarily of compensation, development expenses related to the design of our products and certain components, the cost of materials and components to build prototype devices for testing and facilities costs. Costs related to product development are recorded as research and development expenses in the period in which they are incurred.



General and administrative. Our general and administrative expense consists primarily of compensation and associated costs for executive management, finance, legal and other administrative personnel, outside legal and professional fees, insurance premiums and fees, allocated facilities costs and other corporate expenses such as charges and benefits related to the change in allowance for doubtful debt.

## Factors and Trends That Affect Our Operations and Financial Results

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

Net sales. Our net sales grew from $185.9 million in 2009 to $648.0 million in 2013, representing a compound annual growth rate of approximately 37%. Net sales growth was driven by (i) increasing demand for our products, fueled by their superior performance and decreasing average cost per watt of output power which has resulted in a substantial improvement in their cost competitiveness compared to traditional lasers, (ii) the introduction of new products, including our high-power lasers with higher output power levels, (iii) the growing market acceptance of fiber lasers and (iv) the development of new applications for our products and new OEM customer relationships. Our annual revenue growth rates have varied. Net sales increased by 15%, 19%, 59% and 61% in 2013, 2012, 2011 and 2010, respectively. However in 2009, our net sales decreased by 19%, primarily due to the global economic downturn.

Our business depends substantially upon capital expenditures by our customers, particularly by manufacturers using our products for materials processing, which includes general manufacturing, automotive, aerospace, heavy industry, consumer, semiconductor and electronics. Approximately 94% of our revenues in 2013 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 customers for materials processing and will be subject to the broader fluctuations of capital equipment spending.

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 shipment, installation and acceptance of products at our customers' facilities, the mix of OEM orders and one-time orders for products with large purchase prices, and seasonal factors such as the purchasing patterns and levels of activity throughout the year in the regions where we operate. Historically, our net sales have been higher in the second half of the year than in the first half of the year. Furthermore, 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. 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.

Gross margin. Our total gross margin in any period can be significantly affected by total net sales in any period, by product mix, that is, the percentage of our revenue in the period that is attributable to higher or lower-power products and the mix of sales between laser and amplifier sources and complete systems, by sales mix between OEM customers who purchase devices from us in high unit volumes and other customers, by mix of sales in different geographies and by other factors, some of which are not under our control.

Our product mix affects our margins because the selling price per watt is generally higher for low, mid-power devices and certain specialty products than for high-power devices sold in large volumes. The overall cost of high-power lasers may be partially offset by improved absorption of fixed overhead costs associated with sales of larger volumes of higher-power products because they use a greater number of optical components and drive economies of scale in manufacturing. Also, the profit margins on systems can be lower than margins for our laser and amplifier sources, depending on the configuration, volume and competitive forces, among other factors.

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

We invested $70.9 million, $68.2 million and $53.0 million in capital expenditures in 2013, 2012 and 2011, respectively. Most of this investment relates to expansion of our manufacturing capacity.

A high proportion of our costs is fixed so they are generally difficult or slow 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 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 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 $15.1 million, $8.2 million and $6.1 million in 2013, 2012 and 2011, respectively.

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

Research and development expense. We plan to continue to invest in research and development to improve our existing components and products and develop new components, products and systems. The amount of research and development expense we incur may vary from period to period. In general, if net sales continue to increase we expect research and development expense to increase in the aggregate.

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

Major customers. While we have historically depended on a few customers for a large percentage of our annual net sales, the composition of this group can change from year to year. Net sales derived from our five largest customers as a percentage of our annual net sales were 21%, 16% and 17% in 2013, 2012 and 2011. In 2013, sales to our largest customer accounted for 11% of our net sales. No customer accounted for more than 10% of sales in 2012 or 2011. We seek to add new customers and to expand our relationships with existing customers. We anticipate that the composition of our significant customers will continue to change. If any of our significant customers were to substantially reduce their purchases from us, our results would be adversely affected.

## Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis we re-evaluate our judgments and estimates including those related to inventories, income taxes and the fair value of certain debt and equity instruments including stock-based compensation. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, which may materially affect our operating results and financial position. The accounting policies described below are those which, in our opinion, involve the most significant application of judgment, or involve complex estimation, and which could, if different judgments or estimates were made, materially affect our reported results of operations and financial position.

Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605. Revenue from orders with multiple deliverables is divided into separate units of accounting when certain criteria are met. These separate units generally consist of equipment and installation. The consideration for the arrangement is then allocated to the separate units of accounting based on their relative selling prices. The selling price of equipment is based on vendor-specific objective evidence and the selling price of installation is based on third-party evidence. Applicable revenue recognition criteria are then applied separately for each separate unit of accounting. Revenue for laser and amplifier sources generally is recognized upon the transfer of ownership which is typically at the time of shipment. Installation revenue is recognized upon completion of the installation service which typically occurs within 30 to 90 days of delivery. Revenue for laser and amplifier sources generally is recognized upon the transfer of ownership which is typically at the time of shipment. Installation revenue is recognized upon completion of the installation service which typically occurs within 30 to 90 days of delivery. For laser systems, which may carry customer specific processing requirements, revenue is recognized at the latter of customer acceptance date or shipment date if the customer acceptance is made prior to shipment.



Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return generally are not included in sales arrangements.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts Receivable include $17.7 million and $8.5 million of bank acceptance drafts at December 31, 2013 and 2012, respectively. Bank acceptance drafts are bank guarantees of payment on specified dates. The maturity of these bank acceptance drafts is less than 90 days. We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.

Inventory. Inventory is stated at the lower of cost (first-in, first-out method) or market value. Inventory includes parts and components that may be specialized in nature and subject to rapid obsolescence. We maintain a reserve for inventory items to provide for an estimated amount of excess or obsolete inventory. The reserve is based upon a review of inventory materials on hand, which we compare with historic usage, estimated future usage and age. In addition, we review the inventory and compare recorded costs with estimates of current market value. Write-downs are recorded to reduce the carrying value to the net realizable value with respect to any part with costs in excess of current market value. Estimating demand and current market values is inherently difficult, particularly given that we make highly specialized components and products. We determine the valuation of excess and obsolete inventory by making our best estimate considering the current quantities of inventory on hand and our forecast of the need for this inventory to support future sales of our products. We often have limited information on which to base our forecasts. If future sales differ from these forecasts, the valuation of excess and obsolete inventory may change and additional inventory provisions may be required. Because of our vertical integration, a significant or sudden decrease in sales could result in a significant change in the estimates of excess or obsolete inventory valuation. We recorded inventory provision for excess or obsolete inventory of $15.1 million, $8.2 million and $6.1 million in 2013, 2012 and 2011, respectively.

Warranty. We maintain an accrual for warranty claims for units sold that are subject to warranty. We estimate this accrual considering past claims experience, the number of units still carrying warranty coverage and the average life of the remaining warranty period.

Stock-based compensation. Stock-based compensation is included in the following financial statement captions as follows:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Cost of sales</td><td>$ 3,187</td><td>$ 2,184</td><td>$ 1,731</td><td></td></tr><tr><td>Sales and marketing</td><td>1,195</td><td>1,052</td><td>1,503</td><td></td></tr><tr><td>Research and development</td><td>1,929</td><td>1,327</td><td>1,036</td><td></td></tr><tr><td>General and administrative</td><td>5,409</td><td>4,002</td><td>3,778</td><td></td></tr><tr><td>Total stock-based compensation</td><td>11,720</td><td>8,565</td><td>8,048</td><td></td></tr><tr><td>Tax benefit recognized</td><td>(3,784)</td><td>(2,629)</td><td>(2,551)</td><td></td></tr><tr><td>Net stock-based compensation</td><td>$ 7,936</td><td>$ 5,936</td><td>$ 5,497</td><td></td></tr></table>

We allocate and record stock-based compensation expense on a straight-line basis over the requisite service period.

We calculate the fair value of stock option grants using the Black-Scholes option pricing model. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. The assumptions used to calculate the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. The weighted average assumptions used in the Black-Scholes model or the calculation of compensation were as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Expected term</td><td>4.4-6.3 years</td><td>4.0-6.6 years</td><td>3.4-6.9 years</td></tr><tr><td>Volatility</td><td>51%-54%</td><td>49%-56%</td><td>46%-56%</td></tr><tr><td>Risk-free rate of return</td><td>0.74%-1.32%</td><td>0.59%-1.23%</td><td>0.48%-2.82%</td></tr><tr><td>Dividend yield</td><td>0.25%</td><td>—%</td><td>—%</td></tr><tr><td>Forfeiture rate</td><td>0%-5.97%</td><td>0%-6.1%</td><td>0%-6.26%</td></tr></table>



As stock-based compensation expense recorded in our statements of operations is based on options ultimately expected to vest, it has been reduced for estimated forfeitures. We estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from the estimates.

We have offered an employee stock purchase plan covering our U.S. and German employees. The plan allows employees who participate to purchase shares of common stock through payroll deductions at a 15% discount to the lower of the stock price on the first day or last day of the six-month purchase period. Payroll deductions may not exceed 10% of the employee's compensation. Compensation expense related to the employee stock purchase plan for the years ended 2013, 2012 and 2011, was approximately $0.5 million, $0.5 million and $0.4 million, respectively.

Income Taxes and Deferred Taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.

We file federal and state income tax returns in the United States and tax returns in numerous international jurisdictions. We must estimate our income tax expense after considering, among other factors, if inter-company transactions have been made on an arm’s length basis, differing tax rates between jurisdictions, allocation factors, tax credits, nondeductible items and changes in enacted tax rates. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. As we continue to expand globally, there is a risk that, due to complexity within and diversity among the various jurisdictions in which we do business, a governmental agency may disagree with the manner in which we have computed our taxes. Additionally, due to the lack of uniformity among all of the foreign and domestic taxing authorities, there may be situations where the tax treatment of an item in one jurisdiction is different from the tax treatment in another jurisdiction or that the transaction causes a tax liability to arise in another jurisdiction.

Deferred taxes arise because of the different treatment between financial statement accounting and tax accounting, known as “temporary differences.” The tax effects of these temporary differences are recorded as deferred tax assets and deferred tax liabilities on the consolidated balance sheet. At December 31, 2013, we recorded a net deferred tax asset of $10.2 million. If insufficient evidence of our ability to generate future taxable income arises, we may be required to record a valuation allowance against these assets, which will result in additional income tax expense. On a quarterly basis, we evaluate whether the deferred tax assets may be realized in the future and assess the need for a valuation allowance.

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefiting our 2012 U.S. federal taxes, including the research and experimentation credit, could not be recognized in our 2012 financial results and instead is reflected in our 2013 financial results.

We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves recorded are based on a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is “more likely than not” to be realized following resolution of any potential contingencies present related to the tax benefit, assuming that the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions is recorded as a component of income tax expense. At December 31, 2013, we had unrecognized tax benefits of approximately $6.5 million that, if recognized, would be recorded as a reduction in income tax expense.

At December 31, 2013, we had $251.5 million of cash in the United States and the remainder of $197.3 million at foreign locations. Cash outside of the United States is intended to fund working capital and business expansion outside the United States.



## Results of Operations

The following table sets forth selected statement of operations data for the periods indicated in dollar amounts and expressed as a percentage of net sales.

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td colspan="6">(In thousands, except percentages and per share data)</td></tr><tr><td>Net sales</td><td>$648,034</td><td>100.0%</td><td>$562,528</td><td>100.0%</td><td>$474,482</td><td>100.0%</td></tr><tr><td>Cost of sales</td><td>308,136</td><td>47.5</td><td>257,801</td><td>45.8</td><td>217,227</td><td>45.8</td></tr><tr><td>Gross profit</td><td>339,898</td><td>52.5</td><td>304,727</td><td>54.2</td><td>257,255</td><td>54.2</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Sales and marketing</td><td>26,692</td><td>4.1</td><td>23,845</td><td>4.2</td><td>21,731</td><td>4.6</td></tr><tr><td>Research and development</td><td>41,660</td><td>6.4</td><td>31,401</td><td>5.6</td><td>25,422</td><td>5.4</td></tr><tr><td>General and administrative</td><td>50,863</td><td>7.8</td><td>39,231</td><td>7.0</td><td>37,442</td><td>7.9</td></tr><tr><td>Loss (gain) on foreign exchange</td><td>2,536</td><td>0.4</td><td>1,362</td><td>0.2</td><td>(2,862)</td><td>(0.6)</td></tr><tr><td>Total operating expenses</td><td>121,751</td><td>18.8</td><td>95,839</td><td>17.0</td><td>81,733</td><td>17.2</td></tr><tr><td>Operating income</td><td>218,147</td><td>33.7</td><td>208,888</td><td>37.1</td><td>175,522</td><td>37.0</td></tr><tr><td>Interest (expense) income, net</td><td>(1)</td><td>—</td><td>319</td><td>0.1</td><td>(681)</td><td>(0.1)</td></tr><tr><td>Other income (expense), net</td><td>155</td><td>—</td><td>8</td><td>—</td><td>(257)</td><td>(0.1)</td></tr><tr><td>Income before provision for income taxes</td><td>218,301</td><td>33.7</td><td>209,215</td><td>37.2</td><td>174,584</td><td>36.8</td></tr><tr><td>Provision for income taxes</td><td>(62,521)</td><td>(9.6)</td><td>(61,471)</td><td>(10.9)</td><td>(53,575)</td><td>(11.3)</td></tr><tr><td>Net income</td><td>155,780</td><td>24.0</td><td>147,744</td><td>26.3</td><td>121,009</td><td>25.5</td></tr><tr><td>Less: Net income attributable to noncontrolling interests</td><td>—</td><td>—</td><td>2,740</td><td>0.5</td><td>3,250</td><td>0.7</td></tr><tr><td>Net income attributable to IPG Photonics Corporation</td><td>$155,780</td><td>24.0%</td><td>$145,004</td><td>25.8%</td><td>$117,759</td><td>24.8%</td></tr><tr><td>Net income attributable to IPG Photonics Corporation per share:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$3.02</td><td></td><td>$2.87</td><td></td><td>$2.48</td><td></td></tr><tr><td>Diluted</td><td>$2.97</td><td></td><td>$2.81</td><td></td><td>$2.41</td><td></td></tr><tr><td>Weighted-average shares outstanding:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>51,548</td><td></td><td>50,477</td><td></td><td>47,365</td><td></td></tr><tr><td>Diluted</td><td>52,375</td><td></td><td>51,536</td><td></td><td>48,685</td><td></td></tr></table>

## Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

Net sales. Net sales increased by $85.5 million, or 15.2%, to $648.0 million in 2013 from $562.5 million in 2012. The table below sets forth sales by application (in thousands, except for percentages):

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">Change</td></tr><tr><td colspan="3">% of Total</td><td colspan="2">% of Total</td><td></td></tr><tr><td>Materials Processing</td><td>$ 608,702</td><td>93.9%</td><td>$ 492,013</td><td>87.5%</td><td>$ 116,689</td><td>23.7%</td></tr><tr><td>Other applications</td><td>39,332</td><td>6.1%</td><td>70,515</td><td>12.5%</td><td>(31,183)</td><td>(44.2)%</td></tr><tr><td>Total</td><td>$ 648,034</td><td>100.0%</td><td>$ 562,528</td><td>100.0%</td><td>$ 85,506</td><td>15.2%</td></tr></table>

Sales for materials processing applications increased primarily due to higher sales of high-power, medium-power and QCW lasers used in cutting and welding applications, offset by decreased sales of pulsed lasers used in marking and engraving applications. We continue to see increased acceptance of the advantages of fiber laser technology. A growing number of OEM customers have developed cutting systems that use our high-power lasers and sales of these systems are gaining sales from gas laser systems. In addition, new welding processes using fiber lasers have been developed, increasing sales of lasers for this application, which are replacing traditional laser and non-laser welding technologies. We also increased sales of QCW lasers used for percussion drilling of holes in the aerospace industry as well as for cutting and welding thin sheet metal and cutting sapphire glass in consumer electronics applications as demand increased for these devices from OEM customers because they are displacing lamp pumped YAG lasers. The decrease in sales of pulsed lasers was attributable to a decrease in consumer electronics demand for marking and engraving compared to a year ago and increased competition for certain models of pulsed lasers. The decrease in other applications sales relates primarily to a decrease in sales of lasers for advanced applications in the



current year following fulfillment of large orders a year ago and lower telecommunications sales in Russia and North America. Orders for certain advanced applications can be uneven and of high unit value so that they can both benefit and impact sales depending on their timing.

Cost of sales and gross margin. Cost of sales increased by $50.3 million, or 19.5%, to $308.1 million in 2013 from $257.8 million in 2012. Our gross margin decreased to 52.5% in 2013 from 54.2% in 2012. Gross margin decreased due to product and geographical mix of sales, an increase in sales volume to OEM customers which earn sales discounts for multiple unit purchases and an increase in provisions for excess and obsolete inventory. Product mix reduced gross margin due to lower sales of high brightness lasers in 2013. High brightness lasers have a higher average selling price per watt than other products. Expenses related to provisions for excess or obsolete inventory and other valuation adjustments increased by $6.9 million to $15.1 million, or 2.3% of sales, for the year ended December 31, 2013, as compared to $8.2 million, or 1.5% of sales, for the year ended December 31, 2012. The increase in inventory provisions primarily relate to inventory in our telecommunications and micro-systems businesses which have both experienced slowdowns.

Sales and marketing expense. Sales and marketing expense increased by $2.9 million, or 11.9%, to $26.7 million in 2013 from $23.8 million in 2012, primarily as a result of an increase in personnel costs, premises expenses and expenses related to trade shows to support the increase in revenue. As a percentage of sales, sales and marketing expense decreased to 4.1% in 2013 from 4.2% in 2012. As we continue to expand our worldwide sales organization, we expect sales and marketing expenses to increase in the aggregate.

Research and development expense. Research and development expense increased by $10.3 million, or 32.7%, to $41.7 million in 2013 from $31.4 million in 2012, primarily as a result of an increase in personnel and consultant costs, expenses related to research and development contracts to develop new laser systems and application processes as well as an increase in depreciation expense. Expenses for materials used in research and development were approximately the same as one year ago. Included in the increase are $5.4 million of research and development costs associated with companies which were acquired in the third quarter of 2012 and first quarter of 2013. Research and development continues to focus on developing new products at different wavelengths including UV, green and mid-infrared, new pulsed products, improving the electrical efficiency of high power products, enhancing the performance of our internally manufactured components, refining production processes to improve manufacturing yields, developing new accessories and achieving higher output powers. As a percentage of sales, research and development expense increased to 6.4% in 2013 from 5.6% in 2012. We expect to continue to invest in research and development and that research and development expense will increase in the aggregate.

General and administrative expense. General and administrative expense increased by $11.7 million, or 29.7%, to $50.9 million in 2013 from $39.2 million in 2012, primarily due to increased personnel costs, consultants, legal, travel, fees and subscriptions, donations, depreciation expense and premises expenses. General and administrative costs increased $2.7 million or by 6.9% due to the additions of general and administrative costs for companies acquired in the third quarter of 2012 and the first quarter of 2013. As a percentage of sales, general and administrative expense increased to 7.8% in 2013 from 7.0% in 2012. We expect general and administrative expenses to increase as we invest to support the expected growth in net sales.

Effect of exchange rates on sales, gross margin and operating expenses. We estimate that if exchange rates had been the same as one year ago, sales in 2013 would have been $2.7 million higher, gross margin would have been $1.5 million higher and operating expenses in total would have been $0.1 million higher. The measures that assume constant exchange rates between fiscal year 2013 and fiscal year 2012 are calculated using the average exchange rates for the twelve-month period ended December 31, 2012 for the respective currencies, which were Euro 1=US$1.29, Japanese Yen 1=US$0.01, Chinese Yuan 1=US$0.16 and Russian Ruble 1=US$0.03.

Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $2.5 million in 2013 as compared to a loss of $1.4 million in 2012. The change is primarily attributable to the depreciation of the U.S. Dollar compared to the Euro, the depreciation of the Russian Ruble compared to the U.S. Dollar and the Euro, partially off-set by the appreciation of the Chinese Yuan compared to the U.S. Dollar.

Interest (expense) income, net. Interest (expense) income, net was $0.1 million of expense in 2013 compared to $0.3 million of income in 2012. The decrease is the result of lower interest earned on deposits as compared to the prior period.

Other income (expense), net. Other income (expense), net increased to $0.2 million of income in 2013 compared to $0.1 million of income in 2012. Included in other income (expense), net for 2013 were $2.7 million reduction in contingent consideration related to prior year acquisitions and $0.5 million gain on the sale of an investment from our Russian subsidiary partially offset by a $2.9 million goodwill impairment charge. For 2012, other expense included $1.1 million related to final payments of contingent consideration due for a prior acquisition.



Provision for income taxes. Provision for income taxes was $62.5 million in 2013 compared to $61.5 million in 2012, representing an effective tax rate of 28.6% in 2013 and 29.4% in 2012. The increase in the provision for income taxes was primarily the result of increased income before provision for income taxes. The decrease in effective rate was due primarily to the mix of income earned in various tax jurisdictions, the benefit of additional research and development credits claimed after completion of a study to analyze and document research and development activity as well as the benefit of 2012 research and development credits included in the American Taxpayer Relief Act of 2012 (the “Act”) which was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefiting our 2012 U.S. federal taxes, including the research and experimentation credit, could not be recognized in our 2012 financial results and instead were reflected in our 2013 financial results.

Net income. Net income attributable to IPG Photonics Corporation increased by $10.8 million to $155.8 million in 2013 from $145.0 million in 2012. Net income attributable to IPG Photonics Corporation as a percentage of our net sales decreased by 1.8 percentage points to 24.0% in 2013 from 25.8% in 2012 due to the factors described above.

## Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

Net sales. Net sales increased by $88.0 million, or 18.6%, to $562.5 million in 2012 from $474.5 million in 2011. The table below sets forth sales by application (in thousands, except for percentages):

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2012</td><td colspan="2">2011</td><td colspan="2">Change</td></tr><tr><td colspan="3">% of Total</td><td colspan="2">% of Total</td><td></td></tr><tr><td>Materials Processing</td><td>$ 492,013</td><td>87.5%</td><td>$ 419,443</td><td>88.4%</td><td>$ 72,570</td><td>17.3%</td></tr><tr><td>Other applications</td><td>70,515</td><td>12.5%</td><td>55,039</td><td>11.6%</td><td>15,476</td><td>28.1%</td></tr><tr><td>Total</td><td>$ 562,528</td><td>100.0%</td><td>$ 474,482</td><td>100.0%</td><td>$ 88,046</td><td>18.6%</td></tr></table>

Sales for materials processing applications increased primarily due to higher sales of high-power and medium-power lasers used in cutting and welding applications and pulsed lasers used in marking and engraving applications. We also increased sales of pulsed lasers used for marking and engraving applications due to increased demand in consumer electronics applications. The increase in other applications sales relates primarily to an increase in sales of high-power, high-brightness lasers used in advanced applications.

Cost of sales and gross margin. Cost of sales increased by $40.6 million, or 18.7%, to $257.8 million in 2012 from $217.2 million in 2011. Our gross margin remained consistent at 54.2% in 2012 from 54.2% in 2011. Gross margin was positively affected by product mix and by reductions in direct product cost due to continued reduction of the cost of internally manufactured components. This benefit was offset by a decrease in absorption of fixed manufacturing costs. Expenses related to inventory reserves and other valuation adjustments increased by $2.1 million to $8.2 million, or 1.5% of sales, for the year ended December 31, 2012, as compared to $6.1 million, or 1.3% of sales, for the year ended December 31, 2011.

Sales and marketing expense. Sales and marketing expense increased by $2.1 million, or 9.7%, to $23.8 million in 2012 from $21.7 million in 2011, primarily as a result of increases in personnel costs, depreciation of product used for demonstration purposes and advertising and trade show expenses. As a percentage of sales, sales and marketing expense decreased to 4.2% in 2012 from 4.6% in 2011.

Research and development expense. Research and development expense increased by $6.0 million, or 23.5%, to $31.4 million in 2012 from $25.4 million in 2011. This increase was primarily a result of increases in personnel costs and in material expenses. Research and development activity continues to focus on enhancing the performance of our internally manufactured components, refining production processes to improve manufacturing yields, the development of new products operating at different wavelengths and higher output powers and new complementary accessories. As a percentage of sales, research and development expense increased to 5.6% in 2012 from 5.4% in 2011.

General and administrative expense. General and administrative expense increased by $1.8 million, or 4.8%, to $39.2 million in 2012 from $37.4 million in 2011, primarily due to increased personnel cost, increased recruitment costs and increased travel expenses offset by decreased legal expense. Legal expense decreased following a favorable verdict in 2011 in a patent infringement lawsuit. As a percentage of sales, general and administrative expense decreased to 7.0% in 2012 from 7.9% in 2011.

Effect of exchange rates on sales, gross margin and operating expenses. We estimate that if exchange rates had been the same as one year ago, sales in 2012 would have been $14.3 million higher, gross margin would have been $7.8 million higher and operating expenses in total would have been $2.1 million higher. The measures that assume constant exchange rates



between fiscal year 2012 and fiscal year 2011 are calculated using the average exchange rates for the twelve-month period ended December 31, 2011 for the respective currencies, which were Euro 1=US$1.39, Japanese Yen 1=US$0.01, Chinese Yuan 1=US$0.15 and Russian Ruble 1=US$0.03.

Loss (gain) on foreign exchange. We incurred a foreign exchange loss of $1.4 million in 2012 as compared to a gain of $2.9 million in 2011. The change was primarily attributable to the depreciation of the U.S. Dollar against the Euro, Russian Ruble and Japanese Yen.

Interest (expense) income, net. Interest (expense) income, net was $0.3 million of income in 2012 compared to $0.7 million of expense in 2011. The increase in income is the result of increases in interest-bearing deposits during the period as well as increases in cash and cash equivalents.

Provision for income taxes. Provision for income taxes was $61.5 million in 2012 compared to $53.6 million in 2011, representing an effective tax rate of 29.4% in 2012 and 30.7% in 2011. The increase in the provision for income taxes was due to an increase in income before the provision for income taxes, while the decrease in the effective rate was due to the proportion of income earned in countries with lower enacted tax rates.

Net income. Net income attributable to IPG Photonics Corporation increased by $27.2 million to $145.0 million in 2012 from $117.8 million in 2011. Net income attributable to IPG Photonics Corporation as a percentage of our net sales increased by 1 percentage point to 25.8% in 2012 from 24.8% in 2011 due to the factors described above.

## Liquidity and Capital Resources

Our principal sources of liquidity as of December 31, 2013 consisted of cash and cash equivalents of $448.8 million, unused credit lines and overdraft facilities of $61.8 million and working capital (excluding cash and cash equivalents) of $237.5 million. This compares to cash and cash equivalents of $384.1 million, unused credit lines and overdraft facilities of $61.4 million and working capital (excluding cash and cash equivalents) of $155.5 million as of December 31, 2012. The increase in cash and cash equivalents of $64.7 million from $384.1 million relates primarily to cash provided by operating activities in 2013 of $119.4 million and cash provided by financing activities of $14.1 million which was partially offset by cash used in investing activities of $75.9 million. Cash used in investing activities primarily relates to investments in fixed assets in 2013 and an acquisition during the first quarter of 2013.

Our long-term debt consists primarily of a $12.7 million secured variable-rate note, of which $1.3 million is the current portion. This debt matures in June 2015, at which time the outstanding debt balance would be $10.7 million. The variable interest rate was fixed at a rate of 2.57% per annum by means of an interest rate swap instrument.

In June 2012, our German subsidiary entered into a new credit facility with Deutsche Bank AG (the “Euro Credit Facility”) to replace the prior credit facility that expired on June 30, 2012. The Euro Credit Facility makes available Euro 20.0 million ($27.5 million) and will expire on June 30, 2014.

We believe that our existing cash and marketable securities, our cash flows from operations and our existing lines of credit provides us with the financial flexibility to meet our liquidity and capital needs, as well as to complete certain acquisitions of complementary businesses and technologies. Our future long-term capital requirements will depend on many factors including our level of sales, the impact of economic environment on our sales levels, the timing and extent of spending to support development efforts, the expansion of the global sales and marketing activities, the timing and introductions of new products, the need to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products.

The following table details our line-of-credit facilities as of December 31, 2013:

<table><tr><td>Description</td><td>Available Principal</td><td>Interest Rate</td><td>Maturity</td><td>Security</td></tr><tr><td>U.S. Revolving Line of Credit (1)</td><td>Up to $35.0 million</td><td>LIBOR plus 1.125% to 1.625%, depending on our performance</td><td>June 2015</td><td>Unsecured</td></tr><tr><td>Euro Credit Facility (Germany)(2)</td><td>Euro 20.0 million ($27.5 million)</td><td>Euribor + 1.25% or EONIA 1.75%</td><td>June 2014</td><td>Unsecured, guaranteed by parent company</td></tr><tr><td>Euro Overdraft Facilities</td><td>Euro 1.9 million ($2.5 million)</td><td>1.2%-6.5%</td><td>October 2014</td><td>Common pool of assets of Italian subsidiary</td></tr></table>



(1) $14.1 million of this revolving credit facility is available to our foreign subsidiaries in their respective local currencies, including India, China, Japan and South Korea. There were no drawings at December 31, 2013.

(2) $17.9 million of this credit facility is available to our German subsidiary, $4.1 million is available to our Russian subsidiary and $5.5 million is available to our Italian subsidiary. Total drawings at December 31, 2013 were $3.3 million with an interest rate of 1.7%.

Our largest committed credit lines are with Bank of America and Deutsche Bank in the amounts of $35.0 million and $27.5 million (or 20 million Euro as described above), respectively, and neither of them is syndicated.

We are required to meet certain financial covenants associated with our U.S. revolving line of credit and long-term debt facilities. These covenants, tested quarterly, include a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio. The debt service coverage covenant requires that we maintain a trailing twelve month ratio of cash flow to debt service that is greater than 1.5:1. Debt service is defined as required principal and interest payments during the period. Cash flow is defined as EBITDA less unfunded capital expenditures. The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis shall be less than two times our trailing twelve months EBITDA. We were in compliance with all such financial covenants as of and for the three months ended December 31, 2013.

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

In December 2010 and June 2011, we sold an aggregate 22.5% minority interest (the “Minority Interest”) of our Russian subsidiary, NTO IRE-Polus (“NTO”), to the Russian Corporation for Nanotechnologies (“Rusnano”) for an aggregate of $45.0 million. In addition, we had a call option commencing in December 2013 to buy back the Minority Interest at a predetermined value and Rusnano had a warrant to purchase an additional 2.5% interest in NTO and a put option commencing in December 2015 to sell its Minority Interest to us at a predetermined value. On June 29, 2012, we repurchased the Minority Interest for $55.4 million in cash and, under the terms of the agreement, the warrant and the put and call options were terminated. Due to the put rights, the Minority Interest was reported as a liability other than permanent equity under ASC 480-10-S99-3A. Based upon our valuation of the Minority Interest, the amount paid to repurchase the Minority Interest did not exceed its fair value. Accordingly, pursuant to ASC 480-10-S99-3A, we recorded the amount paid in excess of carrying amount in additional paid-in capital. See Note 7 to the Consolidated Financial Statements.

Operating activities. Net cash provided by operating activities decreased by $55.9 million to $119.4 million in 2013 from $175.3 million in 2012, primarily resulting from:

- A decrease in income and other taxes payable of $30.8 million in 2013 compared to an increase of $21.1 million in 2012, which includes cash payments for corporation tax in Germany of approximately $32 million which related to the final payment for fiscal year 2011 and revised estimated payment for fiscal year 2012 which both became due when we filed our fiscal year 2011 German tax return and which would normally have been paid in 2012;

- An increase in inventory of $50.4 million in 2013 compared to an increase of inventory of $23.0 million in 2012; offset by

• An increase in accounts receivable of $10.0 million in 2013 compared to an increase of $22.7 million in 2012;

- An increase in cash provided by net income after adding back non-cash charges of $222.7 million in 2013 as compared to $209.2 million in 2012.

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



Deferred tax liabilities are not recorded for undistributed earnings of a foreign subsidiary that are deemed to be indefinitely reinvested in the foreign jurisdiction. Historically, we have reinvested the undistributed earnings of our foreign subsidiaries. We intend to continue to do this and keep such earnings indefinitely reinvested in the applicable tax jurisdictions.

Investing activities. Net cash used in investing activities was $75.9 million and $55.3 million in 2013 and 2012, respectively. The cash used in investing activities in 2013 related to the construction of new buildings in the United States, Germany and Russia as well as purchases of machinery and equipment and $5.6 million for an acquisition during the first quarter of 2013. The cash used in investing activities in 2012 related to the construction of new buildings in the United States, Germany and Russia as well as purchases of machinery and equipment and $11.6 million for the purchase of a laser microsystems company during the third quarter of 2012. These expenditures were partially offset by the proceeds from the maturity of short-term investments of $25.5 million.

We expect to incur approximately $70 million in capital expenditures, excluding acquisitions, in 2014, as we continue to upgrade facilities and add capacity world wide to support our anticipated revenue growth. The timing and extent of any capital expenditures in and between periods can have a significant effect on our cash flow. Many of the capital expenditure projects that we undertake have long lead times and are difficult to cancel or defer to a later period.

Financing activities. Net cash provided by financing activities was $14.1 million and $82.1 million in 2013 and 2012, respectively. The cash provided by financing activities in 2013 was primarily related to the cash provided by the exercise of stock options, issuances under our employee stock purchase plan, the related tax benefits of the exercises and net proceeds of line-of-credit facilities partially offset by the payments on our long-term debt. The cash provided by financing activities in 2012 was primarily related to the follow-on public stock offering for which we received $167.9 million, net of offering expenses. To a lesser extent, in 2012, cash was provided from stock option exercises and stock sales under our employee stock purchase plan. These were partially offset by the repurchase of a 22.5% redeemable noncontrolling interest in our Russian subsidiary of $55.4 million and a special dividend of $33.4 million to stockholders of record in December 2012.

## Contractual Obligations

The following table describes our contractual obligations as of December 31, 2013 (in thousands):

<table><tr><td rowspan="2"></td><td colspan="6">Payments Due in</td></tr><tr><td>Total</td><td colspan="2">Less Than 1 Year</td><td>1-3 Years</td><td>3-5 Years</td><td>More Than 5 Years</td></tr><tr><td>Operating lease obligations</td><td>$ 12,709</td><td>$ 4,794</td><td>$ 6,688</td><td>$ 1,187</td><td>$ 40</td><td></td></tr><tr><td>Purchase obligations</td><td>3,371</td><td>3,371</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Long-term debt obligations (including interest)(1)</td><td>12,991</td><td>1,367</td><td>11,624</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Contingent consideration</td><td>375</td><td>375</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total(2)</td><td>$ 29,446</td><td>$ 9,907</td><td>$ 18,312</td><td>$ 1,187</td><td>$ 40</td><td></td></tr></table>

(1) Interest for long-term debt obligations was calculated including the effect of our interest rate swaps. The effect of the interest rate swaps, which are accounted for as a cash flow hedge, are to fix the LIBOR component of the interest rate of the underlying floating rate loan at 2.6% for the remaining term of the debt.

(2) Excludes obligations related to ASC 740, reserves for uncertain tax positions, because we are unable to provide a reasonable estimate of the timing of future payments relating to the remainder of these obligations. See Note 14 to the Consolidated Financial Statements.

## Recent Accounting Pronouncements

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

## ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate risk. Our investments have limited exposure to market risk. To minimize this risk, we maintain a portfolio of cash, cash equivalents and short-term investments, consisting primarily of bank deposits, money market funds and short-term government securities. The interest rates are variable and fluctuate with current market conditions. Because of the short-term



nature of these instruments, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations.

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

Exchange rates. Due to our international operations, a significant portion of our net sales, cost of sales and operating expenses are denominated in currencies other than the U.S. Dollar, principally the Euro, the Chinese Yuan, the Japanese Yen, and the Russian Ruble. As a result, our international operations give rise to transactional market risk associated with exchange rate movements of the U.S. Dollar, the Euro, the Chinese Yuan, the Japanese Yen, and the Russian Ruble. Loss on foreign exchange transactions totaled $2.5 million and $1.4 million in 2013 and 2012, respectively. Management attempts to hedge these exposures by partially or fully off-setting foreign currency denominated assets and liabilities at our subsidiaries that operate in different functional currencies. Foreign currency derivative instruments can also be used to hedge exposures and reduce the risks of certain foreign currency transactions; however, these instruments provide only limited protection and can carry significant cost. We have no foreign currency hedges as of December 31, 2013. We will continue to analyze our exposure to currency exchange rate fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations. Exchange rate fluctuations may adversely affect our financial results in the future.

## ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This information is incorporated by reference from pages F-1 through F-24 of this report.

## ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

## ITEM 9A. CONTROLS AND PROCEDURES

## Evaluation of Disclosure Controls and Procedures

Under the supervision of our Chief Executive Officer and our Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and our chief financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

## Management’s Annual Report on Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and its subsidiaries. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of the Evaluation Date based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of the Evaluation Date, our internal control over financial reporting was effective.

Our independent registered public accounting firm, Deloitte & Touche LLP, has audited our internal control over financial reporting, as stated in their report below.



## Changes in Internal Controls

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Limitations on Effectiveness of Controls

Our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that the disclosure controls and procedures or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected.



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of IPG Photonics Corporation
Oxford, Massachusetts

We have audited the internal control over financial reporting of IPG Photonics Corporation and subsidiaries (the “Company”) as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2013 of the Company and our report dated February 28, 2014 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 28, 2014



## PART III

## ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2013.

## ITEM 11. EXECUTIVE COMPENSATION

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2013.

## ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2013, with the exception of the information regarding securities authorized for issuance under our equity compensation plans, which is set forth in Item 5, “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Information Regarding Equity Compensation Plans” and is incorporated herein by reference.

## ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2013.

## ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required hereunder is incorporated herein by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the SEC within 120 days after December 31, 2013.

## PART IV

## ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements.

See Index to Financial Statements on page F-1.

(2) Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto.

(3) The exhibits listed in the “Index to Exhibits” preceding the Exhibits attached hereto are filed with this Form 10-K or incorporated by reference as set forth therein.

(b) Exhibits.

See (a)(3) above.

(c) Additional Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required information is shown on the financial statements or notes thereto.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2014.

IPG PHOTONICS CORPORATION

By: /s/ Valentin P. Gapontsev

Valentin P. Gapontsev
Chief Executive Officer and
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

<table><tr><td>Signature</td><td>Title</td><td></td></tr><tr><td>/s/ Valentin P. Gapontsev
Valentin P. Gapontsev</td><td>Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer)</td><td>February 28, 2014</td></tr><tr><td>/s/ Timothy P.V. Mammen
Timothy P.V. Mammen</td><td>Senior Vice President, Chief Financial Officer (Principal Financial Officer)</td><td>February 28, 2014</td></tr><tr><td>/s/ Thomas J. Burgomaster
Thomas J. Burgomaster</td><td>Vice President, Corporate Controller (Principal Accounting Officer)</td><td>February 28, 2014</td></tr><tr><td>/s/ Robert A. Blair
Robert A. Blair</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ Michael C. Child
Michael C. Child</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ Henry E. Gauthier
Henry E. Gauthier</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ William S. Hurley
William S. Hurley</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ William F. Krupke
William F. Krupke</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ John Peeler
John Peeler</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ Igor Samartsev
Igor Samartsev</td><td>Director</td><td>February 28, 2014</td></tr><tr><td>/s/ Eugene Scherbakov
Eugene Scherbakov</td><td>Director</td><td>February 28, 2014</td></tr></table>



Powered by TCPDF (www.tcpdf.org)



## INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2013 and 2012 F-3
Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 2011 F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2012 F-5
Consolidated Statements of Equity for the Years Ended December 31, 2013, 2012 and 2011 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements F-8



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of IPG Photonics Corporation
Oxford, Massachusetts

We have audited the accompanying consolidated balance sheets of IPG Photonics Corporation and subsidiaries (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
February 28, 2014



## IPG PHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS

<table><tr><td rowspan="3"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td colspan="2">(In thousands, except share and per share data)</td></tr><tr><td colspan="3">ASSETS</td></tr><tr><td>CURRENT ASSETS:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$     448,776</td><td>$     384,053</td></tr><tr><td>Accounts receivable, net</td><td>103,803</td><td>96,630</td></tr><tr><td>Inventories</td><td>172,700</td><td>139,618</td></tr><tr><td>Prepaid income taxes</td><td>15,996</td><td>13,071</td></tr><tr><td>Prepaid expenses and other current assets</td><td>30,836</td><td>18,639</td></tr><tr><td>Deferred income taxes, net</td><td>14,232</td><td>12,948</td></tr><tr><td>Total current assets</td><td>786,343</td><td>664,959</td></tr><tr><td>DEFERRED INCOME TAXES, NET</td><td>4,799</td><td>2,107</td></tr><tr><td>GOODWILL</td><td>455</td><td>2,898</td></tr><tr><td>INTANGIBLE ASSETS, NET</td><td>9,564</td><td>7,510</td></tr><tr><td>PROPERTY, PLANT AND EQUIPMENT, NET</td><td>252,245</td><td>210,563</td></tr><tr><td>OTHER ASSETS</td><td>7,810</td><td>7,461</td></tr><tr><td>TOTAL</td><td>$     1,061,216</td><td>$     895,498</td></tr><tr><td colspan="3">LIABILITIES AND EQUITY</td></tr><tr><td>CURRENT LIABILITIES:</td><td></td><td></td></tr><tr><td>Revolving line-of-credit facilities</td><td>$     3,296</td><td>$     2,442</td></tr><tr><td>Current portion of long-term debt</td><td>1,333</td><td>1,505</td></tr><tr><td>Accounts payable</td><td>18,787</td><td>17,783</td></tr><tr><td>Accrued expenses and other liabilities</td><td>59,336</td><td>51,451</td></tr><tr><td>Deferred income taxes, net</td><td>2,109</td><td>9,831</td></tr><tr><td>Income taxes payable</td><td>15,218</td><td>42,443</td></tr><tr><td>Total current liabilities</td><td>100,079</td><td>125,455</td></tr><tr><td>DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES</td><td>21,835</td><td>13,102</td></tr><tr><td>LONG-TERM DEBT, NET OF CURRENT PORTION</td><td>11,333</td><td>14,014</td></tr><tr><td>Total liabilities</td><td>133,247</td><td>152,571</td></tr><tr><td>COMMITMENTS AND CONTINGENCIES (NOTE 10)</td><td></td><td></td></tr><tr><td>IPG PHOTONICS CORPORATION STOCKHOLDERS&#x27; EQUITY:</td><td></td><td></td></tr><tr><td>Common stock, $0.0001 par value, 175,000,000 shares authorized; 51,930,978 shares issued and outstanding at December 31, 2013; 51,359,247 shares issued and outstanding at December 31, 2012</td><td>5</td><td>5</td></tr><tr><td>Additional paid-in capital</td><td>538,908</td><td>511,039</td></tr><tr><td>Retained earnings</td><td>390,757</td><td>234,977</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(1,701)</td><td>(3,094)</td></tr><tr><td>Total IPG Photonics Corporation stockholders&#x27; equity</td><td>927,969</td><td>742,927</td></tr><tr><td>TOTAL</td><td>$     1,061,216</td><td>$     895,498</td></tr></table>

See notes to consolidated financial statements.



## IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

<table><tr><td rowspan="3"></td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td colspan="3">(in thousands, except per share data)</td></tr><tr><td>NET SALES</td><td>$ 648,034</td><td>$ 562,528</td><td>$ 474,482</td></tr><tr><td>COST OF SALES</td><td>308,136</td><td>257,801</td><td>217,227</td></tr><tr><td>GROSS PROFIT</td><td>339,898</td><td>304,727</td><td>257,255</td></tr><tr><td>OPERATING EXPENSES:</td><td></td><td></td><td></td></tr><tr><td>Sales and marketing</td><td>26,692</td><td>23,845</td><td>21,731</td></tr><tr><td>Research and development</td><td>41,660</td><td>31,401</td><td>25,422</td></tr><tr><td>General and administrative</td><td>50,863</td><td>39,231</td><td>37,442</td></tr><tr><td>Loss (gain) on foreign exchange</td><td>2,536</td><td>1,362</td><td>(2,862)</td></tr><tr><td>Total operating expenses</td><td>121,751</td><td>95,839</td><td>81,733</td></tr><tr><td>OPERATING INCOME</td><td>218,147</td><td>208,888</td><td>175,522</td></tr><tr><td>OTHER INCOME (EXPENSE), Net:</td><td></td><td></td><td></td></tr><tr><td>Interest (expense) income, net</td><td>(1)</td><td>319</td><td>(681)</td></tr><tr><td>Other income (expense), net</td><td>155</td><td>8</td><td>(257)</td></tr><tr><td>Total other income (expense)</td><td>154</td><td>327</td><td>(938)</td></tr><tr><td>INCOME BEFORE PROVISION FOR INCOME TAXES</td><td>218,301</td><td>209,215</td><td>174,584</td></tr><tr><td>PROVISION FOR INCOME TAXES</td><td>(62,521)</td><td>(61,471)</td><td>(53,575)</td></tr><tr><td>NET INCOME</td><td>155,780</td><td>147,744</td><td>121,009</td></tr><tr><td>LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS</td><td>—</td><td>2,740</td><td>3,250</td></tr><tr><td>NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION</td><td>$ 155,780</td><td>$ 145,004</td><td>$ 117,759</td></tr><tr><td>NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 3.02</td><td>$ 2.87</td><td>$ 2.48</td></tr><tr><td>Diluted</td><td>$ 2.97</td><td>$ 2.81</td><td>$ 2.41</td></tr><tr><td>WEIGHTED AVERAGE SHARES OUTSTANDING:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>51,548</td><td>50,477</td><td>47,365</td></tr><tr><td>Diluted</td><td>52,375</td><td>51,536</td><td>48,685</td></tr></table>

See notes to consolidated financial statements.



## IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<table><tr><td rowspan="3"></td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td colspan="3">(In thousands)</td></tr><tr><td>Net income</td><td>$ 155,780</td><td>$ 147,744</td><td>$ 121,009</td></tr><tr><td>Other comprehensive income (loss), net of tax:</td><td></td><td></td><td></td></tr><tr><td>Translation adjustments</td><td>1,125</td><td>11,225</td><td>(15,167)</td></tr><tr><td>Change in carrying value of auction rate securities</td><td>—</td><td>—</td><td>232</td></tr><tr><td>Unrealized gain (loss) on derivatives</td><td>268</td><td>241</td><td>(42)</td></tr><tr><td>Total other comprehensive income (loss)</td><td>1,393</td><td>11,466</td><td>(14,977)</td></tr><tr><td>Comprehensive income</td><td>157,173</td><td>159,210</td><td>106,032</td></tr><tr><td>Comprehensive income attributable to noncontrolling interest &amp; redeemable noncontrolling interest</td><td>—</td><td>1,908</td><td>1,183</td></tr><tr><td>Comprehensive income attributable to IPG Photonics Corporation</td><td>$ 157,173</td><td>$ 157,302</td><td>$ 104,849</td></tr></table>

See notes to consolidated financial statements.



## IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td colspan="6">(In thousands, except share and per share data)</td></tr><tr><td></td><td>Shares</td><td>Amount</td><td>Shares</td><td>Amount</td><td>Shares</td><td>Amount</td></tr><tr><td>COMMON STOCK</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td>51,359,247</td><td>$ 5</td><td>47,616,115</td><td>$ 5</td><td>46,988,566</td><td>5</td></tr><tr><td>Exercise of stock options</td><td>540,232</td><td>—</td><td>456,919</td><td>—</td><td>595,448</td><td>—</td></tr><tr><td>Common stock issued under employee stock purchase plan</td><td>31,499</td><td>—</td><td>36,213</td><td>—</td><td>32,101</td><td>—</td></tr><tr><td>Common stock issued in a public offering</td><td>—</td><td>—</td><td>3,250,000</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Balance, end of period</td><td>51,930,978</td><td>5</td><td>51,359,247</td><td>5</td><td>47,616,115</td><td>5</td></tr><tr><td>ADDITIONAL PAID-IN CAPITAL</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td></td><td>511,039</td><td></td><td>332,585</td><td></td><td>310,218</td></tr><tr><td>Stock-based compensation</td><td></td><td>11,720</td><td></td><td>8,565</td><td></td><td>8,048</td></tr><tr><td>Exercise of stock options and related tax benefit from exercise</td><td></td><td>14,523</td><td></td><td>8,954</td><td></td><td>12,423</td></tr><tr><td>Common stock issued under employee stock purchase plan</td><td></td><td>1,626</td><td></td><td>1,205</td><td></td><td>879</td></tr><tr><td>Fair value of warrant transferred to additional paid-in capital</td><td></td><td>—</td><td></td><td>—</td><td></td><td>674</td></tr><tr><td>Purchase of redeemable noncontrolling interests ("NCI")</td><td></td><td>—</td><td></td><td>(7,794)</td><td></td><td>10,138</td></tr><tr><td>Increase redeemable NCI to initial redemption value</td><td></td><td>—</td><td></td><td>—</td><td></td><td>(9,795)</td></tr><tr><td>Common stock issued in follow-on public offering</td><td></td><td>—</td><td></td><td>167,928</td><td></td><td>—</td></tr><tr><td>Premium on purchase of NCI</td><td></td><td>—</td><td></td><td>(404)</td><td></td><td>—</td></tr><tr><td>Balance, end of period</td><td></td><td>538,908</td><td></td><td>511,039</td><td></td><td>332,585</td></tr><tr><td>RETAINED EARNINGS</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td></td><td>234,977</td><td></td><td>122,833</td><td></td><td>5,567</td></tr><tr><td>Net income attributable to IPG Photonics Corporation</td><td></td><td>155,780</td><td></td><td>145,004</td><td></td><td>117,759</td></tr><tr><td>Adjustments to redemption value of redeemable NCI</td><td></td><td>—</td><td></td><td>493</td><td></td><td>(493)</td></tr><tr><td>Dividend to shareholders</td><td></td><td>—</td><td></td><td>(33,353)</td><td></td><td>—</td></tr><tr><td>Balance, end of period</td><td></td><td>390,757</td><td></td><td>234,977</td><td></td><td>122,833</td></tr><tr><td>ACCUMULATED OTHER COMPREHENSIVE LOSS</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td></td><td>(3,094)</td><td></td><td>(12,100)</td><td></td><td>810</td></tr><tr><td>Translation adjustments</td><td></td><td>1,125</td><td></td><td>11,225</td><td></td><td>(15,167)</td></tr><tr><td>Unrealized gain on derivatives, net of tax</td><td></td><td>268</td><td></td><td>241</td><td></td><td>(42)</td></tr><tr><td>Change in carrying value of auction rate securities</td><td></td><td>—</td><td></td><td>—</td><td></td><td>232</td></tr><tr><td>Purchase of NCI &amp; redeemable NCI</td><td></td><td>—</td><td></td><td>(3,292)</td><td></td><td>—</td></tr><tr><td>Attribution to NCI &amp; redeemable NCI</td><td></td><td>—</td><td></td><td>832</td><td></td><td>2,067</td></tr><tr><td>Balance, end of period</td><td></td><td>(1,701)</td><td></td><td>(3,094)</td><td></td><td>(12,100)</td></tr><tr><td>TOTAL IPG PHOTONICS CORPORATION STOCKHOLDERS&#x27; EQUITY</td><td></td><td>927,969</td><td></td><td>742,927</td><td></td><td>443,323</td></tr><tr><td>NONCONTROLLING INTERESTS</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td></td><td>—</td><td></td><td>287</td><td></td><td>203</td></tr><tr><td>Net income attributable to NCI</td><td></td><td>—</td><td></td><td>—</td><td></td><td>94</td></tr><tr><td>Sale of NCI</td><td></td><td>—</td><td></td><td>(700)</td><td></td><td>—</td></tr><tr><td>Other comprehensive income attributable to NCI</td><td></td><td>—</td><td></td><td>9</td><td></td><td>(10)</td></tr><tr><td>Premium on purchase of NCI</td><td></td><td>—</td><td></td><td>404</td><td></td><td>—</td></tr><tr><td>Balance, end of period</td><td></td><td>—</td><td></td><td>—</td><td></td><td>287</td></tr><tr><td>TOTAL STOCKHOLDERS&#x27; EQUITY</td><td></td><td>$927,969</td><td></td><td>$742,927</td><td></td><td>$443,610</td></tr></table>

See notes to consolidated financial statements.



## IPG PHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<table><tr><td rowspan="3"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td colspan="4">(In thousands)</td></tr><tr><td>CASH FLOWS FROM OPERATING ACTIVITIES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$     155,780</td><td>$     147,744</td><td>$     121,009</td><td></td></tr><tr><td>Adjustments to reconcile net income to net cash provided by operating activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>31,524</td><td>26,144</td><td>23,962</td><td></td></tr><tr><td>Deferred income taxes</td><td>(6,168)</td><td>5,546</td><td>(288)</td><td></td></tr><tr><td>Stock-based compensation</td><td>11,720</td><td>8,565</td><td>8,048</td><td></td></tr><tr><td>(Gains) losses on unrealized foreign currency transactions</td><td>(235)</td><td>1,250</td><td>(764)</td><td></td></tr><tr><td>Other</td><td>62</td><td>(19)</td><td>565</td><td></td></tr><tr><td>Provisions for inventory, warranty &amp; bad debt</td><td>29,975</td><td>19,967</td><td>15,346</td><td></td></tr><tr><td>Changes in assets and liabilities that (used) provided cash:</td><td></td><td></td><td></td><td></td></tr><tr><td>Accounts receivable</td><td>(9,991)</td><td>(22,706)</td><td>(23,688)</td><td></td></tr><tr><td>Inventories</td><td>(50,355)</td><td>(22,975)</td><td>(56,139)</td><td></td></tr><tr><td>Prepaid expenses and other current assets</td><td>(3,980)</td><td>(899)</td><td>(770)</td><td></td></tr><tr><td>Accounts payable</td><td>974</td><td>4,375</td><td>1,985</td><td></td></tr><tr><td>Accrued expenses and other liabilities</td><td>(281)</td><td>(8,155)</td><td>(6,811)</td><td></td></tr><tr><td>Income and other taxes payable</td><td>(30,784)</td><td>21,118</td><td>12,929</td><td></td></tr><tr><td>Tax benefit from exercise of employee stock options</td><td>(8,874)</td><td>(4,679)</td><td>(8,033)</td><td></td></tr><tr><td>Net cash provided by operating activities</td><td>119,367</td><td>175,276</td><td>87,351</td><td></td></tr><tr><td>CASH FLOWS FROM INVESTING ACTIVITIES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Purchases of property, plant and equipment</td><td>(70,919)</td><td>(68,184)</td><td>(53,007)</td><td></td></tr><tr><td>Proceeds from sales of property, plant and equipment</td><td>236</td><td>—</td><td>—</td><td></td></tr><tr><td>Proceeds from sale of investment</td><td>495</td><td>—</td><td>—</td><td></td></tr><tr><td>Proceeds from short-term investments</td><td>—</td><td>25,451</td><td></td><td></td></tr><tr><td>Purchases of short-term investments</td><td>—</td><td>—</td><td>(25,451)</td><td></td></tr><tr><td>Acquisition of businesses</td><td>(5,555)</td><td>(11,596)</td><td>(750)</td><td></td></tr><tr><td>Other</td><td>(143)</td><td>(928)</td><td>109</td><td></td></tr><tr><td>Net cash used in investing activities</td><td>(75,886)</td><td>(55,257)</td><td>(79,099)</td><td></td></tr><tr><td>CASH FLOWS FROM FINANCING ACTIVITIES:</td><td></td><td></td><td></td><td></td></tr><tr><td>Proceeds from line-of-credit facilities</td><td>16,843</td><td>12,760</td><td>10,673</td><td></td></tr><tr><td>Payments on line-of-credit facilities</td><td>(15,990)</td><td>(17,190)</td><td>(10,630)</td><td></td></tr><tr><td>Purchase of noncontrolling interests</td><td>—</td><td>(700)</td><td>—</td><td></td></tr><tr><td>Purchase of redeemable noncontrolling interests</td><td>—</td><td>(55,400)</td><td>19,972</td><td></td></tr><tr><td>Principal payments on long-term borrowings</td><td>(2,853)</td><td>(2,117)</td><td>(1,432)</td><td></td></tr><tr><td>Exercise of employee stock options and issuances under employee stock purchase plan</td><td>7,275</td><td>5,480</td><td>5,268</td><td></td></tr><tr><td>Tax benefit from exercise of employee stock options</td><td>8,874</td><td>4,679</td><td>8,034</td><td></td></tr><tr><td>Proceeds from follow-on public offering, net of offering expenses</td><td>—</td><td>167,928</td><td>—</td><td></td></tr><tr><td>Distributions to shareholders</td><td>—</td><td>(33,353)</td><td>—</td><td></td></tr><tr><td>Net cash provided by financing activities</td><td>14,149</td><td>82,087</td><td>31,885</td><td></td></tr><tr><td>EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS</td><td>7,093</td><td>1,713</td><td>(7,763)</td><td></td></tr><tr><td>NET INCREASE IN CASH AND CASH EQUIVALENTS</td><td>64,723</td><td>203,819</td><td>32,374</td><td></td></tr><tr><td>CASH AND CASH EQUIVALENTS — Beginning of period</td><td>384,053</td><td>180,234</td><td>147,860</td><td></td></tr><tr><td>CASH AND CASH EQUIVALENTS — End of period</td><td>$     448,776</td><td>$     384,053</td><td>$     180,234</td><td></td></tr><tr><td>SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash paid for interest</td><td>$     208</td><td>$     864</td><td>$     1,089</td><td></td></tr><tr><td>Cash paid for income taxes</td><td>$     89,611</td><td>$     25,980</td><td>$     39,199</td><td></td></tr><tr><td>Non-cash transactions:</td><td></td><td></td><td></td><td></td></tr><tr><td>Demonstration units transferred from inventory to other assets</td><td>$     3,927</td><td>$     2,631</td><td>$     3,784</td><td></td></tr><tr><td>Additions to property, plant and equipment included in accounts payable</td><td>$     2,132</td><td>$     2,071</td><td>$     484</td><td></td></tr><tr><td>Property purchase financed with debt</td><td>$      —</td><td>$      —</td><td>$     1,833</td><td></td></tr><tr><td>Gain on sale of property, plant and equipment offset by related notes</td><td>$      —</td><td>$     322</td><td>$      —</td><td></td></tr></table>

See notes to consolidated financial statements.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

## 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business — IPG Photonics Corporation (the “Company”) is the leading developer and manufacturer of a broad line of high-performance fiber lasers, fiber amplifiers and diode lasers that are used for diverse applications, primarily in materials processing. Its world headquarters are located in Oxford, Massachusetts. It also has facilities and sales offices elsewhere in the United States, Europe and Asia.

Principles of Consolidation — The Company was incorporated as a Delaware corporation in December 1998. The accompanying financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Foreign Currency — The financial information for entities outside the United States is measured using local currencies as the functional currency. Assets and liabilities are translated into U.S. dollars at the exchange rate in effect on the respective balance sheet dates. Income and expenses are translated into U.S. dollars based on the average rate of exchange for the corresponding period. Exchange rate differences resulting from translation adjustments are accounted for directly as a component of accumulated other comprehensive income (loss).

Cash and Cash Equivalents and Short-Term Investments — Cash and cash equivalents consist primarily of highly liquid investments, such as bank deposits, marketable securities with original maturities of three months or less with insignificant interest rate risk and marketable securities with remaining maturities of three months or less at the date of acquisition. Short-term investments consisted primarily of similar highly liquid investments, such as bank deposits and marketable securities with remaining maturities greater than three months.

Inventories — Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventories include parts and components that may be specialized in nature and subject to rapid obsolescence. The Company periodically reviews the quantities and carrying values of inventories to assess whether the inventories are recoverable. Because of the Company’s vertical integration, a significant or sudden decrease in sales activity could result in a significant change in the estimates of excess or obsolete inventory valuation. The costs associated with provisions for excess quantities, technological obsolescence, or component rejections are charged to cost of sales as incurred.

Property, Plant and Equipment — Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is determined using the straight-line method based on the estimated useful lives of the related assets. In the case of leasehold improvements, the estimated useful lives of the related assets do not exceed the remaining terms of the corresponding leases. The following table presents the assigned economic useful lives of property, plant and equipment:

<table><tr><td>Category</td><td>Economic Useful Life</td></tr><tr><td>Buildings</td><td>30 years</td></tr><tr><td>Machinery and equipment</td><td>5-7 years</td></tr><tr><td>Office furniture and fixtures</td><td>3-5 years</td></tr></table>

Expenditures for maintenance and repairs are charged to operations. Interest expense associated with significant capital projects is capitalized as a cost of the project. The Company capitalized $524, $142 and $46 of interest expense in 2013, 2012 and 2011, respectively.

Long-Lived Assets — Long-lived assets, which consist primarily of property, plant and equipment, are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In cases in which undiscounted expected future cash flows are less than the carrying value, an impairment loss is recorded equal to the amount by which the carrying value exceeds the fair value of assets. No impairment losses have been recorded during the periods presented.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

Included in other long-term assets is certain demonstration equipment. The demonstration equipment is amortized over the respective estimated economic lives, generally 3 years. The carrying value of the demonstration equipment totaled $5,524 and $4,931 at December 31, 2013 and 2012, respectively. Amortization expense of demonstration equipment for the years ended December 31, 2013, 2012 and 2011, was $2,725, $2,797 and $2,920, respectively.

Goodwill — Goodwill is the amount by which the cost of the acquired net assets in a business acquisition exceeded the fair values of the net identifiable assets on the date of purchase. Goodwill is not amortized which is in accordance with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other (“FASB ASC 350”). Goodwill is assessed for impairment at least annually, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess. As more fully described in Note 13, the Company incurred an impairment loss of $2,803 in 2013, which is included in other income (expense) in the accompanying consolidated statements of income.

Intangible Assets — Intangible assets result from the Company’s various business acquisitions. Intangible assets are reported at cost, net of accumulated amortization, and are amortized on a straight-line basis either over their estimated useful lives of five to ten years or over the period the economic benefits of the intangible asset are consumed.

Revenue Recognition — The Company recognizes revenue in accordance with FASB ASC 605. Revenue from orders with multiple deliverables is divided into separate units of accounting when certain criteria are met. These separate units generally consist of equipment and installation. The consideration for the arrangement is allocated to the separate units of accounting based on their relative selling prices. The selling price of equipment is based on vendor-specific objective evidence and the selling price of installation is based on third-party evidence. Applicable revenue recognition criteria are applied separately for each separate unit of accounting. Revenue for laser and amplifier sources generally is recognized upon the transfer of ownership which is typically at the time of shipment. Installation revenue is recognized upon completion of the installation service which typically occurs within 30 to 90 days of delivery. For laser systems, which may carry customer specific processing requirements, revenue is recognized at the latter of customer acceptance date or shipment date if the customer acceptance is made prior to shipment. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return generally are not included in sales arrangements.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts Receivable include $17,679 and $8,526 of bank acceptance drafts at December 31, 2013 and 2012, respectively. Bank acceptance drafts are bank guarantees of payment on specified dates. The maturity of these bank acceptance drafts is less than 90 days. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.

Activity related to the allowance for doubtful accounts was as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$ 2,173</td><td>$ 1,605</td><td>$ 2,143</td></tr><tr><td>Provision for bad debts, net of recoveries</td><td>323</td><td>642</td><td>(219)</td></tr><tr><td>Uncollectable accounts written off</td><td>(31)</td><td>(170)</td><td>(309)</td></tr><tr><td>Foreign currency translation</td><td>8</td><td>96</td><td>(10)</td></tr><tr><td>Balance at December 31</td><td>$ 2,473</td><td>$ 2,173</td><td>$ 1,605</td></tr></table>

Warranties — The Company typically provides one to three-year parts and service warranties on lasers and amplifiers. Most of the Company’s sales offices provide support to customers in their respective geographic areas. The Company estimates the warranty accrual considering past claims experience, the number of units still covered by warranty and the average life of the remaining warranty period. The warranty accrual has generally been sufficient to cover product warranty repair and replacement costs.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

Activity related to the warranty accrual was as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$ 10,714</td><td>$ 8,631</td><td>$ 6,917</td></tr><tr><td>Provision for warranty accrual</td><td>11,363</td><td>8,112</td><td>6,701</td></tr><tr><td>Warranty claims and other reductions</td><td>(7,405)</td><td>(6,542)</td><td>(4,692)</td></tr><tr><td>Foreign currency translation and other</td><td>325</td><td>513</td><td>(295)</td></tr><tr><td>Balance at December 31</td><td>$ 14,997</td><td>$ 10,714</td><td>$ 8,631</td></tr></table>

Accrued warranty reported in the accompanying consolidated financial statements as of December 31, 2013 and December 31, 2012 consists of $7,724 and $7,838 in accrued expenses and other liabilities and $7,273 and $2,876 in other long-term liabilities, respectively.

Advertising Expense — The cost of advertising is expensed as incurred. The Company conducts substantially all of its sales and marketing efforts through trade shows, professional and technical conferences, direct sales and our website. The Company’s advertising costs were not material for the periods presented.

Research and Development — Research and development costs are expensed as incurred.

Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities and net operating loss carryforwards and credits using enacted rates in effect when those differences are expected to reverse. Valuation allowances are provided against deferred tax assets that are not deemed to be recoverable. The Company recognizes tax positions that are more likely than not to be sustained upon examination by relevant tax authorities. The tax positions are measured at the greatest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement.

The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. The reserves are based on a determination of whether and how much of a tax benefit taken by it in its tax filings or positions is more likely than not to be realized following resolution of uncertainties related to the tax benefit, assuming that the matter in question will be raised by the tax authorities.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents, auction rate securities and accounts receivable. The Company maintains substantially all of its cash and marketable securities in six financial institutions, which it believes to be high-credit quality financial institutions. The Company grants credit to customers in the ordinary course of business and provide a reserve for potential credit losses. Such losses historically have been within management’s expectations (see discussion related to significant customers in Note 15).

Fair Value of Financial Instruments — The Company’s financial instruments consist of cash equivalents, accounts receivable, auction rate securities, accounts payable, drawings on revolving lines of credit, long-term debt, certain derivative instruments and contingent consideration.

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

The carrying amounts of cash equivalents, accounts receivable, accounts payable and drawings on revolving lines of credit are considered reasonable estimates of their fair market value, due to the short maturity of these instruments or as a result of the competitive market interest rates, which have been negotiated.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

The following table presents information about the Company’s assets and liabilities measured at fair value:

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="4">Fair Value Measurements at December 31, 2013</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash equivalents</td><td>$ 240,159</td><td>$ 240,159</td><td>$</td><td>—</td><td>$</td></tr><tr><td>Auction rate securities</td><td>1,120</td><td>—</td><td>—</td><td></td><td>1,120</td></tr><tr><td>Total assets</td><td>$ 241,279</td><td>$ 240,159</td><td>$</td><td>—</td><td>$ 1,120</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Contingent purchase consideration</td><td>$ 375</td><td>$</td><td>—</td><td>$</td><td>375</td></tr><tr><td>Interest rate swap</td><td>423</td><td>—</td><td></td><td>423</td><td>—</td></tr><tr><td>Total liabilities</td><td>$ 798</td><td>$</td><td>—</td><td>423</td><td>$ 375</td></tr></table>

<table><tr><td rowspan="2"></td><td rowspan="2">Total</td><td colspan="4">Fair Value Measurements at December 31, 2012</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cash equivalents</td><td>$ 237,049</td><td>$ 237,049</td><td>$</td><td>—</td><td>$</td></tr><tr><td>Auction rate securities</td><td>1,112</td><td>—</td><td>—</td><td></td><td>1,112</td></tr><tr><td>Total assets</td><td>$ 238,161</td><td>$ 237,049</td><td>$</td><td>—</td><td>$ 1,112</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Contingent purchase consideration</td><td>$ 3,023</td><td>$</td><td>—</td><td>$</td><td>3,023</td></tr><tr><td>Interest rate swaps</td><td>855</td><td></td><td>—</td><td>855</td><td></td></tr><tr><td>Total liabilities</td><td>$ 3,878</td><td>$</td><td>—</td><td>855</td><td>$ 3,023</td></tr></table>

Auction rate securities and contingent consideration are measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The fair value of the auction rate securities was determined using prices observed in inactive secondary markets for the securities held by the Company. The auction rate securities are considered available-for-sale securities. They had a cost basis of $1,450 at December 31, 2013 and December 31, 2012. Other-than-temporary impairments recorded in other income (expense), net were $0, $0 and $49 in 2013, 2012 and 2011, respectively.

The interest rate swaps are designated as cash flow hedges the fair value of which was estimated based on quoted market prices or pricing models using current market rates. Fair value at December 31, 2013 and December 31, 2012 for the interest rate swaps considered prices observed in inactive secondary markets for the securities held by the Company.

The fair value of contingent consideration was determined using an income approach at the respective business combination dates and at the reporting date. That approach is based on significant inputs that are not observable in the market and include key assumptions such as assessing the probability of meeting certain milestones required to earn the contingent consideration. The business combinations that give rise to contingent consideration are more fully described in Note 12.

During the second quarter of 2013, the Company reduced the fair value of contingent consideration related to the Company's subsidiary, IPG Microsystems LLC's ("IPGM") acquisition of certain working capital and long-term assets from JP Sercel Associates Inc. ("JPSA") to $0 because management assessed that there was no possibility that milestones in the earn-out agreements would be achieved. Additionally, the Company reduced other contingent consideration for other agreements by $196. Accordingly, $2,659 is included in other income (expense) in the accompanying Consolidated Statements of Income.

During the year ended December 31, 2012, the Company terminated a warrant held by a former investor in the Company's Russian subsidiary NTO IRE-Polus ("IPG Russia") as part of the redemption of the investor's redeemable noncontrolling interest for its fair value of $77.



## IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

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

<table><tr><td></td><td>2013</td><td>2012</td></tr><tr><td>Auction Rate Securities</td><td></td><td></td></tr><tr><td>Balance, January 1</td><td>$ 1,112</td><td>$ 1,104</td></tr><tr><td>Change in fair value and accretion</td><td>8</td><td>8</td></tr><tr><td>Balance, December 31</td><td>$ 1,120</td><td>$ 1,112</td></tr><tr><td>Contingent Purchase Consideration</td><td></td><td></td></tr><tr><td>Balance, January 1</td><td>$ 3,023</td><td>$ 999</td></tr><tr><td>Period transactions</td><td>—</td><td>2,444</td></tr><tr><td>Adjustment for determination of final payment</td><td>—</td><td>987</td></tr><tr><td>Change in fair value and currency fluctuations</td><td>(2,648)</td><td>10</td></tr><tr><td>Settlements and payments</td><td>—</td><td>(1,417)</td></tr><tr><td>Balance, December 31</td><td>$ 375</td><td>$ 3,023</td></tr><tr><td>Warrant</td><td></td><td></td></tr><tr><td>Balance, January 1</td><td>$ —</td><td>$ 77</td></tr><tr><td>Period transactions</td><td>—</td><td>(77)</td></tr><tr><td>Balance, December 31</td><td>$ —</td><td>$ —</td></tr></table>

Comprehensive Income — Comprehensive income includes charges and credits to equity that are not the result of transactions with stockholders. Included within comprehensive income is the cumulative foreign currency translation adjustment and unrealized gains or losses on derivatives. These adjustments are accumulated within the consolidated statements of comprehensive income.

Total components of accumulated other comprehensive loss were as follows:

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Foreign currency translation adjustments</td><td>$ (1,677)</td><td>$ (2,802)</td></tr><tr><td>Unrealized loss on derivatives, net of tax of $168 and $331</td><td>(256)</td><td>(524)</td></tr><tr><td>Change in carrying value of auction rate securities</td><td>232</td><td>232</td></tr><tr><td>Attribution to NCI and redeemable NCI</td><td>—</td><td>3,292</td></tr><tr><td>Purchase of NCI and redeemable NCI</td><td>—</td><td>(3,292)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>$ (1,701)</td><td>$ (3,094)</td></tr></table>

Derivative Instruments — The Company’s primary market exposures are to interest rates and foreign exchange rates. The Company uses certain derivative financial instruments to help manage these exposures. The Company executes these instruments with financial institutions it judges to be credit-worthy. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company has interest rate swaps that are classified as a cash flow hedge of its variable rate debt. The Company has no derivatives that are not accounted for as a hedging instrument.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

Cash Flow Hedges — The Company’s cash flow hedges are interest rate swaps under which it pays fixed rates of interest. The fair value amounts in the consolidated balance sheets were:

<table><tr><td rowspan="3"></td><td colspan="2">Notional Amounts \( ^{1} \)</td><td colspan="2">Other Assets</td><td colspan="2">Deferred Income Taxes And Other Long-Term Liabilities</td></tr><tr><td colspan="2">December 31,</td><td colspan="2">December 31,</td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2013</td><td>2012</td><td>2013</td><td>2012</td></tr><tr><td>Interest rate swap(s)</td><td>12,666</td><td>14,000</td><td>—</td><td>—</td><td>423</td><td>855</td></tr><tr><td>Total</td><td>12,666</td><td>14,000</td><td>—</td><td>—</td><td>423</td><td></td></tr></table>

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

The derivative gains and losses in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011, related to the Company’s interest rate swap contracts were as follows:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Effective portion recognized in other comprehensive income (loss), pretax:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate swap</td><td>$     881</td><td>$     944</td><td>$     562</td><td></td></tr><tr><td>Effective portion reclassified from other comprehensive income (loss) to interest expense, pretax:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate swap</td><td>$      (449)</td><td>$      (576)</td><td>$      (629)</td><td></td></tr><tr><td>Ineffective portion recognized in income:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate swap</td><td>$      —</td><td>$      —</td><td>$      —</td><td></td></tr></table>

The Company made no adjustments to the fair value of this derivative as a result of evaluating counterparty risk.

Business Segment Information — The Company operates in one segment which involves the design, development, production and distribution of fiber lasers, laser systems, fiber amplifiers, and related optical components. The Company has a single, company-wide management team that administers all properties as a whole rather than as discrete operating segments. The chief decision maker, who is the Company’s chief executive officer, measures financial performance as a single enterprise and not on legal entity or end-market basis. Throughout the year, the chief decision maker allocates capital resources on a project-by-project basis across the Company’s entire asset base to maximize profitability without regard to legal entity or end-market basis. The Company operates in a number of countries throughout the world in a variety of product lines. Information regarding geographic financial information and product lines is provided in Note 15.

Earnings Per Share — The Company computes net income per share in accordance with ASC 260-Earnings Per Share. Under the provisions of ASC 260, the Company is required to present basic and diluted earnings per share information separately for each class of equity instruments that participate in any income distribution with primary equity instruments. The Company calculates earnings per share in periods where a class of common stock was redeemable for other than fair value through the application of the two-class method. Until June 29, 2012, the Company had redeemable noncontrolling interests reported in the accompanying consolidated financial statements related to a 22.5% minority interest of IPG Russia. The computation of net income per share is provided in Note 9.

Recent Accounting Pronouncements — Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

Subsequent Events — The Company has considered the impact of subsequent events through the filing date of these financial statements.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

## 2. STOCK-BASED COMPENSATION

Stock-based compensation is included in the following financial statement captions:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>Cost of sales</td><td>$     3,187</td><td>$     2,184</td><td>$     1,731</td><td></td></tr><tr><td>Sales and marketing</td><td>1,195</td><td>1,052</td><td>1,503</td><td></td></tr><tr><td>Research and development</td><td>1,929</td><td>1,327</td><td>1,036</td><td></td></tr><tr><td>General and administrative</td><td>5,409</td><td>4,002</td><td>3,778</td><td></td></tr><tr><td>Total stock-based compensation</td><td>11,720</td><td>8,565</td><td>8,048</td><td></td></tr><tr><td>Tax benefit recognized</td><td>(3,784)</td><td>(2,629)</td><td>(2,551)</td><td></td></tr><tr><td>Net stock-based compensation</td><td>$     7,936</td><td>$     5,936</td><td>$     5,497</td><td></td></tr></table>

Compensation cost for all share-based payment awards is based on the estimated grant-date fair value. The Company allocates and records stock-based compensation expense on a straight-line basis over the requisite service period.

The Company calculates the fair value of stock option grants using the Black-Scholes option pricing model. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. The weighted average assumptions used in the Black-Scholes model or the calculation of compensation were as follows for the years ended December 31.

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Expected term</td><td>4.4-6.3 years</td><td>4.0-6.6 years</td><td>3.4-6.9 years</td></tr><tr><td>Volatility</td><td>51%-54%</td><td>49%-56%</td><td>46%-56%</td></tr><tr><td>Risk-free rate of return</td><td>0.74%-1.32%</td><td>0.59%-1.23%</td><td>0.48%-2.82%</td></tr><tr><td>Dividend yield</td><td>0.25%</td><td>—%</td><td>—%</td></tr><tr><td>Forfeiture rate</td><td>0%-5.97%</td><td>0%-6.1%</td><td>0%-6.26%</td></tr></table>

Incentive Plans — In April 2000, the Company’s board of directors adopted the 2000 Incentive Compensation Plan (the “2000 Plan”), and in February 2006, the Company’s board of directors adopted the 2006 Incentive Compensation Plan (the “2006 Plan”), which provide for the issuance of stock options and other stock and non-stock based awards to the Company’s directors, employees, consultants and advisors. The Company reserved 5,833,333 shares under the 2000 Plan and 4,000,000 shares under the 2006 Plan for the issuance of awards under the plans. During 2011, the Company reserved an additional 6,084,273 shares under the 2006 Plan. In June 2006, the Company’s board of directors adopted the Non-Employee Directors Stock Plan (the “Directors Plan”). Only non-employee directors are eligible to receive awards under the Directors Plan. The Company reserved 486,660 shares for issuance under the Directors Plan. Under the three plans, the Company may grant nonstatutory stock options at an exercise price at least equal to the fair value of its common stock on the date of grant, unless the board of directors or compensation committee determines otherwise on the date of grant. Incentive stock options may be granted under the 2000 Plan and the 2006 Plan at exercise prices equal to or exceeding the fair value of the common stock on the date of grant. The Company may also grant restricted stock, restricted stock units and other equity-based awards. Incentive awards generally become exercisable over periods of one to five years and expire seven to ten years from the date of the grant. The awards under the 2000 Plan and the 2006 Plan may become exercisable earlier upon the occurrence of certain change of control events at the election of the board of directors or compensation committee, and all awards under the Directors Plan automatically become exercisable upon a change of control. All shares issued under the stock option plans are registered shares newly issued by the Company. At December 31, 2013, options to purchase 5,949,410 shares of the Company’s stock were available for future grant under the three option plans.

A summary of option activity, including the employee stock purchase plan, is presented below (see Note 11 for further information):



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

<table><tr><td></td><td>Number of Options</td><td>Weighted-Average Exercise Price</td><td>Weighted-Average Remaining Contractual Life</td><td>Aggregate Intrinsic Value</td></tr><tr><td></td><td></td><td></td><td>(In years)</td><td>(In thousands)</td></tr><tr><td>Outstanding — January 1, 2013</td><td>2,789,752</td><td>$ 29.50</td><td></td><td></td></tr><tr><td>Granted</td><td>511,881</td><td>60.33</td><td></td><td></td></tr><tr><td>Exercised</td><td>(540,232)</td><td>10.89</td><td></td><td></td></tr><tr><td>Forfeited</td><td>(61,504)</td><td>48.13</td><td></td><td></td></tr><tr><td>Outstanding — December 31, 2013</td><td>2,699,897</td><td>$ 38.00</td><td>6.79</td><td>$ 113,234</td></tr><tr><td>Vested or expected to vest — December 31, 2013</td><td>2,554,470</td><td>$ 37.01</td><td>6.70</td><td>$ 109,308</td></tr><tr><td>Exercisable — December 31, 2013</td><td>951,180</td><td>$ 20.93</td><td>4.98</td><td>$ 53,916</td></tr></table>

The intrinsic value of the options exercised during the years ended December 31, 2013, 2012 and 2011, was $30,063, $20,792 and $29,265, respectively.

The weighted-average grant fair value per share for options granted during the years ended December 31, 2013, 2012 and 2011, was $28.28, $26.80 and $27.60, respectively.

The total compensation cost related to nonvested awards not yet recorded at December 31, 2013 was $25,323 which is expected to be recognized over a weighted average of 2.7 years.

The aggregate fair value of awards vested during the year ended December 31, 2013 was $5,619.

## 3. INVENTORIES

Inventories consist of the following:

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Components and raw materials</td><td>$ 54,539</td><td>$ 53,436</td></tr><tr><td>Work-in-process</td><td>64,927</td><td>46,240</td></tr><tr><td>Finished goods</td><td>53,234</td><td>39,942</td></tr><tr><td>Total</td><td>$ 172,700</td><td>$ 139,618</td></tr></table>

The Company recorded inventory provisions totaling $15,128, $8,232 and $6,139 for the years ended December 31, 2013, 2012 and 2011, respectively. These provisions relate to the recoverability of the value of inventories due to technological changes and excess quantities. These provisions are reported as a reduction to components and raw materials and finished goods.

## 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consist of the following:

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Land</td><td>$ 15,448</td><td>$ 17,303</td></tr><tr><td>Buildings</td><td>146,730</td><td>109,288</td></tr><tr><td>Machinery and equipment</td><td>165,050</td><td>135,756</td></tr><tr><td>Office furniture and fixtures</td><td>23,589</td><td>22,446</td></tr><tr><td>Construction-in-progress</td><td>52,911</td><td>52,457</td></tr><tr><td>Total property, plant and equipment</td><td>403,728</td><td>337,250</td></tr><tr><td>Accumulated depreciation</td><td>(151,483)</td><td>(126,687)</td></tr><tr><td>Total property, plant and equipment — net</td><td>$ 252,245</td><td>$ 210,563</td></tr></table>



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

The Company recorded depreciation expense of $26,489, $21,108 and $18,796 for the years ended December 31, 2013, 2012 and 2011, respectively.

## 5. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Accrued compensation</td><td>$ 25,727</td><td>$ 21,972</td></tr><tr><td>Customer deposits and deferred revenue</td><td>18,489</td><td>17,174</td></tr><tr><td>Current portion of accrued warranty</td><td>7,724</td><td>7,838</td></tr><tr><td>Other</td><td>7,396</td><td>4,467</td></tr><tr><td>Total</td><td>$ 59,336</td><td>$ 51,451</td></tr></table>

## 6. FINANCING ARRANGEMENTS

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Revolving line-of-credit facilities:</td><td></td><td></td></tr><tr><td>European overdraft facilities</td><td>$ 1,038</td><td>$ 1,135</td></tr><tr><td>Euro line of credit</td><td>2,258</td><td>956</td></tr><tr><td>U.S. line of credit</td><td>—</td><td>351</td></tr><tr><td>Total</td><td>$ 3,296</td><td>$ 2,442</td></tr><tr><td>Term debt:</td><td></td><td></td></tr><tr><td>U.S. long-term note</td><td>$ 12,666</td><td>$ 14,000</td></tr><tr><td>Other notes payable</td><td>—</td><td>1,519</td></tr><tr><td>Less: current portion</td><td>(1,333)</td><td>(1,505)</td></tr><tr><td>Total long-term debt</td><td>$ 11,333</td><td>$ 14,014</td></tr></table>

The U.S. and Euro lines of credit are available to certain foreign subsidiaries and allow for borrowings in the local currencies of those subsidiaries.

## Revolving Line of Credit Facilities:

U.S. Line of Credit — The Company maintains an unsecured revolving line of credit with available principal of up to $35,000, expiring in June 2015. The line of credit bears interest at a variable rate of LIBOR plus 1.125% to 1.625% depending on the Company’s financial performance. $14,100 of this credit facility is available to the Company’s foreign subsidiaries including those in India, China, Japan and South Korea. At December 31, 2013, there were no drawings and the remaining availability under the U.S. Line of Credit totaled $35,000.

Euro Line of Credit — The Company maintains an unsecured revolving line of credit with a principal amount of Euro 20,000 ($27,533 at December 31, 2013) that expires in June 2014. The credit facility bears interest at various rates based upon the type of loan. $17,896 of this credit facility is available to our German subsidiary, $4,130 is available to the Company’s Russian subsidiary and $5,507 is available to the Company’s Italian subsidiary. Total drawings at December 31, 2013 were $2,258 with an interest rate of 1.7%. At December 31, 2013, the aggregate remaining availability under this line was $25,275.

Euro Overdraft Facilities — The Company maintains a syndicated overdraft facility with available principal of Euro 850 ($1,170 at December 31, 2013) that does not have an expiration date. This facility bears interest at market rates that vary depending upon the bank within the syndicate that advances the principal outstanding (6.5% at December 31, 2013). At December 31, 2013, the aggregate remaining availability under these lines was $1,170.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

Other European Facilities — The Company maintains two Euro credit lines in Italy with aggregate available principal of Euro 1,000 ($1,377 as of December 31, 2013) which bear interest at 1.2% and expire in June and September 2014. Total drawings at December 31, 2013 were $1,038. At December 31, 2013, the aggregate remaining availability under these lines was $339. These facilities are collateralized by a common pool of the assets of the Company’s Italian subsidiary, IPG Photonics (Italy) S.r.l.

## Term Debt:

U.S. Long-Term Note — Outstanding principal under the U.S. Long-Term Note bears interest at LIBOR plus 0.9% to 1.3%, depending on certain financial ratios and requires monthly principal payments of $111 and interest through June 2015, at which time the remaining principal is payable. The Company entered into an interest rate swap instrument which converted the variable LIBOR rate on the original term note to a fixed rate of 5.0% per annum. For the term from August 2013 to June 2015, the Company entered into a separate interest rate swap instrument which converts the variable LIBOR rate to a fixed rate of 2.57% per annum. Changes in fair value of the swaps are included in accumulated other comprehensive loss on the consolidated balance sheets. The unrealized loss on the swap will be recognized into income over the term of the swap as a charge to interest expense.

The Company is required to meet certain financial covenants associated with its U.S. Line of Credit and U.S. Long-Term Note. These covenants, tested quarterly, include a debt service coverage ratio and a funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio. The debt service coverage covenant requires it to maintain a trailing twelve month ratio of cash flow to debt service that is greater than 1.5:1. Debt service is defined as required principal and interest payments during the period. Cash flow is defined as EBITDA less unfunded capital expenditures. The funded debt to EBITDA covenant requires that the sum of all indebtedness for borrowed money on a consolidated basis be less than two times the Company’s trailing twelve months EBITDA.

## 7. REDEEMABLE NONCONTROLLING INTERESTS, STOCKHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

Redeemable Noncontrolling Interests — Redeemable noncontrolling interests reported in the accompanying consolidated financial statements related to a 22.5% minority interest of IPG Russia, as of December 31, 2011 and through June 29, 2012, respectively.

In December 2010 and June 2011, the Company sold an aggregate 22.5% minority interest (the “Minority Interest”) of IPG Russia to an investor for $45,000. In addition, the Company had a call option commencing in December 2013 to buy back the Minority Interest at a predetermined value and the investor had a warrant to purchase an additional 2.5% interest in IPG Russia and a put option commencing in December 2015 to sell its Minority Interest to the Company at a predetermined value. On June 29, 2012, the Company repurchased the Minority Interest for $55,400 in cash. Under the terms of the agreement, the warrant and the put and call options were terminated. Due to the put rights, the Minority Interest repurchase was reported as a liability other than permanent equity under ASC 480-10-S99-3A. Based upon the Company’s valuation of the Minority Interest, the amount paid to repurchase the Minority Interest did not exceed its fair value. Accordingly, pursuant to ASC 480-10-S99-3A, the Company recorded the amount paid in excess of carrying amount in additional paid-in capital.

The following is a reconciliation of the reported amounts of redeemable noncontrolling interest in the accompanying balance sheets as of December 31, 2012. As the redeemable NCI was repurchased during 2012, there is no reconciliation for 2013.

<table><tr><td></td><td>2012</td></tr><tr><td>Balance at January 1</td><td>$ 46,123</td></tr><tr><td>Net income attributable to redeemable NCI</td><td>2,740</td></tr><tr><td>Adjustments to redemption value</td><td>(493)</td></tr><tr><td>Other comprehensive (loss) attributable to redeemable NCI</td><td>(841)</td></tr><tr><td>Carrying value of redeemable NCI at purchase date</td><td>$ 47,529</td></tr><tr><td>Purchase of redeemable NCI in excess of carrying amount</td><td>7,794</td></tr><tr><td>Rupurchase of NCI, less warrant value</td><td>(55,323)</td></tr><tr><td>Balance at December 31</td><td>$ —</td></tr></table>



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

Authorized Capital — The Company has authorized capital stock consisting of 175,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share. There are no shares of preferred stock outstanding as of December 31, 2013.

Dividend — The Company declared and paid a special cash dividend on its capital stock in December 2012 of $33,353, or $0.65 per share. There were no dividends declared or paid for the years ended December 31, 2013 or 2011.

Noncontrolling Interests — Noncontrolling interests reported in the accompanying consolidated financial statements consisted of a 10% noncontrolling interest of the Company’s South Korean subsidiary, IPG Photonics (Korea) Ltd. (“IPG Korea”), as of December 31, 2011. In January 2012, the Company purchased the outstanding 10% noncontrolling interest of IPG Korea from the other stockholder of IPG Korea.

For the years ended December 31, 2013, 2012 and 2011, the net income attributable to NCI of $0, $2,740 and $3,250, respectively, includes amounts related to the IPG Russia investor NCI of $0, $2,740 and $3,156, respectively. The net income attributable to NCI classified as permanent equity totaled $94 in 2011.

## 8. RELATED-PARTY TRANSACTIONS

In 2013 and in 2012, the Company purchased various parts and services from a company with which one of the Company’s outside directors is affiliated. The payments made for such services for 2013 totaled $130. In 2012, payments of $3,973 of which $3,967 were made prior to that outside director being appointed to the Company’s board. The Company has an amount of $1,155 in Accounts Payable due to this company at December 31, 2013. There were no amounts due to this company in 2012. The Company also sold various products to a separate company with whom another of the Company’s outside directors is affiliated. Sales to that company totaled $194 for 2012. No sales were made to this company during 2013.

## 9. NET INCOME ATTRIBUTABLE TO IPG PHOTONICS CORPORATION PER SHARE

The following table sets forth the computation of diluted net income attributable to IPG Photonics Corporation per share:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net income attributable to IPG Photonics Corporation</td><td>$ 155,780</td><td>$ 145,004</td><td>$ 117,759</td></tr><tr><td>Adjustments to redemption value of redeemable noncontrolling interests</td><td>—</td><td>493</td><td>(493)</td></tr><tr><td>Net income attributable to common stockholders</td><td>155,780</td><td>145,497</td><td>117,266</td></tr><tr><td>Weighted average shares</td><td>51,548</td><td>50,477</td><td>47,365</td></tr><tr><td>Dilutive effect of common stock equivalents</td><td>827</td><td>1,059</td><td>1,320</td></tr><tr><td>Diluted weighted average common shares</td><td>52,375</td><td>51,536</td><td>48,685</td></tr><tr><td>Basic net income attributable to IPG Photonics Corporation per share</td><td>$ 3.02</td><td>$ 2.86</td><td>$ 2.49</td></tr><tr><td>Adjustments to redemption value of redeemable noncontrolling interests</td><td>—</td><td>0.01</td><td>(0.01)</td></tr><tr><td>Basic net income attributable to common stockholders</td><td>$ 3.02</td><td>$ 2.87</td><td>$ 2.48</td></tr><tr><td>Diluted net income attributable to IPG Photonics Corporation per share</td><td>$ 2.97</td><td>$ 2.80</td><td>$ 2.42</td></tr><tr><td>Adjustments to redemption value of redeemable noncontrolling interests</td><td>—</td><td>0.01</td><td>(0.01)</td></tr><tr><td>Diluted net income attributable to common stockholders</td><td>$ 2.97</td><td>$ 2.81</td><td>$ 2.41</td></tr></table>

The computation of diluted weighted average common shares excludes options to purchase 322,301 shares, 164,858 shares and 338,679 shares for the years ended December 31, 2013, 2012 and 2011, respectively, because the effect would be anti-dilutive.

## 10. COMMITMENTS AND CONTINGENCIES

Operating Leases — The Company leases certain facilities under cancelable and noncancelable operating lease agreements which expire through January 2018. In addition, it leases capital equipment under operating leases. Rent expense for the years ended December 31, 2013, 2012 and 2011, totaled $4,560, $3,885 and $4,369, respectively.

Commitments under the noncancelable lease agreements as of December 31, 2013 are as follows:



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

<table><tr><td>Years Ending December 31</td><td>Facilities</td><td>Equipment</td><td>Total</td></tr><tr><td>2014</td><td>$ 3,888</td><td>$ 906</td><td>$ 4,794</td></tr><tr><td>2015</td><td>3,459</td><td>530</td><td>3,989</td></tr><tr><td>2016</td><td>2,441</td><td>258</td><td>2,699</td></tr><tr><td>2017</td><td>787</td><td>53</td><td>840</td></tr><tr><td>2018</td><td>325</td><td>22</td><td>347</td></tr><tr><td>Thereafter</td><td>—</td><td>40</td><td>40</td></tr><tr><td>Total</td><td>$ 10,900</td><td>$ 1,809</td><td>$ 12,709</td></tr></table>

Employment Agreements — The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to three years and include noncompete and nondisclosure provisions, as well as provisions for defined severance for terminations of employment under certain conditions and change of control of the Company. The Company also maintains a severance plan for certain of its senior management providing for defined severance for terminations of employment under certain conditions and change of control of the Company.

Contractual Obligations — The Company has entered into various purchase obligations that include agreements for construction of buildings, raw materials and equipment. Obligations under these agreements were $3,371 and $8,921 as of December 31, 2013 and 2012, respectively.

Legal proceedings — From time to time, the Company may be involved in disputes and legal proceedings in the ordinary course of its business. These proceedings may include allegations of infringement of intellectual property, commercial disputes and employment matters. In August 2013, the Company was sued for misappropriation of certain trade secrets, unfair trade practices, and correction of internship on a patent owned by the Company related to beam couplers and beam switches. The plaintiff seeks damages in an unspecified amount, double damages for misappropriation of trade secrets and treble damages for unfair trade practices and correction of internship on one patent. The Company intends to vigorously defend the claims. At this time, no loss is deemed probable and no amounts have been accrued in respect of this contingency. As of December 31, 2013 and through the date of the Company’s subsequent review period of February 28, 2014, the Company has no legal proceedings ongoing that management estimates could have a material effect on the Company’s Consolidated Financial Statements.

## 11. EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) retirement savings plan covering all of its U.S. employees. The Company makes matching contributions equal to 50% of the employee’s contributions, subject to a maximum of 6% of eligible compensation. Compensation expense related to its contribution to the plan for the years ended December 31, 2013, 2012 and 2011, approximated $1,127, $848 and $701, respectively.

The Company has offered an employee stock purchase plan covering its U.S. and German employees. The plan allows employees who participate to purchase shares of common stock through payroll deductions at a 15% discount to the lower of the stock price on the first day or the last day of the six-month purchase period. Payroll deductions may not exceed 10% of the employee’s compensation and are subject to other limitations. Compensation expense related to the employee stock purchase plan was $498, $452 and $359 for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, there were 385,194 shares available for issuance under the employee stock purchase plan.

## 12. BUSINESS COMBINATIONS

On March 13, 2013, the Company acquired the working capital and long term assets of Mobius Photonics Inc. ("Mobius"), a manufacturer of high-power pulsed ultra-violet ("UV") fiber lasers for micro-machining and fine processing applications. As a result of the acquisition, the Company recorded intangible assets of $4,480 which related to production know-how with an estimated useful life of 7 years and $455 of goodwill that is deductible for federal income tax purposes. The acquisition did not have a material effect on the Company’s financial results in 2013.

On August 31, 2012, the Company's subsidiary, IPGM acquired certain working capital and long-term assets from JPSA, which is a manufacturer of laser-based systems performing fine processing of materials used in semiconductor, LED and solar applications. As a result of the acquisition, the Company recorded $2,898 of goodwill and intangible assets of $3,400, of which $2,400 related to technology and production know-how and the remainder related to customer relationships, non-compete agreements and trade names with weighted-average estimated useful lives of 10 years, 10 years, 5 years and 7 years,



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

respectively. The acquisition did not have a material effect on the Company’s financial results in 2012. In addition to cash paid, consideration included contingent consideration based on sales targets that extended for two one-year periods beginning October 1, 2012. Total possible additional payouts under these earn-outs were $18,500. As discussed in the fair value financial instruments disclosures in Note 1, the Company reduced the fair value of the contingent consideration related to IPGM to $0 during 2013. Also, as discussed in Note 13, the Company reduced the Goodwill associated with IPGM to $0 as well.

The Company completed the acquisition of Multilane Technology through its Italian subsidiary in the first quarter of 2011. The acquisition did not have a material effect on the Company’s financial results in 2011. Consideration included contingent consideration with an aggregate fair value of $282. Net assets acquired primarily consisted of intangible assets related to software aggregating $1,182.

## 13. GOODWILL AND INTANGIBLES

The following table sets forth the changes in the carrying amount of goodwill for the year ended December 31, 2013:

<table><tr><td></td><td>December 31, 2013</td><td>December 31, 2012</td></tr><tr><td>Balance at January 1</td><td>$ 2,898</td><td>$ —</td></tr><tr><td>Adjustment</td><td>(95)</td><td>—</td></tr><tr><td>Impairment</td><td>(2,803)</td><td>—</td></tr><tr><td>Total goodwill arising from acquisition</td><td>455</td><td>2,898</td></tr><tr><td>Balance at December 31</td><td>$ 455</td><td>$ 2,898</td></tr></table>

The goodwill balance at January 1 of $2,898 and the adjustment of $95, largely reflected the potential synergies and expansion of the Company’s service offerings complementary to its specialized laser systems and UV and short-pulse fiber lasers resulting from the 2012 acquisition from JPSA.

The goodwill of $455 arising from the Mobius acquisition relates to the expected synergies for the Company's expansion of product offerings with UV and short pulsed fiber lasers. The goodwill arising from the acquisition in 2013 is deductible over 15 years for federal tax purposes.

During the second quarter of 2013, the Company undertook an impairment analysis of long-lived assets and goodwill related to IPGM, the assets of which were acquired in September 2012 which is also described in Note 1.

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

<table><tr><td rowspan="2"></td><td colspan="4">December 31, 2013</td><td colspan="4">December 31, 2012</td></tr><tr><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td>Net Carrying Amount</td><td>Weighted-Average Amortization</td><td>Gross Carrying Amount</td><td>Accumulated Amortization</td><td>Net Carrying Amount</td><td>Weights-Average Lives</td></tr><tr><td>Patents</td><td>$ 4,667</td><td>$ (4,091)</td><td>$ 576</td><td>6 Years</td><td>$ 4,664</td><td>$ (4,193)</td><td>$ 471</td><td>6 Years</td></tr><tr><td>Customer relationships</td><td>4,112</td><td>(3,324)</td><td>788</td><td>5 Years</td><td>3,993</td><td>(2,363)</td><td>1,630</td><td>5 Years</td></tr><tr><td>Production know-how</td><td>7,063</td><td>(1,747)</td><td>5,316</td><td>8 Years</td><td>2,514</td><td>(656)</td><td>1,858</td><td>9 Years</td></tr><tr><td>Technology, trademark and tradename</td><td>4,271</td><td>(1,387)</td><td>2,884</td><td>8 Years</td><td>4,229</td><td>(678)</td><td>3,551</td><td>8 Years</td></tr><tr><td></td><td>$20,113</td><td>$ (10,549)</td><td>$ 9,564</td><td></td><td>$ 15,400</td><td>$ (7,890)</td><td>$ 7,510</td><td></td></tr></table>

Amortization expense for the years ended December 31, 2013, 2012 and 2011 was $2,310, $2,091 and $2,246, respectively.

The estimated future amortization expense for intangibles as of December 31, 2013 is as follows:

<table><tr><td>2014</td><td>2015</td><td>2016</td><td>2017</td><td>2018</td><td>Thereafter</td><td>Total</td></tr><tr><td>$2,149</td><td>$1,549</td><td>$1,454</td><td>$1,454</td><td>$1,389</td><td>$1,569</td><td>$9,564</td></tr></table>

Impairment — In accordance with ASC 350-Intangibles-Goodwill and Other, the Company assesses the impairment of its long-lived assets including its definite-lived intangible assets and goodwill, at least annually for goodwill, and whenever changes



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

in events or circumstances indicate that the carrying value of such assets may not be recoverable. During each reporting period, the Company assesses for factors that may be present which would cause an impairment review.

The Company performed an impairment analysis to assess whether there was impairment of long-lived assets of IPGM including identifiable intangibles included in the table above using the guidance in ASC 360-10-35. The Company concluded that no impairment existed as the undiscounted cash flows from IPGM are forecasted to be greater than the carrying value of identified long-lived assets.

The Company carried out the two-step goodwill impairment test in accordance with the provisions of ASC 350-20-35. That analysis indicated that the fair value of the IPGM reporting unit, based on a discounted cash flow analysis, was less than the carrying value. The implied value of goodwill, as measured in step 2, was zero. Accordingly, the Company adjusted the value of goodwill associated with IPGM to $0.

## 14. INCOME TAXES

Income before the impact of income taxes for the years ended December 31 consisted of the following:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>U.S.</td><td>$ 59,006</td><td>$ 58,964</td><td>$ 42,637</td></tr><tr><td>Foreign</td><td>159,295</td><td>150,251</td><td>131,947</td></tr><tr><td>Total</td><td>$ 218,301</td><td>$ 209,215</td><td>$ 174,584</td></tr></table>

The Company’s provision for income taxes for the years ended December 31 consisted of the following:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Current:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ (19,285)</td><td>$ (16,675)</td><td>$ (15,355)</td></tr><tr><td>State</td><td>(2,617)</td><td>(309)</td><td>(447)</td></tr><tr><td>Foreign</td><td>(46,787)</td><td>(38,941)</td><td>(38,061)</td></tr><tr><td>Total current</td><td>$ (68,689)</td><td>$ (55,925)</td><td>$ (53,863)</td></tr><tr><td>Deferred:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ 3,834</td><td>$ (2,174)</td><td>$ 630</td></tr><tr><td>State</td><td>203</td><td>(140)</td><td>106</td></tr><tr><td>Foreign</td><td>2,131</td><td>(3,232)</td><td>(448)</td></tr><tr><td>Total deferred</td><td>$ 6,168</td><td>$ (5,546)</td><td>$ 288</td></tr><tr><td>Provision for income taxes</td><td>$ (62,521)</td><td>$ (61,471)</td><td>$ (53,575)</td></tr></table>

A reconciliation of income tax expense at the U.S. federal statutory income tax rate to the recorded tax provision for the years ended December 31, is as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Tax at statutory rate</td><td>$ (76,406)</td><td>$ (73,225)</td><td>$ (61,104)</td></tr><tr><td>Non-U.S. rate differential — net</td><td>10,761</td><td>11,744</td><td>9,295</td></tr><tr><td>State income taxes — net</td><td>(1,512)</td><td>(1,527)</td><td>(1,200)</td></tr><tr><td>Effect of changes in enacted tax rates on deferred tax assets and liabilities</td><td>186</td><td>(617)</td><td>(192)</td></tr><tr><td>Nondeductible stock compensation expense</td><td>(101)</td><td>(1,020)</td><td>(448)</td></tr><tr><td>Other nondeductible expenses</td><td>(1,666)</td><td>(794)</td><td>(339)</td></tr><tr><td>Federal and state tax credits</td><td>7,500</td><td>4,623</td><td>2,002</td></tr><tr><td>Change in reserves, including interest and penalties</td><td>(1,273)</td><td>(243)</td><td>(1,688)</td></tr><tr><td>Settlements, interest and penalties</td><td>—</td><td>—</td><td>1</td></tr><tr><td>Change in valuation allowance</td><td>—</td><td>(314)</td><td>—</td></tr><tr><td>Other — net</td><td>(10)</td><td>(98)</td><td>98</td></tr><tr><td></td><td>$ (62,521)</td><td>$ (61,471)</td><td>$ (53,575)</td></tr></table>



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, are as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Property, plant and equipment</td><td>$ (2,230)</td><td>$ (3,629)</td><td>$ 901</td></tr><tr><td>Inventory provisions</td><td>8,261</td><td>7,942</td><td>7,281</td></tr><tr><td>Allowances and accrued liabilities</td><td>3,634</td><td>(4,829)</td><td>(1,494)</td></tr><tr><td>Other tax credits</td><td>769</td><td>1,673</td><td>1,260</td></tr><tr><td>Deferred compensation</td><td>(434)</td><td>3,538</td><td>2,669</td></tr><tr><td>Net operating loss carryforwards</td><td>229</td><td>5</td><td>21</td></tr><tr><td>Valuation allowance</td><td>—</td><td>—</td><td>(314)</td></tr><tr><td>Net deferred tax assets</td><td>$ 10,229</td><td>$ 4,700</td><td>$ 10,324</td></tr></table>

In general, it is the Company’s practice and intention to reinvest the earnings of non-U.S. subsidiaries in those operations. Accordingly, it has not made any provision for additional U.S. or foreign withholding taxes with respect to repatriation of earnings of non-U.S. subsidiaries. At December 31, 2013 and 2012, the cumulative unremitted earnings that are reinvested in non-U.S. subsidiaries are approximately $346,000 and $283,000, respectively.

As of December 31, 2013, 2012 and 2011, the Company has state credit carry-forwards of $2,074, $1,419 and $918, respectively, that are not included in deferred tax assets. The state credit carry forwards begin expiring in 2015.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$ 5,392</td><td>$ 4,509</td><td>$ 2,951</td></tr><tr><td>Reductions of prior period positions</td><td>(505)</td><td>(317)</td><td>(335)</td></tr><tr><td>Additions for tax positions in prior period</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Additions for tax positions in current period</td><td>1,614</td><td>1,200</td><td>1,893</td></tr><tr><td>Balance at December 31</td><td>$ 6,501</td><td>$ 5,392</td><td>$ 4,509</td></tr></table>

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

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective tax rate in the future. The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefiting the Company’s 2012 U.S. federal taxes, including the research and experimentation credit, could not be recognized in the Company’s 2012 financial results and instead is reflected in its 2013 financial results.

Estimated penalties and interest related to the underpayment of income taxes are $374, $352 and $133 for the years ended December 31, 2013, 2012 and 2011, respectively, and are included within the provision for income taxes. Total accrued penalties and interest related to the underpayment of income taxes are $862 and $487 at December 31, 2013 and 2012, respectively.

The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. If realized, all of the Company’s uncertain tax positions would affect its effective tax rate. Certain of the Company’s uncertain tax positions are expected to settle within one year. Open tax years by major jurisdictions are:

<table><tr><td>• United States</td><td>2002 — 2013</td></tr><tr><td>• Germany</td><td>2010 — 2013</td></tr><tr><td>• Russia</td><td>2009 — 2013</td></tr></table>

The Company currently has ongoing audits on its federal income tax returns.



# IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

On September 13, 2013, the United States Treasury and Internal Revenue Service issued final tangible personal property regulations that broadly apply to amounts paid to acquire, produce or improve tangible property, as well as dispositions of such property. In review of these regulations, the Company has concluded that there is no material impact on its consolidated financial position, results of operations or cash flows.

## 15. GEOGRAPHIC AND PRODUCT INFORMATION

The Company markets and sells its products throughout the world through both direct sales and distribution channels. The geographic sources of the Company’s net sales based on billing addresses of its customers are as follows:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2013</td><td colspan="2">2012</td><td>2011</td></tr><tr><td>United States and other North America</td><td>$ 116,935</td><td>$ 108,316</td><td>$ 86,181</td><td></td></tr><tr><td>Europe:</td><td></td><td></td><td></td><td></td></tr><tr><td>Germany</td><td>65,147</td><td>89,848</td><td>76,279</td><td></td></tr><tr><td>Other including Eastern Europe/CIS</td><td>140,279</td><td>110,860</td><td>103,305</td><td></td></tr><tr><td>Asia and Australia:</td><td></td><td></td><td></td><td></td></tr><tr><td>Japan</td><td>67,981</td><td>69,576</td><td>63,261</td><td></td></tr><tr><td>China</td><td>192,134</td><td>138,782</td><td>104,560</td><td></td></tr><tr><td>Other</td><td>64,346</td><td>43,445</td><td>36,937</td><td></td></tr><tr><td>Rest of World</td><td>1,212</td><td>1,701</td><td>3,959</td><td></td></tr><tr><td>Total</td><td>$ 648,034</td><td>$ 562,528</td><td>$ 474,482</td><td></td></tr></table>

Sales are derived from products for different applications: fiber lasers, diode lasers and diodes for materials processing, fiber lasers and amplifiers for advanced applications, fiber amplifiers for communications applications, and fiber lasers for medical applications. Net sales for these product lines are as follows:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended December 31,</td></tr><tr><td>2013</td><td colspan="2">2012</td><td>2011</td></tr><tr><td>Materials Processing</td><td>$ 608,702</td><td>$ 492,013</td><td>$ 419,443</td><td></td></tr><tr><td>Other applications</td><td>39,332</td><td>70,515</td><td>55,039</td><td></td></tr><tr><td>Total</td><td>$ 648,034</td><td>$ 562,528</td><td>$ 474,482</td><td></td></tr></table>

One customer comprised 11% of net sales during the year ended December 31, 2013. No single customer comprised more than 10% of net sales during the years ended December 31, 2012 or 2011. The Company has historically depended on a few customers for a significant percentage of its annual net sales. The composition of this group can change from year to year. Net sales derived from the Company’s five largest customers as a percentage of its annual net sales were 21%, 16% and 17% in 2013, 2012 and 2011, respectively.

The geographic locations of the Company’s long-lived assets, net, based on physical location of the assets, as of December 31, 2013, 2012 and 2011, are as follows:

<table><tr><td rowspan="2"></td><td colspan="4">December 31,</td></tr><tr><td>2013</td><td colspan="2">2012</td><td>2011</td></tr><tr><td>United States</td><td>$ 110,441</td><td>$ 86,226</td><td>$ 67,550</td><td></td></tr><tr><td>Germany</td><td>52,791</td><td>47,019</td><td>40,983</td><td></td></tr><tr><td>Russia</td><td>73,747</td><td>60,151</td><td>32,197</td><td></td></tr><tr><td>China</td><td>5,895</td><td>6,424</td><td>5,550</td><td></td></tr><tr><td>Other</td><td>13,480</td><td>15,674</td><td>12,721</td><td></td></tr><tr><td></td><td>$ 256,354</td><td>$ 215,494</td><td>$ 159,001</td><td></td></tr></table>

Long lived assets include property, plant and equipment and demonstration equipment.



## IPG PHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)

## 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<table><tr><td rowspan="2">2013</td><td rowspan="2">First Quarter</td><td rowspan="2">Second Quarter</td><td rowspan="2">Third Quarter</td><td rowspan="2">Fourth Quarter</td></tr><tr></tr><tr><td></td><td></td><td>(In thousands, except per share data)</td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 141,852</td><td>$ 168,171</td><td>$ 172,152</td><td>$ 165,859</td></tr><tr><td>Gross profit</td><td>75,641</td><td>89,922</td><td>92,813</td><td>81,522</td></tr><tr><td>Net income</td><td>35,127</td><td>41,720</td><td>42,338</td><td>36,595</td></tr><tr><td>Net income attributable to IPG Photonics Corporation</td><td>35,127</td><td>41,720</td><td>42,338</td><td>36,595</td></tr><tr><td>Basic earnings per share</td><td>0.68</td><td>0.81</td><td>0.82</td><td>0.71</td></tr><tr><td>Diluted earnings per share</td><td>0.67</td><td>0.80</td><td>0.81</td><td>0.70</td></tr><tr><td>Dividends per common share</td><td>—</td><td>—</td><td>—</td><td>—</td></tr></table>

<table><tr><td rowspan="2">2012</td><td rowspan="2">First Quarter</td><td rowspan="2">Second Quarter</td><td rowspan="2">Third Quarter</td><td rowspan="2">Fourth Quarter</td></tr><tr></tr><tr><td></td><td></td><td>(In thousands, except per share data)</td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 123,192</td><td>$ 137,927</td><td>$ 156,379</td><td>$ 145,030</td></tr><tr><td>Gross profit</td><td>68,684</td><td>74,910</td><td>85,959</td><td>75,174</td></tr><tr><td>Net income</td><td>30,548</td><td>39,849</td><td>42,435</td><td>34,912</td></tr><tr><td>Net income attributable to IPG Photonics Corporation</td><td>29,915</td><td>37,742</td><td>42,435</td><td>34,912</td></tr><tr><td>Basic earnings per share</td><td>0.63</td><td>0.74</td><td>0.83</td><td>0.68</td></tr><tr><td>Diluted earnings per share</td><td>0.61</td><td>0.72</td><td>0.81</td><td>0.67</td></tr><tr><td>Dividends per common share</td><td>—</td><td>—</td><td>—</td><td>0.65</td></tr></table>



## EXHIBIT

<table><tr><td>Exhibit Number</td><td>Description</td></tr><tr><td>3.1</td><td>Form of Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement No. 333-136521 filed with the Securities and Exchange Commission (the “Commission”) on August 11, 2006)</td></tr><tr><td>3.3</td><td>Form of Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.4 to Registration Statement No. 333-136521 filed with the Commission on August 11, 2006)</td></tr><tr><td>4.1</td><td>Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-136521 filed with the Commission on November 14, 2006)</td></tr><tr><td>10.1</td><td>2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2007)</td></tr><tr><td>10.2</td><td>Amendment to Section 4.2 of 2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 13, 2008)</td></tr><tr><td>10.3</td><td>2006 Stock Incentive Plan, as amended July 28, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 2, 2011)</td></tr><tr><td>10.4</td><td>Amendment to Section 16.2 of the 2006 Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10.2 to the Registrant’s current Report on Form 8-K filed with the Commission on March 5, 2013</td></tr><tr><td>10.5</td><td>Non-Employee Directors Stock Plan, as amended April 2, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 8, 2010)</td></tr><tr><td>10.6</td><td>IPG Photonics Non-Employee Director Compensation Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2013)</td></tr><tr><td>10.7</td><td>Senior Executive Short-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-136521 filed with the Commission on August 11, 2006)</td></tr><tr><td>10.8</td><td>2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 13, 2008)</td></tr><tr><td>10.9</td><td>Amendment to 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 15, 2009)</td></tr><tr><td>10.10</td><td>Employment Agreement dated October 7, 2013 between the Registrant and Dr. Valentin P. Gapontsev, (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 15, 2013)</td></tr><tr><td>10.11</td><td>Service Agreement dated October 7, 2013 between IPG Laser GmbH and Dr. Eugene Scherbakov, (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 15, 2013)</td></tr><tr><td>10.12</td><td>Form of Employment Agreement dated October 7, 2013 between the Registrant and each of Timothy P.V. Mammen, Angelo P. Lopresti and Alexander Ovchinnikov, (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 15, 2013)</td></tr><tr><td>10.13</td><td>Form of Confidentiality, Non-Competition and Confirmatory Assignment Agreement between the Registrant and each of the named executive officers and certain other executive officers, (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 15, 2013)</td></tr><tr><td>10.14</td><td>Form of Indemnification Agreement between the Registrant and each of its Directors and Executive Officers (incorporated by reference to Exhibit 10.13 to Registration Statement No. 333-136521 filed with the Commission on August 11, 2006)</td></tr></table>



Exhibit Number
Description
10.15
Loan Agreement between the Registrant and Bank of America, N.A. dated as of June 4, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 9, 2008)
10.16
Revolving Credit Note by the Registrant dated June 4, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on June 9, 2008)
10.17
Term Note by the Registrant dated June 4, 2008 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on June 9, 2008)
10.18
Second Amendment to Loan Agreement, between the Registrant and Bank of America, N.A., dated as of September 30, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 9, 2010)
10.19
Revolving Credit Note Modification Agreement No. 1, between the Registrant and Bank of America, N.A., dated as of September 30, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 9, 2010)
10.20
Term Note Modification Agreement No. 1, between the Registrant and Bank of America, N.A., dated as of September 30, 2010 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 9, 2010)
10.21
Credit Facility Agreement between IPG Laser GmbH and Deutsche Bank AG dated June 18, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on June 29, 2012)
10.22
Guarantee of the Registrant to Deutsche Bank AG dated June 26, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on June 29, 2012)
10.23
Enclosure 1 to Guarantee to Deutsche Bank AG dated June 26, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on June 29, 2012)
12.1
Statement re Computation of Earnings to Fixed Charges
21.1
List of Subsidiaries
23.1
Consent of Deloitte & Touche LLP
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase




NOTICE AND PROXY STATEMENT
2014



Powered by TCPDF (www.tcpdf.org)




April 15, 2014

Dear Fellow Stockholder:

You are cordially invited to attend our annual meeting of stockholders on June 3, 2014. We will hold the meeting at 10:00 a.m. Eastern Time at our world headquarters, 50 Old Webster Road, Oxford, Massachusetts.

A notice of the annual meeting, a proxy statement, proxy card and our 2013 annual report to stockholders, which provide detailed information relating to our activities and operating performance, accompany this letter.

At this year’s meeting, you will be asked to elect ten directors to our board of directors for a term of one year, to approve our executive compensation in an advisory vote and to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2014. Our board of directors recommends that you approve each of these proposals. I urge you to read the proxy statement for further details about the proposals.

Your vote is important to us and our business. Whether or not you plan to attend the annual meeting of stockholders, we encourage you to cast your vote by completing, signing and dating the enclosed proxy card and returning it promptly in the envelope provided. You may also vote your shares using the internet or the telephone by following the instructions provided on the enclosed proxy card.

On behalf of the entire IPG Board of Directors, we look forward to seeing you at the meeting.

Sincerely,



Dr. Valentin P. Gapontsev

Chairman of the Board of Directors and Chief Executive Officer



## Table of Contents

Notice of Annual Meeting of Stockholders 1
General Information About the Meeting 2
Corporate Governance 5
Related Person Transactions 9
Board of Directors 9
Director Compensation 14
Common Stock Ownership 16
Proposal 1: Election of Directors 18
Executive Officers 18
Compensation Committee Report 19
Compensation Discussion and Analysis 19
Executive Compensation Tables 30
Equity Compensation Plans 37
Proposal 2: Advisory Vote on Executive Compensation 38
Audit Committee Report 40
Proposal 3: Ratification of Independent Registered Public Accounting Firm 40
Other Matters 41



# NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To the Stockholders:

We invite you to attend our annual meeting of stockholders which is being held as follows:

Date: June 3, 2014

Time: 10:00 a.m. Eastern Time

Location: IPG Photonics Corporation

50 Old Webster Road
Oxford, Massachusetts 01540

At the meeting, we will ask our stockholders to:

• elect ten directors named in the proxy to serve until our 2015 annual meeting of stockholders;

• approve our executive compensation in an advisory vote; and

• ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2014.

You may vote on these matters in person or by proxy. Whether or not you plan to attend the meeting, we ask that you promptly vote your shares. Only stockholders of record at the close of business on April 7, 2014 may vote at the meeting.

By order of the Board of Directors
IPG PHOTONICS CORPORATION

C

Angelo P. Lopresti
Senior Vice President, General Counsel and Secretary

April 15, 2014
Oxford, Massachusetts

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting on June 3, 2014:

The proxy statement and 2013 annual report to stockholders are available at http://investor.ipgphotonics.com/annual-proxy.cfm



# PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS

## GENERAL INFORMATION ABOUT THE MEETING

Our Board of Directors is soliciting proxies from our stockholders in connection with our annual meeting of stockholders to be held on Tuesday, June 3, 2014 and any and all adjournments thereof. No business can be conducted at the annual meeting unless a majority of all outstanding shares entitled to vote are either present in person or represented by proxy at the meeting. As far as we know, the only matters to be brought before the annual meeting are those referred to in this proxy statement. If any additional matters are presented at the annual meeting, the persons named as proxies may vote your shares in their discretion.

This proxy statement and our 2013 annual report are first being mailed to stockholders of record on or about April 15, 2014, and are made available on our website at http://investor.ipgphotonics.com/annual-proxy.cfm. Information on our website does not constitute part of this proxy statement.

Unless otherwise noted, the information in this proxy statement covers our 2013 fiscal year (or “fiscal 2013”), which ran from January 1, 2013 through December 31, 2013, and, in some cases, our 2012 fiscal year (or “fiscal 2012”), which ran from January 1, 2012 through December 31, 2012.

## Questions and Answers about the Meeting and Voting

When and Where Is the Annual Meeting?

When: Tuesday, June 3, 2014, at 10:00 a.m. Eastern Time

Where: IPG Photonics Corporation
50 Old Webster Road
Oxford, Massachusetts 01540

## Who Is Entitled to Vote at the Meeting?

You are entitled to vote at the meeting if you owned IPG Photonics shares (directly or in “street name,” as defined below) as of the close of business on April 7, 2014, the record date for the meeting. On that date, 52,014,775 shares of our common stock were outstanding and entitled to vote and no shares of our preferred stock were outstanding. Each share of our common stock is entitled to one vote with respect to each matter on which it is entitled to vote; there is no cumulative voting with respect to any proposal.

## What Do I Need to Do If I Plan to Attend the Meeting in Person?

If you plan to attend the annual meeting in person, you must provide proof of your ownership of our common stock and a form of personal identification, such as a driver's license, for admission to the meeting. If you are a stockholder of record, the top half of your proxy card is your admission ticket and will serve as proof of ownership. If you hold your shares in street name, a recent brokerage statement or a letter from your bank or broker are examples of proof of ownership. If you hold your shares in street name and you also wish to be able to vote at the meeting, you must obtain a proxy, executed in your favor, from your bank or broker.

## What Is the Difference Between Holding Shares Directly as a Stockholder of Record and Holding Shares in “Street Name” at a Bank or Broker?

Most of our stockholders hold their shares directly through a broker, bank or other nominee rather than directly in their own name. As summarized below, there are differences between shares held of record and those held in “street name.”



Stockholder of Record: If your shares are registered directly in your name with our transfer agent, Computershare, N.A., you are considered the stockholder of record with respect to those shares, and the proxy statement and annual report were sent directly to you. As the stockholder of record, you have the right to vote your shares as described herein.

“Street Name” Stockholder: If your shares are held by a bank or broker as your nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy statement and annual report were forwarded to you by your bank or broker who is considered the stockholder of record with respect to those shares. Your bank or broker sent to you, as the beneficial owner, a document describing the procedure for voting your shares. You should follow the instructions provided by your bank or broker to vote your shares. You are also invited to attend the annual meeting. However, if you wish to be able to vote at the meeting, you must obtain a proxy card, executed in your favor, from your bank or broker.

## What Matters Am I Being Asked to Vote On at the Meeting and What Vote is Required to Approve Each Matter?

You are being asked to vote on three proposals. Proposal 1 requests the election of directors. Each director will be elected by the vote of the plurality of the votes cast when a quorum is present. A “plurality of the votes cast” means that the ten persons receiving the greatest number of votes cast “for” will be elected. “Votes cast” excludes “withhold votes” and any broker non-votes (as defined below). Accordingly, withhold votes and broker non-votes will have no effect on Proposal 1. If you hold your shares in street name, it is critically important that you submit your voting instructions to your bank or broker if you want your shares to count for Proposal 1.

Proposal 2 requests the approval of our executive compensation. It is an advisory vote which means that it is not binding upon the Company.

Proposal 3 requests the ratification of the appointment of our independent registered public accounting firm.

The affirmative vote of a majority of the shares which are present at the meeting in person or by proxy, and entitled to vote thereon, is required for approval of Proposals 2 and 3. Abstentions have the same effect as voting against Proposals 2 and 3. Broker non-votes have no effect on Proposal 2.

## Who Counts the Votes?

We have engaged Computershare as our independent agent to receive and tabulate stockholder votes. Computershare will separately tabulate “for,” “against” and “withhold” votes, abstentions and broker non-votes. Computershare will also act as independent election inspector to certify the results, determine the existence of a quorum and the validity of proxies and ballots, and perform any other acts required under the General Corporation Law of Delaware.

## How Can I Vote?

Most stockholders have a choice of voting in one of four ways:

• via the Internet;

• using a toll-free telephone number;

• completing a proxy/voting instruction card and mailing it in the postage-paid envelope provided; or

• in person at the meeting.

The telephone and Internet voting facilities for stockholders of record will close at 1:00 a.m. Central Time on June 3, 2014. The Internet and telephone voting procedures are designed to authenticate stockholders by use of a control number and to allow you to confirm that your instructions have been properly recorded.

If you hold your shares in street name, your bank or broker will send you a separate package describing the procedures and options for voting your shares. Please read this information carefully.

## What Does it Mean to Give a Proxy?

Your properly completed proxy/voting instruction card will appoint Valentin P. Gapontsev and Angelo P. Lopresti as proxy holders or your representatives to vote your shares in the manner directed therein by you. Dr. Gapontsev is our Chairman of the Board and Chief Executive Officer. Mr. Lopresti is our Senior Vice President, General Counsel and Secretary. Your proxy permits you to direct the proxy holders to vote “for” or “withhold” for the nominees for director (Proposal 1), and “for,” “against,” or “abstain” from the advisory vote on executive



compensation (Proposal 2) and the ratification of the appointment of our independent registered accounting firm (Proposal 3).

All of your shares entitled to vote and represented by a properly completed proxy or voting instruction received prior to the meeting and not revoked will be voted at the meeting in accordance with your instruction.

What Happens If I Sign, Date and Return My Proxy But Do Not Specify How I Want My Shares Voted on One of the Proposals?

Stockholder of Record: Your proxy will be counted as a vote “For” all of the nominees for director and “For” Proposals 2 and 3.

“Street Name” Stockholder: Your bank, broker or nominee may vote your shares only on those proposals on which it has discretion to vote. Under New York Stock Exchange rules, your bank, broker or nominee does not have discretion to vote your shares on non-routine matters such as the election of directors (Proposal 1) and the advisory vote on executive compensation (Proposal 2). This is called a “broker non-vote.” However, your bank, broker or nominee does have discretion to vote your shares on routine matters such as the ratification of the appointment of our independent registered public accounting firm (Proposal 3). Accordingly, if you do not give your bank, broker or nominee specific instructions with respect to Proposal 3, your shares will be voted in such entity’s discretion. We urge you to promptly provide your bank, broker or nominee with appropriate voting instructions so that all of your shares may be voted at the meeting.

## Can I Change My Vote Before the Meeting?

You can change your vote at any time before your proxy is exercised by delivering a properly executed, later-dated proxy (including an Internet or telephone vote), by revoking your proxy by written notice to the Secretary of IPG Photonics, or by voting in person at the meeting. The method by which you vote by a proxy will in no way limit your right to vote at the meeting if you decide to attend in person.

If your shares are held in street name, please refer to the information forwarded by your bank, broker or nominee for procedures on changing your voting instructions.

## Is the Proxy Statement Available on the Internet?

Yes. We are mailing copies of the proxy statement and our 2013 annual report to all stockholders. Stockholders can also view these documents on the Internet by accessing our website at http://investor.ipgphotonics.com/annual-proxy.cfm.

## Who Is Soliciting my Proxy and Who is Paying for the Cost of this Proxy Solicitation?

The Board of Directors of IPG Photonics is soliciting your proxy to vote at the 2014 annual meeting of stockholders. IPG Photonics will bear the expense of preparing, printing and mailing this proxy material, as well as the cost of any required solicitation. Our directors, officers or employees may solicit proxies on our behalf. We have not engaged a proxy solicitation firm to assist us in the solicitation of proxies, but we may if we deem it appropriate. In addition, we will reimburse banks, brokers and other custodians, nominees and fiduciaries for reasonable expenses incurred in forwarding proxy materials to beneficial owners of our stock and obtaining their proxies.

## What Is the Quorum Required to Transact Business?

At the close of business on April 7, 2014, the record date, there were 52,014,775 shares of our common stock outstanding. Our by-laws require that a majority of our common stock be represented, in person or by proxy, at the meeting in order to constitute the quorum we need to transact business at the meeting. We will count withhold votes, abstentions and broker non-votes in determining whether a quorum exists.



## CORPORATE GOVERNANCE

At IPG Photonics, we believe that strong and effective corporate governance procedures and practices are an extremely important part of our corporate culture. We have summarized several of our corporate governance practices below.

## Significant Corporate Governance Practices and Policies

Listed below are some of the significant corporate governance practices and policies we have adopted:

- Independent Director Majority and Presiding Independent Director. Six of the nine directors currently on our Board of Directors (the “Board”) are non-employees of the Company who meet the independence criteria under applicable rules of the Securities and Exchange Commission ("SEC") and NASDAQ guidelines. Only independent directors sit on our three standing Board committees. Several years ago, the Board established the role of a presiding independent director who is elected annually by the independent directors. More information about the role of the independent directors, the Presiding Independent Director and our Board structure can be found below in this section.

- Executive Sessions. Our Board meets regularly in executive sessions without the presence of management, including our Chairman. These sessions are led by our Presiding Independent Director, as described below in this section.

- Annual Election of Entire Board. Stockholders elect each director annually. We do not have a classified board.

- Related Person Transaction Policy. Our Nominating and Corporate Governance Committee is responsible for approving or ratifying transactions involving our Company and related persons and determining if the transaction is in, or not inconsistent with, the best interests of our Company and our stockholders. More information about our Related Person Transaction Policy and transactions can be found below in this section.

- Stock Ownership Guidelines. Our directors and executive officers are required to own a minimum amount of IPG Photonics shares. We believe that stock ownership requirements align the interest of the directors and officers with our stockholders. Our directors and executive officers fully complied with our guidelines in 2013. In 2013, our Board increased the stock ownership requirements for our directors.

- Prohibition on Hedging: Limits on Pledging. Our Insider Trading Policy expressly prohibits directors and employees from engaging in short sales of our common stock or buying or selling puts, calls or derivative securities in connection with IPG Photonics shares. In 2013, the Board adopted a policy to limit the pledging of our stock by directors and officers.

Additional information is provided below regarding these and certain other key corporate governance policies, which we believe enable us to manage our business in accordance with high standards of business practices and in the best interest of our stockholders. Many policies may be found at http://investor.ipgphotonics.com/governance.cfm. Note that information on our website does not constitute part of this proxy statement. Hard copies of these documents may be obtained without charge by any stockholder upon request by contacting the Office of the Secretary, IPG Photonics Corporation, 50 Old Webster Road, Oxford, Massachusetts 01540.

## Corporate Governance Guidelines

Our Board has adopted Corporate Governance Guidelines that outline, among other matters, the roles and functions of the Board, the responsibilities of various Board committees and the mission of the Board. Each of the Board committees has a written charter that sets forth the purposes, goals and responsibilities of the committee as well as qualification for committee membership, procedures for committee membership, appointment and removal, committee structure and operations and committee reporting to the entire Board.

The Governance Guidelines provide, among other things, that:

• a majority of our Board must be independent;



• the Presiding Independent Director presides over executive sessions of independent directors;

• the Board appoints all members and chairpersons of the Board committees;

- the Audit, Compensation, and Nominating and Corporate Governance Committees consist solely of independent directors;

- the independent directors meet periodically in executive sessions without the presence of the non-independent directors or members of our management;

• directors may not serve on the boards of more than three other public companies;

• evaluations of the Board and committees are conducted annually; and

• the Board and key officers should have a meaningful financial stake in the Company.

The Board reviews changing legal and regulatory requirements, evolving best practices and other developments. The Board modifies the Governance Guidelines and its other corporate governance policies and practices from time to time, as appropriate.

Executive Sessions. Our independent directors meet privately, without employee directors or management present, at least four times during the year. These private sessions are generally held in conjunction with the regular quarterly Board meetings. Other private meetings are held as often as deemed necessary by the independent directors. The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee meet without employee directors or management present from time to time as they deem necessary.

Director Meetings and Policy Regarding Board Attendance. It has been the practice of our Board and its committees to hold at least four in-person regular meetings each year. The Board and its committees also have telephone meetings throughout the year. In accordance with our Governance Guidelines, our directors are expected to prepare for, attend and actively participate in meetings of the Board and its committees. Our directors are expected to spend the time needed at each meeting and to meet as frequently as necessary to properly discharge their responsibilities. We encourage members of our Board to attend annual meetings of stockholders, but we do not have a formal policy requiring them to do so.

Stock Ownership Guidelines. The Board adopted stock ownership guidelines to more closely align the interests of our directors and executive officers with those of our long-term stockholders. Under the guidelines, the following persons are expected to maintain a minimum investment in our common stock as follows: for non-employee directors, the lesser of 3,000 shares or three times their annual cash Board retainer (excluding committee retainers); for the Chief Executive Officer, the lesser of 7,500 shares or one times his annual salary; and for other executive officers, the lesser of 5,000 shares or one times their respective annual salaries. In 2013, the Board approved an increase in stock ownership requirements for non-employee directors to the level stated in the previous sentence. Vested equity compensation such as vested stock options counts towards the stock ownership levels. Indirect ownership of shares through a separate legal entity counts toward fulfillment of the ownership guidelines. These ownership levels are to be achieved no later than four years after the election as a director or as an executive officer, except that prior to such time the director or officer is expected to retain a certain portion of stock issued upon exercise of stock options or vesting of restricted stock awards until the minimum ownership levels are attained. All directors and executive officers were in compliance with our stock ownership guidelines as of December 31, 2013.

Board Self-Assessments. The Board conducts annual self-evaluations to determine whether it and its committees are functioning effectively. The Nominating and Corporate Governance Committee oversees the Board and committee self-assessments and the Board receives a report on its self-assessments annually. Each committee reviews and reassesses the adequacy of its charter annually and recommends any proposed changes. Each committee also annually reviews its own performance and reports the results to the Board.

Prohibition on Hedging; Limits on Pledging. Under our Insider Trading Policy, no director or employee may engage in shorting shares of our common stock, or buying or selling puts, calls or derivatives related to our common stock. In addition, the Board approved in 2013 limits on pledging. A director or officer of the Company may not pledge shares constituting more than 20% of his or her total stock ownership. Pledges of shares constituting 20% or less of total stock ownership are subject to certain conditions.

Director Orientation and Continuing Education. Upon joining the Board, directors are provided with an initial orientation about our management, including our business operations, strategy and governance. New directors without previous experience as a director of a public company are expected to enroll in a director education program on the principles of corporate governance and director professionalism offered by a nationally-recognized sponsoring organization. We also provide orientation to directors who join a committee, including oversight responsibilities, policies and practices. We provide our directors with resources and ongoing educational



opportunities to assist them in remaining abreast of developments in corporate governance and critical issues relating to the operation of public company boards. All current directors are enrolled members of the National Association of Corporate Directors and we plan to enroll newly elected directors as well. We pay for membership dues and director education expenses. The Board also conducts periodic visits to major facilities of the Company as part of its regularly scheduled Board meetings.

Nomination of Directors. The Nominating and Corporate Governance Committee considers candidates for director nominees proposed by directors and stockholders. This Committee may retain recruiting professionals and use director databases to assist in identifying and evaluating candidates for director nominees. The Board seeks members from diverse professional backgrounds with a reputation for integrity who do not have professional commitments that might unreasonably interfere with the demands and duties of a board member. Candidates for director are reviewed in the context of the current composition of the Board, the operating requirements of the Company and the long-term interests of the Company's stockholders. The Nominating and Governance Committee seeks directors with a broad spectrum of experience and expertise. It seeks a Board that reflects diversity, including in experience, gender and ethnicity. It does not have formal objective criteria for determining the degree of diversity needed or present on the Board. Board candidates are considered based upon various criteria, such as demonstrated excellence, leadership and significant experience in an area of endeavor, relevant expertise and experience and the ability to offer advice and guidance based upon that expertise, possession of high personal integrity and ethics, ability to read and understand financial statements, a commitment to representing the long-term interests of the Company's stockholders while keeping in perspective the interests of customers, suppliers and employees, and any other factors appropriate in the context of an assessment by the Nominating and Corporate Governance Committee of the needs of the Board at that time. Candidates for director should also have certain minimum qualifications, including the ability to read and understand basic financial statements, must be over 21 years of age and possess the highest personal integrity and ethics. In addition, the Nominating and Corporate Governance Committee considers whether the individual satisfies criteria for independence as may be required by applicable regulations. The Nominating and Corporate Governance Committee retained the search firm Heidrick & Struggles to assist in the search and evaluation of candidates for director which resulted in the nomination of Mr. Eric Meurice and Mr. Thomas Seifert for election to the Board at our 2014 annual meeting. See "Board of Directors -- Nominees for Directors" below.

The Nominating and Corporate Governance Committee has adopted a policy under which it will consider nominations by stockholders. The same identifying and evaluating procedures apply to all candidates for director nomination, including candidates submitted by stockholders. The Nominating and Corporate Governance Committee evaluates and interviews potential board candidates. All members of the Board may interview the final candidates.

Code of Business Conduct. We have a code of business conduct that applies to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer and other executive officers. Our code of business conduct includes provisions covering conflicts of interest, business gifts and entertainment, outside activities, compliance with laws and regulations, insider trading practices, antitrust laws, payments to government personnel, bribes or kickbacks, corporate record keeping and accounting records. The code of business conduct is posted on our website at http://investor.ipgphotonics.com/governance.cfm.

Procedures for Submitting Complaints Regarding Accounting and Auditing Matters. We have procedures for the treatment of complaints regarding accounting, internal accounting controls, auditing matters, fight against bribery, banking, and financial crime, including procedures for the confidential and anonymous submission by our directors, officers and employees of concerns regarding questionable accounting, internal accounting controls or auditing matters. These procedures are posted on our website at http://investor.ipgphotonics.com/governance.cfm.

## Board Leadership Structure

Dr. Gapontsev, our Chief Executive Officer, also serves as the Chairman of the Board. Our independent directors determined several years ago that, for effective board governance, it is important to have a presiding independent director. Mr. Gauthier has been selected as the Presiding Independent Director for a term ending June 2014.

Dr. Gapontsev became our Chief Executive Officer and Chairman in 2000. His dual role was established fourteen years ago when the Board was first established. Our directors believe that each of the possible leadership structures for a board has its particular pros and cons which much be considered in the context of the specific



circumstances, culture and challenges facing a company, and that such consideration is the responsibility of a company's board that has a diversity of views and experiences. Our directors come from a variety of organizational backgrounds and have direct experience with a wide range of leadership and management structures. The makeup of our Board puts it in a very strong position to evaluate the pros and cons of the various types of board leadership structures and to ultimately decide which structure is in the best interests of our stockholders. The independent directors believe that having Dr. Gapontsev serve in both capacities is in the best interest of the Company and its stockholders because it allows Dr. Gapontsev to more effectively execute the Company's strategic initiatives and business plans. He is the founder of the Company and beneficially owns approximately 15.0% of the Company's common stock. The combination of the roles of Chairman and Chief Executive Officer in Dr. Gapontsev creates clear and unambiguous authority, which is essential to effective management. The Board and management can respond more effectively to a clear line of authority. Further, given that he is closer to the Company's business than any other Board member and he has the benefit of over 14 years of operations and leadership experience within the Company, Dr. Gapontsev is best-positioned to set the Board's agenda and provide leadership. Dr. Gapontsev's extensive scientific and business experience also gives him vast industry knowledge, which the Board believes is critical for the chairman of the board of a company that operates in a highly technical industry. The combined Chairman/Chief Executive structure is a leadership model that has served our stockholders well for many years.

The Board also recognized the importance for a board to have in place, and build upon, a counterbalancing structure to ensure that it functions in an appropriately independent manner. As a result, the Board enhanced its governance structure several years ago by creating the position of Presiding Independent Director with leadership authority and responsibilities. The duties and responsibilities of the Presiding Independent Director include: setting the agenda for, and leading, executive sessions of the independent directors; providing consolidated feedback from those meetings to the Chairman and Chief Executive Officer; providing input on the agenda for Board meetings; periodically providing feedback on the quality and quantity of information flow from management; having the authority to call meetings of the independent directors; facilitating discussions outside of scheduled Board meetings among the independent directors on key issues as required; serving as a non-exclusive liaison with the Chairman and Chief Executive Officer in consultation with the other independent directors; interviewing Board candidates as appropriate; and, commencing in 2014, leading the determination of the goals and objectives for the Chairman and Chief Executive Officer with the input of the independent directors and the annual performance evaluation for him with the input of the independent directors and providing that evaluation to the Compensation Committee. In the event of a crisis, the Presiding Independent Director would have an increased role in crisis management oversight. The independent directors of our Board elected Mr. Gauthier as the Presiding Independent Director for the term ending June 2014, and this position is voted upon annually by our independent directors.

The Board believes that the position and responsibilities of a presiding independent director and the regular use of executive sessions of the independent directors without the Chief Executive Officer or other executive officers present, along with the Company’s strong committee system and substantial majority of independent directors, allow the Board to maintain effective oversight.

## Risk Oversight

One of the Board’s primary roles in the Company is to provide general oversight of strategy and operations. The Board reviews strategy regularly with management and provides input to management. As part of its oversight of operations, the entire Board reviews and discusses the performance of the Company and the principal risks involved in the operations and management of the Company. The Board allocates risk oversight responsibility among the full Board, the independent directors and the three standing committees of the Board. The Nominating and Corporate Governance Committee periodically reviews risk oversight matters and responsibilities, then makes recommendations to the Board to allocate risk oversight responsibilities.

The 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 other presentations. The independent directors as a group oversee succession and resource planning. The Audit Committee oversees certain financial risks and recommends guidelines to monitor and control such risk exposures. The Compensation Committee reviews the Company’s executive compensation programs, their effectiveness at both linking executive pay to performance and aligning the interests of our executives and our stockholders, and oversees an entity-wide compensation risk assessment. The Nominating and Corporate Governance Committee reviews significant related party transactions with directors, executives and managers and may conduct negotiations on behalf of the Company. The Board’s risk oversight role does not interfere with the Company’s day-to-day management because two-thirds of the current directors and over



two-thirds of the director nominees are independent and therefore have no conflicts that might discourage critical review of the Company’s risks.

## RELATED PERSON TRANSACTIONS

The Board adopted a related person transaction policy that requires the Company’s executive officers, directors and nominees for director to promptly notify the Corporate Secretary in writing of any transaction in which (i) the amount exceeds $100,000, (ii) the Company is, was or is proposed to be a participant and (iii) such person or such person’s immediate family members (“Related Persons”) has, had or may have a direct or indirect material interest (a “Related Person Transaction”). Subject to certain exceptions in the policy, Related Person Transactions must be brought to the attention of the Nominating and Corporate Governance Committee for an assessment of whether the transaction or proposed transaction should be permitted. In deciding whether to approve or ratify the Related Person Transaction, the Nominating and Corporate Governance Committee considers relevant facts and circumstances. If the Nominating and Corporate Governance Committee determines that a Related Person has a direct or indirect material interest in any such transaction, the Committee must review and approve, ratify or disapprove the Related Person Transaction.

Pursuant to our Governance Guidelines, we expect each of our directors to ensure that other existing and future commitments do not conflict with or materially interfere with his or her service as a director. Directors are expected to avoid any action, position or interest that conflicts with our interests or gives the appearance of a conflict. In addition, directors are required to inform the chairman of our Nominating and Corporate Governance Committee prior to joining the Board of another public company to ensure that any potential conflicts, excessive time demands or other issues are carefully considered.

In 2013, the Company purchased from Veeco Instruments Inc. equipment and services amounting to approximately $1,155,000. Mr. Peeler, a non-employee member of our Board, is the Chief Executive Officer and Chairman of the Board of Veeco Instruments Inc. Veeco Instruments, Inc. was a provider of equipment and services to the Company for several years before Mr. Peeler was elected to the Board. The Nominating and Corporate Governance reviewed and approved the transactions with Veeco Instruments Inc., which were ordinary course of business transactions conducted on an “arm’s length” basis with the Company.

## Communication with our Board of Directors

Interested parties wishing to write to the Board or a specified director or a committee of the Board should send correspondence to the Office of the Secretary, IPG Photonics Corporation, 50 Old Webster Road, Oxford, Massachusetts 01540. All written communications received in such manner from stockholders of the Company will be forwarded to the members or committee of the Board to whom the communication is directed or, if the communication is not directed to any particular member(s) or committee(s) of the Board, the communication shall be forwarded to all members of the Board.

## BOARD OF DIRECTORS

Dr. William Krupke decided to not stand for re-election to our Board of Directors at our 2014 annual meeting. IPG Photonics extends its sincere appreciation to Dr. Krupke for the valuable contributions he provided to our Company and stockholders during his service as a member of our Board since 2000.

The Board currently has set the number of directors at nine. The number of directors will be set at ten directors from and after the 2014 annual meeting.

## Nominees for Director

The following table sets forth certain information as of April 1, 2014 regarding the director nominees. Each of our incumbent directors, other than Dr. Krupke (who decided to not stand for re-election), has been nominated by the Board for election at our 2014 annual meeting and there are two director nominees who are not currently directors, Messrs. Meurice and Seifert.



<table><tr><td>Name</td><td>Age</td><td>Position</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>75</td><td>Chief Executive Officer and Chairman of the Board</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>66</td><td>Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Director</td></tr><tr><td>Igor Samartsev</td><td>51</td><td>Chief Technology Officer and Director</td></tr><tr><td>Robert A. Blair</td><td>67</td><td>Director</td></tr><tr><td>Michael C. Child</td><td>59</td><td>Director</td></tr><tr><td>Henry E. Gauthier</td><td>73</td><td>Director</td></tr><tr><td>William S. Hurley</td><td>69</td><td>Director</td></tr><tr><td>Eric Meurice</td><td>57</td><td>Nominee for Director</td></tr><tr><td>John R. Peeler</td><td>59</td><td>Director</td></tr><tr><td>Thomas J. Seifert</td><td>50</td><td>Nominee for Director</td></tr></table>

Valentin P. Gapontsev, Ph.D., founded IPG in 1990 and has been our Chief Executive Officer and Chairman of our Board since our inception. Prior to that time, he served as senior scientist in laser material physics and head of the laboratory at the Soviet Academy of Science's Institute of Radio Engineering and Electronics in Moscow. He has over thirty years of academic research experience in the fields of solid state laser materials, laser spectroscopy and non-radiative energy transfer between rare earth ions and is the author of many scientific publications and several international patents. Dr. Gapontsev holds a Ph.D. in Physics from the Moscow Institute of Physics and Technology. In 2006, he was awarded the Ernst & Young \( ^{®} \)  Entrepreneur of the Year Award for Industrial Products and Services in New England, and in 2009, he was awarded the Arthur L. Schawlow Award by the Laser Institute of America. In 2011, he received the Russian Federation National Award in Science and Technology, and he was selected as a Fellow of the Optical Society of America. He is the founder of the Company and has successfully led the Company and the Board since the Company was formed. His scientific understanding along with his corporate vision and operational knowledge provide strategic guidance to the Company and the Board. For these reasons, he has been nominated to continue serving on the Board.

Eugene Scherbakov, Ph.D., has served as the Managing Director of IPG Laser GmbH, our German subsidiary, since August 2000 and has been a member of our Board since September 2000. He has served as Senior Vice President-Europe since February 2013. Dr. Scherbakov served as the Technical Director of IPG Laser from 1995 to August 2000. From 1983 to 1995, Dr. Scherbakov was a senior scientist in fiber optics and head of the optical communications laboratory at the General Physics Institute, Russian Academy of Science in Moscow. Dr. Scherbakov graduated from the Moscow Physics and Technology Institute with an M.S. in Physics. In addition, Dr. Scherbakov attended the Russian Academy of Science in Moscow, where he received a Ph.D. in Quantum Electronics from its Lebedev Physics Institute and a Dr.Sci. degree in Laser Physics from its General Physics Institute. Dr. Scherbakov has been nominated to continue serving on the Board because of his position as manager of IPG Laser GmbH and because of his extensive technological knowledge of fiber lasers and components and the manufacturing process. His service as an executive officer of the Company provides the Board with a detailed understanding of the Company’s operations.

Igor Samartsev has served as our Chief Technology Officer since 2011 and has been a member of our Board since February 2006. Since 2005, he has served as the Deputy General Manager of our Russian subsidiary, NTO IRE-Polus. He served as the Technical Director of NTO IRE-Polus from 2000 to April 2005 and, from 1993 to 2001, he was the Deputy Director of NTO IRE-Polus. Mr. Samartsev holds an M.S. in Physics from the Moscow Institute of Physics and Technology. Mr. Samartsev is one of the founders of the Company and has a significant management role in the Company as Chief Technology Officer. The Board values Mr. Samartsev's understanding of technology developments at the Company. For these reasons, he has been nominated to continue serving on the Board.

Robert A. Blair has served as a member of our Board since September 2000. Since January 1999, Mr. Blair has been the President of the Blair Law Firm P.C. Mr. Blair was a senior partner at the law firm of Manatt, Phelps &



manufacturer of semiconductor test equipment), until its acquisition by Advantest Corporation in 2011, ARM Holdings plc (a semiconductor intellectual property supplier) from July 2013 to March 2014 and NXP Semiconductors N.V. (a semiconductor company) since April 2014. Mr. Meurice earned a Master's degree in mechanics and energy generation at the Ecole Centrale de Paris, a Master's degree in Economics from la Sorbonne University, Paris, and an M.B.A. from the Stanford University Graduate School of Business. Mr. Meurice has been nominated to serve on the Board because of his skills and experience as a manager of rapidly-growing, complex and global businesses in the capital equipment and electronics fields with several billions of dollars in revenues. He has experience managing a publicly held company as well as experience on serving on public company boards. Mr. Meurice also has a record of proven leadership as a strategic thinker, operator and marketer at the businesses he managed.

John R. Peeler has served as a member or our Board since September 2012. He has been Chief Executive Officer and a director of Veeco Instruments Inc. since July 2007. Veeco is a developer and manufacturer of MOCVD, molecular beam epitaxy, ion beam and other advanced thin film processes. He was Executive Vice President of JDS Uniphase Corp. ("JDSU") and President of the Communications Test & Measurement Group of JDSU, which he joined upon the closing of JDSU's merger with Acterna, Inc. ("Acterna") in August 2005. Before joining JDSU, Mr. Peeler served as President and Chief Executive Officer of Acterna. He has a B.S. and M.S. in Electrical Engineering from the University of Virginia. Mr. Peeler has been nominated to continue serving on the Board because of his extensive experience in managing high-growth technology companies and his executive leadership of a publicly traded company with international operations. He has a wealth of knowledge about the service needs of customers in demanding markets, including semiconductor capital equipment.

Thomas J. Seifert, nominee for director, has been the Executive Vice President and Chief Financial Officer of Symantec Corporation, a provider of security, backup and availability solutions, since March 2014. He served as Executive Vice President and Chief Financial Officer of Brightstar Corporation, a wireless distribution and services company, from December 2012 to March 2014. He was Senior Vice President and Chief Financial Officer at Advanced Micro Devices Inc., a semiconductor company, from October 2009 to August 2012, and served as Interim Chief Executive Officer from January 2011 to September 2012. From October 2008 to August 2009, Mr. Seifert served as Chief Operating Officer and Chief Financial Officer of Qimonda AG, a German memory chip manufacturer, and as Chief Operating Officer from June 2004 to October 2008. He also held executive positions at Infineon AG, White Oak Semiconductor, including the position as Chief Executive Officer, and Altis Semiconductor. Mr. Seifert has a Bachelor's degree and a Master's degree in Business Administration from Friedrich Alexander University and a Master's degree in Mathematics and Economics from Wayne State University. Mr. Seifert has been nominated to serve on the Board because of his extensive experience as both an operating executive and chief financial officer of several large publicly held international technology businesses.

## Standing Committees and Board Committee Membership

The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, each composed entirely of non-employee directors determined to be "independent" under the listing standards of the NASDAQ stock market. Under their written charters adopted by the Board, each of these committees is authorized and assured appropriate funding to retain and consult with external advisors, consultants and counsel.

The table below sets forth the directors who are currently members or chairs of each of the standing Board committees, and the number of meetings held by each committee and the full Board in 2013. All incumbent directors attended 75% or more of the aggregate meetings of the Board and committees on which they served during 2013. We encourage directors to attend the annual meeting of stockholders, but we do not have a formal policy regarding such attendance. Last year, six of the directors in office attended the annual meeting.



<table><tr><td></td><td>Board of Directors</td><td>Audit</td><td>Compensation</td><td>Nominating and Corporate Governance</td></tr><tr><td>Meetings held in 2013</td><td>5</td><td>7</td><td>11</td><td>8</td></tr><tr><td>Written consents in 2013</td><td>3</td><td>—</td><td>—</td><td>1</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>Chair</td><td></td><td></td><td></td></tr><tr><td>Robert A. Blair</td><td>Member</td><td></td><td>Chair</td><td>Member</td></tr><tr><td>Michael C. Child</td><td>Member</td><td>Member</td><td></td><td>Chair</td></tr><tr><td>Henry E. Gauthier</td><td>Member, and Presiding Independent Director</td><td>Member</td><td></td><td></td></tr><tr><td>William S. Hurley</td><td>Member</td><td>Chair</td><td>Member</td><td></td></tr><tr><td>William F. Krupke, Ph.D.</td><td>Member</td><td></td><td></td><td>Member</td></tr><tr><td>John R. Peeler</td><td>Member</td><td></td><td>Member</td><td>Member</td></tr><tr><td>Igor Samartsev</td><td>Member</td><td></td><td></td><td></td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>Member</td><td></td><td></td><td></td></tr></table>

The Audit Committee assists the Board by providing oversight of financial management, the internal auditor function and the independent auditor and 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 are safeguarded and that financial reports 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. The Audit Committee also pre-approves auditing and permissible non-audit services by our independent auditor, reviews and discusses our annual and quarterly financial statements and related disclosures, and coordinates the oversight of our internal and external controls over financial reporting, disclosure controls and procedures and code of business conduct. In performing these functions, the Audit Committee meets 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. In addition, the Audit Committee appoints the independent auditor. A copy of the charter of the Audit Committee is available on our website at http://investor.ipgphotonics.com/documents.cfm. For more information on Audit Committee activities in 2013, see the Audit Committee Report on page 40 of this proxy statement.

The Board has designated Mr. Hurley, the Chairman of the Audit Committee and an independent Director, as an “audit committee financial expert” under the rules and regulations of the SEC after determining that he meets the requirements for such designation. This determination was based on Mr. Hurley’s experience as chief financial officer at several publicly held companies, where he performed the functions of principal financial officer and principal accounting officer.

The primary function of the Compensation Committee is to discharge the Board’s duties and responsibilities relating to compensation of our non-employee directors and executive officers, and oversee the design and management of the long-term incentive and savings plans that cover our employees. The Compensation Committee’s duties and responsibilities under its charter with respect to the compensation of our directors and executive officers include:

• reviewing and approving the Chairman and Chief Executive Officer’s compensation based on the annual evaluation of his or her performance with input from the independent directors;

• establishing the corporate goals and objectives relevant to the Chairman and Chief Executive Officer and his performance bonus. From 2014, the independent directors will establish and oversee these corporate goals and objectives and provide the evaluation to the Compensation Committee which retains responsibility for determining the performance bonus of the Chairman and Chief Executive Officer;

• reviewing and approving compensation decisions recommended by the Chairman and Chief Executive Officer for the other executive officers, including setting base salaries, annual performance bonuses, long-term incentive awards, severance benefits and perquisites;

• setting our compensation philosophy and composition of the group of peer companies used for comparison of executive compensation; and

• reviewing, and recommending for approval by the Board, the compensation for the non-employee directors.



The Compensation Committee has retained an independent compensation consultant firm, Radford, a unit of Aon Hewitt ("Radford"), for matters related to executive officer and director compensation. Radford does not provide any other services to the Company. The compensation consultant reports directly to the Committee. The Compensation Committee also retains outside legal counsel to provide advice on compensation-related matters, including executive officers, directors and compensation plans. For further discussion of the role of the Compensation Committee in the executive compensation decision-making process, and for a description of the nature and scope of the consultant's assignment, see "Compensation Discussion and Analysis - How Executive Compensation is Determined" on page 24 of this proxy statement. Additionally, the Compensation Committee reviews the Compensation Discussion and Analysis, prepares the Compensation Committee Report in this proxy statement on page 19 and oversees management's risk assessment of the Company's compensation for all employees and compensation-related risks as delegated by the Board. A copy of the charter of the Compensation Committee can be found on our website at http://investor.ipgphotonics.com/documents.cfm.

The Nominating and Corporate Governance Committee is responsible for overseeing matters of corporate governance, including the evaluation of the performance and practices of the Board. The Nominating and Corporate Governance Committee develops and recommends criteria for Board membership, reviews possible candidates for the Board, as discussed on page 7 of this proxy statement, and recommends the nominees for directors to the Board for approval. In addition, the Nominating and Corporate Governance Committee oversees the process for annual performance evaluations of the committees of the Board. It is also within the responsibilities of the Nominating and Corporate Governance Committee to review and recommend director orientation, stock ownership guidelines, delegation of authority to management, insider trading guidelines, and consider questions of possible conflicts of interest, including related party transactions, as such questions arise. The Nominating and Corporate Governance Committee also reviews and recommends risk oversight responsibilities of the Board and its committees. A copy of the charter of the Nominating and Corporate Governance Committee can be found on our website at http://investor.ipgphotonics.com/documents.cfm.

## Compensation Committee Interlocks and Insider Participation

No member of our Compensation Committee is or has been an officer or employee of our Company or any of our subsidiaries.

## DIRECTOR COMPENSATION

The objectives for our non-employee director compensation program are to attract highly-qualified individuals to serve on our Board and align their interests with those of our stockholders. Our non-employee directors are paid pursuant to our non-employee director compensation plan described below. Our Compensation Committee reviews our director compensation program annually to confirm that the program remains appropriate and competitive and recommends any changes to our full Board for consideration and approval.

## Director Compensation Plan

Our non-employee director compensation plan provides for both cash and equity compensation for our non-employee directors. Directors who are also our employees receive no additional compensation for their service as directors. The Compensation Committee engaged Radford, an independent compensation consultant firm, to provide a comprehensive review of compensation for non-employee directors and to make recommendations with regard to director compensation matters.

Cash Compensation. Our non-employee directors receive the annual retainers from us set forth in the table below. Directors do not receive separate fees for attending Board or committee meetings or meetings of stockholders.



<table><tr><td></td><td colspan="2">Amount</td></tr><tr><td>Board Retainer</td><td>$     40,000</td><td></td></tr><tr><td>Presiding Independent Director Retainer</td><td>$     20,000</td><td></td></tr><tr><td>Audit Committee Retainers</td><td></td><td></td></tr><tr><td>Chair</td><td>$     22,500</td><td></td></tr><tr><td>Non-Chair</td><td>$     10,000</td><td></td></tr><tr><td>Compensation Committee Retainers</td><td></td><td></td></tr><tr><td>Chair</td><td>$     20,000</td><td></td></tr><tr><td>Non-Chair</td><td>$     7,500</td><td></td></tr><tr><td>Nominating and Corporate Governance Committee Retainers</td><td></td><td></td></tr><tr><td>Chair</td><td>$     12,500</td><td></td></tr><tr><td>Non-Chair</td><td>$     5,000</td><td></td></tr></table>

Equity Compensation. Under our non-employee director compensation plan, non-employee directors continuing in office after the annual meeting of stockholders receives a grant of stock options to purchase 6,500 shares of common stock and restricted stock units for 1,100 shares of common stock vesting in a single installment on the earlier of the one-year anniversary of the date of grant or the next annual meeting of stockholders. The Presiding Independent Director receives options to purchase an additional 3,250 shares of common stock and restricted stock units for an additional 550 shares of common stock. Upon initial election to the Board, each new non-employee director receives a grant of stock options to purchase 18,750 shares of our common stock and restricted stock units for 3,125 shares of common stock vesting 25% on the first four anniversaries of the date of grant. No new directors were elected in 2013. The exercise price of each of these stock options is the closing market price of our common stock on the date of grant. The non-employee director compensation plan provides that any director who retires after at least eight years of service on the Board will be entitled to full vesting of all options and restricted stock units then held by such director.

## Director Compensation Table

The following table summarizes the compensation of each of our non-employee directors for in 2013:

<table><tr><td>Name</td><td>Fees Earned or Paid in Cash ($)</td><td>Stock Awards ($)(1)</td><td>Option Awards ($)(1)</td><td>Total ($)</td></tr><tr><td>Robert A. Blair</td><td>65,000</td><td>66,000</td><td>166,588</td><td>297,588</td></tr><tr><td>Michael C. Child</td><td>62,500</td><td>66,000</td><td>166,588</td><td>295,088</td></tr><tr><td>Henry E. Gauthier</td><td>70,000</td><td>99,000</td><td>249,882</td><td>418,882</td></tr><tr><td>William S. Hurley</td><td>70,000</td><td>66,000</td><td>166,588</td><td>302,588</td></tr><tr><td>William F. Krupke, Ph.D.</td><td>42,500</td><td>66,000</td><td>166,588</td><td>275,088</td></tr><tr><td>John R. Peeler</td><td>50,787</td><td>66,000</td><td>166,588</td><td>283,375</td></tr></table>

(1) Valuation based on the fair value of the restricted stock unit and stock option awards as of the grant date determined pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 718 ("ASC Topic 718") with respect to 2013. The assumptions that we used with respect to the valuation of restricted stock unit and stock option awards are set forth in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K filed with the SEC on February 28, 2014. On June 4, 2013, each director then serving on the Board was granted restricted stock units for 1,100 shares of common stock and options to purchase 6,500 shares of common stock at an exercise price of $60.00 per share. Mr. Gauthier, the Presiding Independent Director, was granted on the same day additional restricted stock units for 550 shares of common stock and additional options to purchase 3,250 shares of common stock at an exercise price of $60.00 per share. Both restricted stock units and options vest in a single installment on June 3, 2014.

In February 2014, the Board approved several changes to the non-employee director compensation. Based upon a review conducted by Radford, the Compensation Committee’s independent compensation consultant, the Compensation Committee recommended changes to the plan which were approved by the Board. The material amendments include (a) a change in the initial equity grant to new directors from 18,750 stock options and 3,125 restricted stock units to a dollar value grant of $250,000 in stock options and $250,000 in restricted stock units.



vesting over four years, (b) the elimination of the annual grant of additional equity compensation to the Presiding Independent Director, (c) an increase in the cash retainer for all committee members and chairs by $2,500, except that the cash retainer for the chair of the Nominating and Corporate Governance Committee increases by $5,000, and (d) the pro-ration of the first annual equity grant to new directors based upon the date of their initial election to the Board. The changes to the non-employee director compensation plan are effective June 3, 2014.

## Outstanding Equity Awards Table

The following table provides information regarding unexercised stock options and unvested restricted stock units held by each of our non-employee directors on December 31, 2013:

<table><tr><td>Name</td><td>Unvested Restricted Stock Units (#)</td><td>Total Option Awards Held (#)</td><td>Exercisable Option Awards (#)</td></tr><tr><td>Robert A. Blair</td><td>1,100</td><td>19,834</td><td>13,334</td></tr><tr><td>Michael C. Child</td><td>1,100</td><td>43,168</td><td>36,668</td></tr><tr><td>Henry E. Gauthier</td><td>1,650</td><td>44,752</td><td>25,002</td></tr><tr><td>William S. Hurley</td><td>1,100</td><td>39,835</td><td>33,335</td></tr><tr><td>William F. Krupke, Ph.D.</td><td>1,100</td><td>19,834</td><td>13,334</td></tr><tr><td>John R. Peeler</td><td>1,100</td><td>31,500</td><td>6,250</td></tr></table>

We also reimburse directors for all reasonable out-of-pocket expenses incurred for attending Board and committee meetings and director education programs. Non-employee directors do not receive any additional payments or perquisites.

Our certificate of incorporation limits the dollar amount of personal liability of our directors for breaches by them of their fiduciary duties. Our certificate of incorporation requires us to indemnify our directors to the fullest extent permitted by the Delaware General Corporation Law. We have also entered into indemnification agreements with all of our directors and we have purchased directors' and officers' liability insurance.

## COMMON STOCK OWNERSHIP

The following table provides information about the beneficial ownership of our common stock as of April 1, 2014 by:

• each person or entity known by us to own beneficially more than five percent of our common stock;

• each of the Named Executive Officers;

• each person who is a director or nominee; and

• all of our executive officers and directors as a group.

In accordance with SEC rules, beneficial ownership includes any shares for which a person or entity has sole or shared voting power or investment power and any shares for which the person or entity has the right to acquire beneficial ownership within 60 days after April 1, 2014 through the exercise of any option, warrant or otherwise. Percentage of beneficial ownership is based on 52,014,775 shares of common stock outstanding as of April 1, 2014. The contact address of all persons and entities in the table below (other than Artisan Partners Limited Partnership, Columbia Wanger Asset Management, LLC and T. Rowe Price Associates, Inc.) is in care of IPG Photonics Corporation, 50 Old Webster Road, Oxford, Massachusetts 01540.



<table><tr><td>Name</td><td>Shares Owned</td><td>Right to Acquire Shares within 60 Days</td><td>Total</td><td>Percent</td></tr><tr><td>The Valentin Gapontsev Trust I (1)</td><td>15,094,668</td><td>—</td><td>15,094,668</td><td>29.0%</td></tr><tr><td>Valentin P. Gapontsev, Ph.D. (2)</td><td>7,821,933</td><td>—</td><td>7,821,933</td><td>15.0%</td></tr><tr><td>IP Fibre Devices (UK) Ltd.</td><td>7,266,002</td><td>—</td><td>7,266,002</td><td>14.0%</td></tr><tr><td>Artisan Partners Limited Partnership (3)</td><td>3,892,196</td><td>—</td><td>3,892,196</td><td>7.5%</td></tr><tr><td>Columbia Wanger Asset Management, LLC (4)</td><td>2,595,550</td><td>—</td><td>2,595,550</td><td>5.0%</td></tr><tr><td>T. Rowe Price Associates, Inc. (5)</td><td>3,190,830</td><td>—</td><td>3,190,830</td><td>6.1%</td></tr><tr><td>Robert A. Blair</td><td>35,538</td><td>13,334</td><td>48,872</td><td>*%</td></tr><tr><td>Michael C. Child</td><td>8,912</td><td>36,668</td><td>45,580</td><td>*%</td></tr><tr><td>Henry E. Gauthier</td><td>13,000</td><td>35,002</td><td>48,002</td><td>*%</td></tr><tr><td>William S. Hurley</td><td>8,667</td><td>33,335</td><td>42,002</td><td>*%</td></tr><tr><td>William F. Krupke, Ph.D.</td><td>11,700</td><td>13,334</td><td>25,034</td><td>*%</td></tr><tr><td>Eric Meurice</td><td>—</td><td>—</td><td>—</td><td>*%</td></tr><tr><td>John R. Peeler</td><td>—</td><td>9,375</td><td>9,375</td><td>*%</td></tr><tr><td>Igor Samartsev (6)(7)</td><td>905,460</td><td>36,875</td><td>942,335</td><td>1.8%</td></tr><tr><td>Eugene Scherbakov, Ph.D. (6)(8)</td><td>17,065,235</td><td>9,313</td><td>17,074,548</td><td>32.8%</td></tr><tr><td>Thomas J. Seifert</td><td>—</td><td>—</td><td>—</td><td>*%</td></tr><tr><td>Angelo P. Lopresti (8)</td><td>17,103,094</td><td>35,188</td><td>17,138,282</td><td>32.9%</td></tr><tr><td>Timothy P.V. Mammen</td><td>16,736</td><td>49,063</td><td>65,799</td><td>*%</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D. (8)</td><td>17,165,961</td><td>6,563</td><td>17,172,524</td><td>33.0%</td></tr><tr><td>Trevor D. Ness</td><td>883</td><td>16,875</td><td>17,758</td><td>*%</td></tr><tr><td>Nikolai Platonov, Ph.D. (6)(8)</td><td>16,064,668</td><td>4,875</td><td>16,069,543</td><td>30.9%</td></tr><tr><td>Felix Stukalin</td><td>316</td><td>10,688</td><td>11,004</td><td>*%</td></tr><tr><td>All executive officers and directors as a group (14 persons)</td><td>18,762,097</td><td>310,488</td><td>19,072,585</td><td>36.5%</td></tr></table>

 \( ^{*} \)  Less than 1.0%

(1) Includes 7,266,002 shares beneficially owned by IP Fibre Devices (UK) Ltd. (“IPFD”), in which the Valentin Gapontsev Trust I, a trust formed by Dr. Gapontsev (the “Gapontsev Trust I”), has a 48% economic interest. The trustees of the Gapontsev Trust I are Drs. Ovtchinnikov, Platonov and Scherbakov and Mr. Lopresti. Each of the individual trustees disclaims beneficial ownership of the shares held by the Gapontsev Trust I. See note 8 below.

(2) Includes 7,266,002 shares beneficially owned by IPFD, of which Dr. Gapontsev is the sole managing director. Dr. Gapontsev has sole voting and investment power with respect to the shares held of record by IPFD. Dr. Gapontsev has a 3% economic interest in IPFD.

(3) The address of Artisan Partners Limited Partnership is 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202. Based solely on a Schedule 13G/A filed with the SEC on March 24, 2014.

(4) The address of Columbia Wanger Asset Management, LLC is 227 West Monroe Street, Suite 3000, Chicago, IL 60606. Based solely on a Schedule 13G/A filed with the SEC on February 6, 2014.

(5) These securities are owned by various individual and institutional investors which T. Rowe Price Associates, Inc. (“Price Associates”) serves as an investment advisor with power to direct investments and/or sole power to vote the securities. For the purposes of the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. The address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, MD 21202. Based solely on a Schedule 13G filed with the SEC on February 12, 2014.

(6) Does not include shares held by IPFD. Each such person has an 8% economic interest in IPFD but does not possess voting or investment power with respect to such interest. Each disclaims beneficial ownership of the shares held by IPFD except to the extent of his economic interest therein.

(7) Includes 550,000 shares held by a trust of which Mr. Samartsev’s wife is the sole trustee. Mr. Samartsev disclaims beneficial ownership of the shares held in such trust.



(8) Includes (a) 15,094,668 shares beneficially owned by the Gapontsev Trust I, (b) 970,000 shares beneficially owned by the Valentin Gapontsev Trust II, a trust formed by Dr. Gapontsev (the “Gapontsev Trust II”), and (c) 1,000,000 shares beneficially owned by the Valentin Gapontsev Trust III, a trust formed by Dr. Gapontsev (the “Gapontsev Trust III”), of each of which Drs. Ovtchinnikov and Scherbakov and Mr. Lopresti is a trustee. Dr. Platonov is a trustee of the Gapontsev Trust I and the Gapontsev Trust II and his beneficial ownership excludes shares beneficially owned by the Gapontsev Trust III.

## PROPOSAL 1: ELECTION OF DIRECTORS

The stockholders are being asked to elect Dr. Gapontsev, Dr. Scherbakov, Mr. Samartsev, Mr. Blair, Mr. Child, Mr. Gauthier, Mr. Hurley, Mr. Meurice, Mr. Peeler and Mr. Seifert to terms ending with the annual meeting to be held in 2015, until a successor is elected and qualified or until his earlier death, resignation or removal. The Board nominated each of these individuals for election at the 2014 annual meeting of stockholders upon the recommendation of the Nominating and Corporate Governance Committee. Each nominee is currently a director of our company, other than Messrs. Meurice and Seifert. For more information regarding the nominees for director, see “Board of Directors.”

The Board does not contemplate that any of the nominees will be unable to stand for election, but should any nominee become unable to serve or for good cause will not serve, all proxies (except proxies marked to the contrary) will be voted for the election of a substitute nominee nominated by the Board.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ALL OF THE NOMINEES FOR DIRECTOR

## EXECUTIVE OFFICERS

The following table sets forth certain information regarding our executive officers as of April 1, 2014.

<table><tr><td>Name</td><td>Age</td><td>Position</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>75</td><td>Chief Executive Officer and Chairman of the Board</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>66</td><td>Managing Director of IPG Laser GmbH, Senior Vice President, Europe and Director</td></tr><tr><td>Timothy P.V. Mammen</td><td>44</td><td>Chief Financial Officer and Senior Vice President</td></tr><tr><td>Angelo P. Lopresti</td><td>50</td><td>General Counsel, Secretary and Senior Vice President</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D.</td><td>53</td><td>Senior Vice President, Components</td></tr><tr><td>Trevor D. Ness</td><td>41</td><td>Senior Vice President, World Wide Sales</td></tr><tr><td>Igor Samartsev</td><td>51</td><td>Chief Technology Officer and Director</td></tr><tr><td>Felix Stukalin</td><td>52</td><td>Senior Vice President, U.S. Operations</td></tr></table>

The biographies of Dr. Gapontsev, Dr. Scherbakov and Mr. Samartsev are presented on page 10. The biographies of our other executive officers are presented below.

Timothy P.V. Mammen has served as our Chief Financial Officer since July 2000 and a Vice President since November 2000. He was promoted to Senior Vice President in February 2013. Between May 1999 and July 2000, Mr. Mammen served as the Group Finance Director and General Manager of the United Kingdom operations for IPFD. Mr. Mammen was Finance Director and General Manager of United Partners Plc, a commodities trading firm, from 1995 to 1999 and prior to that he worked in the finance department of E.I. du Pont de Nemours and Company. Mr. Mammen holds an Upper Second B.Sc. Honours degree in International Trade and Development from the London School of Economics and Political Science. Also, he is a Chartered Accountant and a member of the Institute of Chartered Accountants of Scotland.

Angelo P. Lopresti has served as our General Counsel and Secretary and one of our Vice Presidents since February 2001. He was promoted to Senior Vice President in February 2013. Prior to joining us, Mr. Lopresti was a partner at the law firm of Winston & Strawn LLP from 1999 to 2001. Prior to that, he was a partner at the law firm of Hertzog, Calamari & Gleason from 1998 to 1999 and an associate there from 1991 to 1998. Mr. Lopresti holds a B.A. in Economics from Trinity College and a J.D. from the New York University School of Law.



Alexander Ovtchinnikov, Ph.D., has served as our Vice President, Components, since September 2005 and as Director of Material Sciences from October 2001 to September 2005. He was promoted to Senior Vice President in February 2013. Prior to joining us, Dr. Ovtchinnikov was Material Science Manager of Lasertel, Inc., a maker of high-power semiconductor lasers, from 1999 to 2001. For 15 years prior to joining Lasertel, Inc., he worked on the development and commercialization of high power diode pump technology at the Ioffe Institute, Tampere University of Technology, Coherent, Inc. and Spectra-Physics Corporation. He holds an M.S. in Electrical Engineering from the Electrotechnical University of St. Petersburg, Russia, and a Ph.D. from Ioffe Institute of the Russian Academy of Sciences.

Trevor D. Ness has served as our Senior Vice President, World Wide Sales since February 2013. From January 2011 until February 2013, he served as our Vice President–Asian Operations. Prior to joining us, he was Director of GSI Precision Technologies China from May 2005 to December 2010. Mr. Ness holds a B.S. in Geology from Imperial College, a H.N.C. from Bournemouth University and an M.B.A. from The Open University.

Felix Stukalin has served as our Senior Vice President, U.S. Operations since February 2013. From March 2009 until February 2013, he served as our Vice President, Devices. Prior to joining us, he was Vice President, Business Development of GSI Group Inc. from April 2002 to September 2008, and from March 2000 to April 2002 he was Vice President of Components and President of the Wave Precision divisions of GSI Luminics, Mr. Stukalin holds a B.S. in Mechanical Engineering from the University of Rochester and he is a graduate of the Harvard Business School General Management Program.

## COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement for the Company’s 2014 annual meeting of stockholders and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

COMPENSATION COMMITTEE

Robert A. Blair, Chair

William S. Hurley

John R. Peeler

April 1, 2014

## COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis provides a comprehensive review of our executive compensation philosophy and program, including our program design for fiscal year 2013. The discussion in this section focuses on the compensation of our “Named Executive Officers” or “NEOs” for fiscal year 2013, who were:

• Valentin P. Gapontsev, Ph.D., our Chairman and Chief Executive Officer;

• Timothy P.V. Mammen, our Senior Vice President and Chief Financial Officer;

- Eugene Scherbakov, Ph.D., the Managing Director of IPG Laser GmbH, our subsidiary, and Senior Vice President, Europe;

• Angelo P. Lopresti, our Senior Vice President, General Counsel and Secretary; and

• Alexander Ovtchinnikov, Ph.D., our Senior Vice President, Components.

## Compensation Program Objectives and Principles

We believe that our success depends on the continued contributions of our executive officers. Our executive compensation programs are designed with the philosophy of attracting, motivating and retaining experienced and qualified executive officers and recognizing individual merit and overall business results.

The objectives of our compensation programs are to:

• attract and retain talented and experienced executives;



• motivate and reward executives whose knowledge, skills and performance are critical to achieving strategic business objectives;

- align the interests of our executive officers and stockholders by motivating executive officers to increase long-term stockholder value;

• provide incentives for future performance through both short-term and long-term financial incentives to build a sustainable company and foster the creation of stockholder value; and

• foster a shared commitment among executives through establishment of uniform company goals.

Our compensation philosophy is reflected in the following executive compensation design principles:

- In addition to a competitive base salary, a substantial portion of the executives’ potential cash compensation should be tied to a short-term incentive plan that rewards corporate and individual achievement of challenging performance goals; and

- The Company uses a combination of restricted stock units and stock options with a service-based vesting to provide a combination of retention and motivation to increase the value of the Company’s common stock.

<table><tr><td>Compensation Element</td><td>Objective</td></tr><tr><td>Base salary</td><td>Provide a competitive fixed component of cash compensation.</td></tr><tr><td>Short-term incentive plan</td><td>Offer a variable cash compensation opportunity earned based upon the level of achievement of challenging corporate goals, with additional compensation opportunity based upon individual performance.</td></tr><tr><td>Long-term incentives</td><td>Align long-term management and stockholder interests and strengthen retention with four-year vesting provisions. Service-based equity awards offer certainty and long-term retention while providing additional compensation opportunity to executives based upon increased stock price levels.</td></tr><tr><td>Benefit plans</td><td>Provide competitive employee benefits. We do not view this as a significant component of our executive compensation program.</td></tr></table>

## 2013 Business Highlights

IPG continued its revenue and income growth in 2013, finishing another record year. We reported revenue growth in all four quarters and continued to make investments for the future. Our results demonstrated that IPG extended its competitive lead while capitalizing on the growing demand for fiber laser technology.

Our strong performance is largely attributable to factors specific to the Company, such as our market leadership in high-power fiber lasers for materials processing applications. IPG achieved greater sales of high-power, medium-power and quasi-CW lasers used in cutting and welding applications. A growing number of OEM customers have developed cutting systems that use our high-power lasers and sales of these systems are gaining sales from gas laser systems. In addition, new welding processes using fiber lasers have been developed, increasing sales of lasers for this application which are replacing traditional laser and non-laser welding technologies. We also introduced new products and applications, assisted by our ongoing significant investments. While we did not grow at the same rate as in 2012, our sales in 2013 grew at a 15% rate over the prior year.

The Company recorded $648 million in revenues in 2013, which is the highest level of revenues for any fiscal year in our history.




Our operating income also achieved its highest levels to date, reaching $218 million in 2013 compared to $208 million in 2012 and $176 million in 2011.



Our gross margin decreased to 52.5% in 2013 from 54.2% in 2012, but represented industry-leading gross margins as compared to our laser peers.



The Company also increased its cash and cash equivalents to over $448 million at December 31, 2013, reflecting solid operating cash flows. Also, we continued substantial investments during 2013 in property, plant, equipment, technology and people so that we are well-positioned for future demand growth for our industry-leading products.



For more information about our business, please read “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 28, 2014.

## Pay-for-Performance

We structure our executive compensation program so that a meaningful percentage of compensation is tied to the achievement of high levels of Company performance. The payouts under our 2013 short-term incentive program reflect the Company’s strong financial and strategic performance. We use net sales and earnings before interest, as adjusted for certain items (“adjusted EBIT”), as the key performance metrics in our compensation program as we believe that they reflect a number of important competitive and business elements, such as product acceptance and revenue growth, and profitability, and are therefore excellent barometers of our overall performance. For 2013, our net sales and adjusted EBIT were $648 million and $231 million, respectively, both of which were higher than the levels from 2013, but below the target levels of $666 million and $250 million, respectively, that the Compensation Committee set for the year. These targets were set such that achievement of the targets would have required record-setting performance by the Company.

Our 2013 annual short-term incentive plan was structured to pay out 100% of our CEO’s base salary and 67% of the other executives’ base salaries if (i) the Company successfully achieved both target levels of financial performance and (ii) the executives achieved the highest levels of individual performance. Based on the Company’s 2013 net sales, adjusted EBIT and individual performance levels (as further described under “Components of Compensation in 2013 – Short-Term Incentive Plan” below), our 2013 short-term incentive plan paid bonuses equal to approximately 84% of our Chief Executive Officer’s base salary and 56% of the other Named Executive Officers’ base salaries.

To illustrate our pay-for-performance philosophy, the following charts reflect the portions of our executive officers' actual compensation for 2013 represented by each of the major elements of our compensation program – base salary paid, 2013 short-term cash incentives (at actual amount earned), option awards and restricted stock units with service-based vesting criteria (valued at their grant-date fair value):

A significant majority of the executives’ overall compensation is derived from performance-based or long-term service-based components of our program. In 2013, this included 45% of the Chief Executive Officer’s compensation and 65% of the other Named Executive Officers’ compensation.

## CEO Pay Mix - 2013

Short-Term Incentive: 45.0%



Base Salary: 55.0%



All Other NEOs Pay Mix - 2013



Our Chief Executive Officer, Dr. Valentin Gapontsev, is also the Company's founder. He does not receive long-term incentives in the form of equity or cash because of his significant level of ownership of our common stock. As a result, a smaller percentage of his total compensation is performance-based as compared to the chief executives of our peer companies, who receive additional compensation in the form of long-term incentives. Dr. Gapontsev's compensation is substantially below the compensation of chief executive officers at our peer companies. Also, his compensation over the past five fiscal years further reflects the effectiveness of our pay-for-performance program. The Company's operating results over the past five years have resulted in corresponding levels of Chief Executive Officer compensation. Conversely, in fiscal year 2009, when the global economic downturn significantly impaired our financial results, Dr. Gapontsev received only his base salary for that year as no bonus was earned based on the Company's results, notwithstanding management's effectiveness during that challenging period in maintaining the employee and customer bases so that we were well-positioned to take advantage of the subsequent demand recovery. The following table demonstrates our pay-for-performance model by tracking Dr. Gapontsev's actual total compensation in each of the last five fiscal years against Company revenues and net income:






## How Executive Compensation is Determined

Role of the Compensation Committee. The Compensation Committee determines, approves and administers the compensation programs for our executive officers, including our Named Executive Officers. Our Compensation Committee is also responsible for making recommendations to the Board with respect to the adoption of equity plans and certain other benefit plans. The Compensation Committee may delegate authority whenever it deems appropriate, but it did not do so in 2013.

Our Compensation Committee’s policy is to set executive officer pay in accordance with the objectives of the Company’s compensation programs as described above. In our view, the Company’s executive compensation program provides an overall level of compensation opportunity that is competitive with peer companies. Actual compensation levels may be greater or less than median compensation levels provided by similar companies based upon annual and long-term Company performance, as well as individual performance, contributions, skills, experience and responsibilities.

During 2013, the Compensation Committee was comprised of independent directors at all times. Mr. Blair, Chair, Mr. Hurley and Mr. Peeler served on the Committee for the entire year. Mr. Michael Kampfe served on the Compensation Committee until June 2013 when he left the Board. Mr. Blair has chaired the Committee since 2006.

Role of Executive Officers in Compensation Decisions. The Compensation Committee regularly meets with Dr. Gapontsev, our Chief Executive Officer, to obtain recommendations with respect to the compensation programs, practices and packages for our Named Executive Officers. Additionally, Mr. Mammen, our Chief Financial Officer, and Mr. Lopresti, our General Counsel, are regularly invited to meetings of the Compensation Committee or otherwise asked to assist the Committee. Such assistance includes providing financial and compensation information and analysis for the Compensation Committee and its compensation consultant, taking minutes of the meeting or providing legal advice, developing compensation proposals for consideration, and providing insights regarding our employees (executive and otherwise). The Named Executive Officers attend portions of Compensation Committee meetings when requested, but leave the meetings as appropriate when matters that will potentially affect them personally or other executive officers including the Chief Executive Officer are discussed. Several meetings of the Compensation Committee are not attended by management. The Compensation Committee makes decisions regarding Dr. Gapontsev’s compensation without him present. From time to time, outside legal counsel and the independent compensation consultant attend Compensation Committee meetings.

Role of Compensation Consultant. The Compensation Committee engaged Radford, an independent compensation consultant, to conduct a comprehensive review and analysis of our executive compensation program and to make recommendations for compensation related to 2013. The compensation consultant provides the Compensation Committee with an independent evaluation of executive compensation and is available as needed by the Compensation Committee to provide advice and counsel. Radford serves at the discretion of the Compensation Committee. Neither Radford nor Aon, Radford's parent company, does any other work for the Company. Aon is a global provider of many services relevant to the Company's business and the Company may retain other services from Radford or Aon as appropriate. The Compensation Committee has reviewed the independence of Radford in light of SEC rules and NASDAQ listing standards regarding compensation consultants. The Compensation Committee believes that there are no actual or potential conflicts of interest with Radford in 2013. The Compensation Committee authorizes the compensation consultant to confer with management for perspective on the impact of compensation recommendations.

## Pay Positioning Strategy

In 2013, we positioned the midpoint of the Company’s target total cash compensation range near the 65 \( ^{th} \)  percentile and the long-term incentive range near the 50 \( ^{th} \)  percentile of the target compensation of our peer group, resulting in targeted total compensation that is competitive within our labor market for performance that meets the objectives established by the Compensation Committee. An individual’s actual salary, non-equity incentive compensation opportunity and equity compensation may fall below or above the target position based on the individual’s experience, seniority, skills, knowledge, performance and contributions as well as the Company’s performance. These factors are weighed individually by the Compensation Committee in its judgment, and no single factor takes precedence over others nor is any formula used in making these decisions. The Chief Executive Officer’s review of the performance of his direct reports is carefully considered by the Compensation Committee in making individual compensation decisions.



In analyzing our executive compensation program relative to this target market positioning, the Compensation Committee utilizes a comparative analysis of the compensation of our executive officers measured against a group of industry peer companies selected by the Compensation Committee with the assistance of Radford and management input. The peer companies are companies in the laser source and photonics industry, as well as a broader group of technology companies of comparable size and complexity that have similar growth rates and international scope. Several factors were considered in selecting the peer group used in 2013, the most important of which were:

• comparable business (primarily laser, photonics, semiconductor, optical components and related device companies);

• market capitalizations, annual revenue and employee levels; and

• geographic location.

Radford also supplements its peer analysis with the data from a broader list of high-technology public company participants in the Radford 2012 Global Technology Survey having revenue levels from $300 million to $1 billion.

For 2013, the peer companies were:

• II-VI Incorporated

• Chart Industries, Inc.

• Cymer Inc.

• FEI Company

• Hittite Microwave Corporation

• RBC Bearings, Inc.

• Teradyne, Inc.

• Analogic Corporation

• Cognex Corporation

• Diodes, Inc.

• FLIR Systems, Inc.

• MKS Instruments, Inc.

• Rofin-Sinar Technologies Inc.

• Veeco Instruments Inc.

• Brooks Automation, Inc.

• Coherent, Inc.

• Entegris, Inc.

• Graco, Inc.

• Newport Corporation

• Riverbed Technology, Inc.

The Compensation Committee reviews this peer group annually to ensure that the comparisons are meaningful. Given the continuing rapid growth of the Company, the Compensation Committee undertook a review of our historical peer group for the 2013 compensation analysis, applying the criteria above. In this review, the Compensation Committee conducted an analysis of our peers to determine which companies are frequently referenced and whether they should be considered for inclusion in IPG Photonics' peer group. Based upon this review, the Compensation Committee removed companies that were no longer viable peers due to acquisitions or that have financial profiles which are not well-aligned with ours. Added were Chart Industries, Inc., FLIR Systems, Inc., Graco, Inc., RBC Bearings, Inc., Riverbed Technology, Inc. and Teradyne, Inc. Removed were Acme Packet, Inc., Electro Scientific Industries, Inc., Measurement Specialties, Inc. and Opnext, Inc.

Also, the Compensation Committee conducted a review of peer companies for the 2014 compensation analysis. Based upon this review and applying the criteria above, the Compensation Committee removed Cymer Inc. from the peer group for 2014 because it was acquired in the prior year.

## Components of Compensation in 2013

The principal components of our executive officer compensation during 2013 were base salary, short-term cash incentives, long-term equity incentive awards, severance benefits, retirement savings benefits provided under a 401(k) plan, executive perquisites, and benefit programs generally available to other employees.

These components were selected because the Compensation Committee believes that a combination of salary, incentive pay, severance and retirement savings benefits and perquisites is necessary to help us attract and retain the executive talent on which our success depends. The annual cash incentives are designed to allow the Compensation Committee to reward performance over a fiscal year and to provide an incentive for executives to appropriately balance their focus on short-term and long-term strategic goals. The fixed components, including salary, severance and retirement savings benefits and perquisites, are structured to provide a sufficient level of compensation for our executives relative to both immediate and long-term income needs. The Compensation Committee believes that, when taken together, these components are effective in achieving the objectives of our compensation program and philosophy and are reasonable relative to our strategy of managing total compensation near the market practices targeted by the Compensation Committee.

The Compensation Committee annually reviews the entire compensation program with the assistance of its independent compensation consultant and outside legal counsel. However, the Compensation Committee may at



any time review one or more components as necessary or appropriate to ensure such components remain competitive and appropriately designed to reward performance. In setting compensation levels for a particular Named Executive Officer, the Committee considers both individual and corporate factors.

Base Salary. We provide base salary to our Named Executive Officers and other employees to compensate them for services rendered on a day-to-day basis during the fiscal year. Unlike short-term cash incentives and long-term equity incentives, base salary is not subject to performance risk. The Compensation Committee reviews information provided by its compensation consultant and considers the experience, skills, knowledge and responsibilities of the executive and the individual's performance assessment provided by the Chief Executive Officer to assist it in evaluating base salary for each Named Executive Officer. With respect to the Chief Executive Officer, the Compensation Committee additionally considers the performance of the Company as a whole.

In 2013, the Compensation Committee conducted an assessment of base salaries and total cash compensation for the Named Executive Officers. After consulting with its compensation consultant, the Compensation Committee increased the targets for base salary and total cash compensation to the 65 \( ^{th} \)  percentile of market practices, taking into account the increasing scale and complexity of the Company’s operations, the strong performance of the Company, the rapid growth of the Company and the importance of retaining an experienced team of proven executives. Based upon this and the selection of new peers for 2013, the Compensation Committee approved increases of 15% to the base salaries of the Named Executive Officers, except for Dr. Ovtchinnikov who received an increase in base salary of 20%. For 2014, the Compensation Committee approved merit increases of 3% to the base salaries of the Named Executive Officers from 2013 levels, except that Mr. Mammen’s base salary was increased by 5% to bring it in line with the market 65th percentile of our peer group.

Short-Term Incentive Plan. To focus each executive officer on the importance of the performance of the Company, a significant portion of the individual’s potential short-term compensation is in the form of annual cash incentive pay that is tied to the achievement of goals established by the Compensation Committee.

Our Named Executive Officers participate in our Senior Executive Short-Term Incentive Plan (the "STIP"). The STIP is administered by the Compensation Committee, which has the discretion to determine the type of award, whether cash or non-cash, granted under the STIP. The STIP emphasizes company-wide performance goals in order to foster a shared commitment among executives. Generally, award levels for executives are the same percentage of salary, except for the Chief Executive Officer whose target award is at a greater percentage of salary than the other officers for achievement of the same performance goals. The Compensation Committee determines who is eligible to receive awards under the STIP, establishes performance goals and objectives for executives, establishes target awards for each participant for the relevant performance period, and determines the percentage of the target award that should be allocated to the achievement of each of the chosen performance goals in consultation with the Chief Executive Officer with respect to other executive officers. The target award percentages established by the Compensation Committee are chosen based upon a compensation review conducted by Radford and the seniority level of the executive.

For 2013, the Compensation Committee identified two financial performance measures: net sales and adjusted EBIT (excluding equity-based compensation expenses and expenses for approved litigation matters), each as determined under the STIP, and assigned a 50% weighting factor to each financial performance goal. The Compensation Committee chose to focus on revenue growth and pretax profits so that our executive officers would be incentivized to deliver the types of growth that benefit our stockholders, namely increasing sales and profits.

The Chief Executive Officer could receive a cash incentive payment ranging from 18.8% to 112.5% of his base salary, and other participants in the STIP could receive a cash incentive payment ranging from 12.5% to 75.0% of their respective base salaries, based upon achievement of the minimum to maximum objectives for both financial performance measures. If the financial performance exceeds one or more of the maximum objectives, the incentive payments to the executive would increase as determined by linear interpolation, subject to limits on payouts discussed below. Consistent with our pay-for-performance philosophy, no cash incentive payments would be made if the minimum financial objectives established by the Compensation Committee in 2013 were not met.

While objectives were intended to be achievable by the Company, a maximum bonus would require very high levels of Company performance. The Compensation Committee believes that the goals are reasonably difficult to achieve, as demonstrated by the fact that the Company achieved only the maximum payout once. The Compensation Committee set minimum and maximum targets for net sales of $566 million and $766 million, respectively, representing annual growth levels of 1% to 36% from the prior year. The minimum and maximum targets for adjusted EBIT were set from $200 million to $300 million, representing a change ranging from a



decrease of 1% to an increase of 38% from the prior year, reflecting the effect of the substantial investment in plant and equipment in 2013. The target levels for net sales and adjusted EBIT were $666 million and $250 million, respectively.

The Chief Executive Officer and the other Named Executive Officers were also eligible to receive awards of up to 25.0% and 16.7%, respectively, of their base salaries under the STIP in 2013, based upon their respective individual performances. The individual goals and objectives for the Chief Executive Officer included operational and strategic targets set by the Compensation Committee with input from the independent directors.

The overall target award (including both financial and individual performance measures) for the Chief Executive Officer was 100.0% of his base salary and 66.7% of the respective base salaries for the other participants. The financial objectives were the same for all executive officers. The range of possible payout amounts for 2013 under the STIP for achievement of financial objectives for each Named Executive Officer is shown below in the Grants of Plan-Based Awards table. The maximum possible payouts under the STIP for both financial and individual performance measures are 225.0% of the target award for the Named Executive Officers.

The Company’s record financial performance for 2013 exceeded minimum financial performance targets set by the Compensation Committee but did not reach either of the target performance measures. The Company achieved net sales of $648 million and adjusted EBIT of $231 million. These results represented a 15% increase in net sales and a 6% increase in adjusted EBIT over 2012 levels. The Compensation Committee reviewed the Chief Executive Officer’s goals and objectives set by the Compensation Committee with input from the independent directors and determined to award him 25.0% of his base salary for his individual performance during 2013. Also, the Compensation Committee, based with input from the Chief Executive Officer, awarded the other Named Executive Officers 16.7% of their respective base salaries for their individual performances in 2013.

The Compensation Committee may make adjustments to our overall corporate performance goals and the ways that our actual performance results are calculated that may cause differences between the numbers used for our performance goals and the numbers reported in our financial statements. These adjustments may exclude all or a portion of both the positive or negative effect of external events that are outside the control of our executives. The Compensation Committee made adjustments to the 2013 STIP for amortization related to an acquisition in 2013 and certain litigation expenses.

Based upon the Company’s financial performance and the individual performance of the Named Executive Officers, the Compensation Committee made the following 2013 awards:

<table><tr><td colspan="3">2013 Short-Term Incentive Plan Payouts</td></tr><tr><td>Name</td><td>Target Awards (\()(1)</td><td>Actual Awards (\))</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>542,800</td><td>445,894</td></tr><tr><td>Timothy P.V. Mammen</td><td>261,224</td><td>219,402</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>299,092</td><td>246,462</td></tr><tr><td>Angelo P. Lopresti</td><td>249,321</td><td>209,405</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D.</td><td>242,401</td><td>203,593</td></tr></table>

(1) Target Awards include both financial and individual performance targets.

Long-Term Equity-Based Incentives. The goal of our equity-based award program is to provide employees and executives with the perspective of an owner with a long-term financial stake in our success, further increasing alignment with stockholders. Long-term incentive awards also incent employees to stay with us for longer periods of time, which in turn provides us with greater stability and directly links compensation to the long-term performance of the Company. We review long-term equity incentives for our Named Executive Officers and other executives annually.

For our Named Executive Officers, our equity-based award program is based on annual grants of service-based stock options and restricted stock units. Of the equity-based awards, 75% is typically in the form of stock options and 25% is typically in the form of restricted stock units. Consistent with our pay-for-performance philosophy, the service-based stock option awards have no value unless our stock price increases after the grant date and the value of the restricted stock units is tied to the value of our stock.



Since the Company’s initial public offering in 2006, the Chief Executive Officer did not receive any equity compensation awards. As the Company’s founder and the beneficial owner of a large number of our shares, he has the perspective of an owner with a significant financial stake in the Company’s success.

In 2013, the Compensation Committee targeted granting equity compensation near the 50 \( ^{th} \)  percentile of the target compensation of our peer group, balancing the perspective of delivering competitive compensation based upon Black-Scholes option pricing values and as a percentage of the Company. The Compensation Committee analyzed several aspects of the equity grant program, including (i) the “in the money” value, the degree to which executives have incentives to remain employed by the Company through unvested option values, and (ii) the aggregate equity usage in terms of (a) annual usage, typically called burn rate, and (b) cumulative equity delivery, typically called overhang, to determine the dilutive effect of equity awards on investors. The majority of outstanding equity holdings of the executives (other than Dr. Gapontsev) were allocated to unvested shares in the aggregate, and all such executives had a minimum of four years’ worth of annual award values in unvested equity value. Based upon this information, Radford advised the Compensation Committee that our equity program provides strong retention incentives.

The following table shows grants of service-based stock options and restricted stock units to the Named Executive Officers in 2013:

<table><tr><td colspan="3">2013 Long-Term Equity-Based Incentive Grants</td></tr><tr><td>Name</td><td>Service-Based Stock Options (#)</td><td>Service-Based Restricted Stock Units (#)</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>—</td><td>—</td></tr><tr><td>Timothy P.V. Mammen</td><td>14,200</td><td>2,200</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>13,000</td><td>2,000</td></tr><tr><td>Angelo P. Lopresti</td><td>11,000</td><td>1,800</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D.</td><td>12,000</td><td>1,900</td></tr></table>

Consistent with past practice as explained above, the Chief Executive Officer did not receive any equity-based award in 2013. The equity awards in 2013 vest in one installment four years after the grant (March 1, 2017), and provide a strong incentive for executives to remain employed by us and to focus on increasing our financial performance over the long-term. The stock options awarded to the executives in 2013 have an exercise price of $60.11 per share.

Equity Grant Process. The Compensation Committee adopted an equity grant policy as follows:

• only the Compensation Committee has the authority to approve equity grants;

• grants made by the Compensation Committee occur only after discussion at a meeting of the Compensation Committee;

• equity award grants ordinarily are made by the Compensation Committee only during an open trading window period under our insider trading policy;

• the grant date ordinarily is within ten business days following the first day of the open trading window period, or such other date as the Compensation Committee determines; and

• the exercise price (if applicable) for all equity awards is the closing price of our stock on the date of grant and stock options are granted with an exercise price of no less than the closing price of our stock on the grant date.

The Compensation Committee considers the aggregate equity usage by the Company compared to peer companies. Measures which are considered include total options and restricted stock units granted as a percentage of total shares issued and outstanding, total options and unvested restricted stock units outstanding as a percentage of total shares issued and outstanding, and total options and unvested restricted stock units outstanding plus shares available for future grant as a percentage of total shares issued and outstanding. In its 2013 assessment, Radford found that the one-year burn rate and the issued overhang rate for the Company in 2011 approximated the 25 \( ^{th} \)  percentile of the named peer group.

Severance Benefits. The Compensation Committee believes that severance benefits are an important element of the executive compensation package. The severance benefits we offer assist us in recruiting and retaining talented individuals and are consistent with the severance benefits offered by our peer group. At the request of the Compensation Committee in 2013, Radford provided market-competitive executive severance benefit data for the officers, including the Named Executive Officers under a Company-initiated (not "for cause") and an executive-



initiated (for "good reason") employment termination following a change in control and absent a change in control. Competitive data was considered for prevalence, specific features, cash and equity benefits, benefits continuation, change in control triggers, acceleration of equity awards and excise tax treatment. Based upon this review, the Compensation Committee approved changes to the severance provisions of our employment agreements, which are summarized below in the section titled "Potential Payments upon Termination or Change in Control."

Retirement Savings Plan. Executive officers in the United States are eligible to participate in our 401(k) retirement plan on the same terms as all other U.S. employees. Our 401(k) retirement plan is a tax-qualified plan and therefore is subject to certain Internal Revenue Code limitations on the dollar amounts of deferrals and Company contributions that can be made to plan accounts. These limitations apply to our more highly-compensated employees (including the Named Executive Officers). We made matching contributions at a rate of 50% of eligible contributions under the 401(k) retirement plan to our employees, including Named Executive Officers, which participate in the plan as set forth in the Summary Compensation Table. Our matching contributions are subject to a limit. Our executives outside of the United States participate in government-sponsored retirement programs. We do not maintain a supplemental executive retirement plan (SERP) or a non-qualified deferred compensation plan for our executives or directors.

Other Compensation and Personal Benefits. All of our executives are eligible to participate in our employee benefit plans, including medical, dental, life and disability insurance, vacation and employee stock purchase plans. These plans generally are available to all salaried employees and do not discriminate in favor of executive officers. Benefits are intended to be competitive with the overall market in order to facilitate attraction and retention of high-quality employees. The Compensation Committee reviewed the executive perquisites in comparison to the peer group and made no changes in any of 2013, 2012 or 2011. The Company provides Dr. Scherbakov with the use of an automobile, as it does to other high-ranking employees in Germany. The Company purchases, from time to time, hourly use of an aircraft for the Chief Executive Officer and other executives for business travel integral to the performance of their duties. The Chief Executive Officer is encouraged to use the aircraft for efficiency, safety and security. The Compensation Committee adopted an aircraft use policy governing the use of the aircraft which the Company makes available to the executives. We permit only our Chief Executive Officer to use time on the aircraft for personal use only if he reimburses the Company for all costs related to personal use. There is no aircraft-related compensation in the Summary Compensation Table because unreimbursed use did not occur. We do not provide our executives with country club memberships, club dues or fees. Nor do we provide home security, tax preparation, estate planning or financial counseling.

## Other Factors Affecting Compensation

Tax Deductibility under Section 162(m). Section 162(m) of the Internal Revenue Code (“Section 162(m)”), limits the deductibility for federal income tax purposes of certain compensation paid in any year by a publicly held corporation to its chief executive officer and its three other most highly compensated officers other than its chief financial officer to $1 million per executive (the “$1 million cap”). The $1 million cap does not apply to “performance-based” compensation as defined under Section 162(m). The Compensation Committee’s policy with respect to Section 162(m) is to consider the tax deductibility of awards as a factor in the compensation setting process and to generally make a reasonable effort to cause compensation to be deductible by the Company while simultaneously providing our executive officers with appropriate rewards for their performance. However, the Compensation Committee retains the discretion to provide compensation that may exceed the $1 million cap or not qualify for the performance-based compensation exception to Section 162(m).

Accounting Considerations. We consider the accounting implications of all aspects of its executive compensation program. In addition, accounting treatment is just one of many factors impacting plan design and pay determinations. Our executive compensation program is designed to attempt to achieve the most favorable accounting and tax treatment possible as long as doing so does not conflict with intended plan design or program objectives.

## Advisory Vote on Executive Compensation

Say-on-Pay Advisory Votes. We conducted our first advisory vote on executive compensation at our 2011 annual meeting of stockholders. Then, our stockholders overwhelmingly approved our executive compensation structure in our first “say-on-pay” advisory vote, voting 40,928,468 shares (99.2%) in favor of our executive compensation structure compared to 305,747 shares (0.7%) against with 43,328 shares (0.1%) abstaining. Because a substantial majority of our stockholders approved the compensation program described in our 2011



proxy statement, the Compensation Committee did not implement changes to our executive compensation program in 2013 as a direct result of the stockholders' advisory vote. At our stockholders meeting in 2011, the advisory proposal to hold "say-on-pay" advisory votes every three years received the greatest amount of votes. Accordingly, the "say-on-pay" advisory vote is being held at our 2014 annual meeting of stockholders. See the section below titled "Proposal 2: Advisory Vote on Executive Compensation."

In addition to the periodic advisory vote on executive compensation, we are committed to ongoing engagement with our stockholders on executive compensation and corporate governance issues. These engagement efforts take place throughout the year through meetings, telephone calls and correspondence involving our senior management and representatives of our stockholders. The Compensation Committee carefully considers feedback from our stockholders regarding our executive compensation program, including the results of our stockholders' advisory vote on executive compensation. Stockholders are invited to express their views to the Compensation Committee as described in this proxy statement under the heading “Corporate Governance — Stockholder Communication with our Board of Directors.”

## EXECUTIVE COMPENSATION TABLES

## Summary Compensation Table

The following table sets forth information regarding compensation earned by our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executives for the fiscal years indicated below:

<table><tr><td>Name and Principal Position</td><td>Year</td><td>Salary ($)</td><td>Bonus ($)</td><td>Stock Awards ($)(1)</td><td>Option Awards ($)(1)</td><td>Non-Equity Incentive Plan Compensation ($)(2)</td><td>All Other Compensation ($)(3)</td><td>Total ($)</td></tr><tr><td>Valentin P. Gapontsev, Ph.D., Chief Executive Officer and Chairman of the Board(4)</td><td>2013</td><td>542,800</td><td>—</td><td>—</td><td>—</td><td>445,894</td><td>11,125</td><td>999,819</td></tr><tr><td></td><td>2012</td><td>475,822</td><td>—</td><td>—</td><td>—</td><td>369,850</td><td>12,345</td><td>858,017</td></tr><tr><td></td><td>2011</td><td>418,167</td><td>—</td><td>—</td><td>—</td><td>808,306</td><td>16,261</td><td>1,242,734</td></tr><tr><td>Timothy P.V. Mammen, Chief Financial Officer and Senior Vice President</td><td>2013</td><td>391,834</td><td>—</td><td>150,275</td><td>432,302</td><td>219,402</td><td>8,190</td><td>1,202,003</td></tr><tr><td></td><td>2012</td><td>340,101</td><td>—</td><td>120,233</td><td>353,768</td><td>177,993</td><td>8,040</td><td>1,000,135</td></tr><tr><td></td><td>2011</td><td>324,500</td><td>—</td><td>198,912</td><td>511,080</td><td>421,623</td><td>7,890</td><td>1,464,005</td></tr><tr><td>Eugene Scherbakov, Ph.D., Managing Director of IPG Laser and Director(4)</td><td>2013</td><td>432,777</td><td>—</td><td>132,242</td><td>403,482</td><td>246,462</td><td>33,677</td><td>1,248,640</td></tr><tr><td></td><td>2012</td><td>364,382</td><td>—</td><td>120,233</td><td>353,768</td><td>195,609</td><td>30,287</td><td>1,064,279</td></tr><tr><td></td><td>2011</td><td>376,187</td><td>—</td><td>176,602</td><td>449,561</td><td>488,452</td><td>32,576</td><td>1,523,378</td></tr><tr><td>Angelo P. Lopresti, General Counsel, Secretary and Senior Vice President</td><td>2013</td><td>373,980</td><td>—</td><td>120,220</td><td>374,662</td><td>209,404</td><td>8,892</td><td>1,087,158</td></tr><tr><td></td><td>2012</td><td>324,606</td><td>—</td><td>112,608</td><td>332,542</td><td>169,883</td><td>8,310</td><td>947,949</td></tr><tr><td></td><td>2011</td><td>309,750</td><td>31,997</td><td>176,602</td><td>449,561</td><td>402,458</td><td>8,160</td><td>1,378,528</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D., Vice President — Components</td><td>2013</td><td>363,600</td><td>—</td><td>108,198</td><td>345,842</td><td>203,593</td><td>8,892</td><td>1,030,125</td></tr><tr><td></td><td>2012</td><td>302,452</td><td>—</td><td>112,608</td><td>332,542</td><td>158,286</td><td>8,742</td><td>914,630</td></tr><tr><td></td><td>2011</td><td>288,750</td><td>—</td><td>176,602</td><td>449,561</td><td>375,173</td><td>8,592</td><td>1,298,678</td></tr></table>

(1) Valuation based on the fair value of such award as of the grant date determined pursuant to ASC Topic 718. The assumptions that we used with respect to the valuation of restricted stock unit and stock option awards are set forth in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K filed with the SEC on February 28, 2014.

(2) Represents amounts earned under our STIP for services rendered in 2013, 2012 and 2011, respectively.



(3) The amount in 2013 for Dr. Gapontsev consists of $11,125 in premiums paid for group term life insurance. Amounts for Messrs. Mammen and Lopresti and Dr. Ovtchinnikov include matching contributions to retirement accounts under our 401(k) plan and our payment of group term life insurance premiums. The amount for Dr. Scherbakov reflects the expense of an automobile provided by us.

(4) Portions of the amounts paid to Dr. Gapontsev and Dr. Scherbakov were denominated in Euros and Rubles. These were translated into U.S. Dollars at the average daily exchange rates for the full years. The average daily rates in 2013, 2012 and 2011, for the Euro were 0.75, 0.78 and 0.72, respectively; and for the Ruble were 31.9, 31.17 and 29.29, respectively. As a result of compensation being paid in one or more currencies that fluctuate against the U.S. Dollar, the amount of salary paid may vary slightly from the salary stated in an employment agreement.

## Employment Agreements

We have employment agreements with each of the executives named in the table above. The employment agreements expire on December 31, 2015, except for the agreement with Dr. Gapontsev, which expires on December 31, 2016. Upon their future expirations, the employment agreements renew for terms of one year, unless the Company or a Named Executive Officer provides written notice of its or his intention to not renew the agreement not less than six months before the expiration date. In the event of a change in control, the agreements would be extended to expire on the second anniversary of the change in control.

The employment agreements set the annual base salaries in 2013 for the Named Executive Officers as follows: $542,800 for Dr. Gapontsev, €325,850 for Dr. Scherbakov ($432,544 at the 2013 average daily exchange rate), $391,834 for Mr. Mammen, $373,980 for Mr. Lopresti and $363,600 for Dr. Ovtchinnikov. For 2014, the Compensation Committee approved annual base salaries of $559,084 for Dr. Gapontsev, €335,626 for Dr. Scherbakov ($445,529 at the 2013 average daily exchange rate), $411,426 for Mr. Mammen, $385,199 for Mr. Lopresti and $374,508 for Dr. Ovtchinnikov. The agreements entitle these executive officers to participate in bonus plans, standard insurance plans such as life, short-term disability and long-term disability insurance and retirement benefits, such as the 401(k) plan and equity award plans described above, on similar terms and on a similar basis as such benefits are available to executives at similar levels within the Company. Each of these executive officers also entered into a separate restrictive covenant agreement with the Company in 2013 that prohibits each of them from competing with the Company for a period of one year after the termination of his employment with the Company for any reason and from hiring or attempting to hire the Company’s employees or soliciting customers or suppliers of the Company for a period ending eighteen months following the termination of his employment for any reason. Each of the officers is entitled to receive his base salary for the period during which the Company enforces the non-competition provisions of the agreement but not for more than one year following the termination of his employment. The severance provisions of the agreements are summarized below in the section titled “Potential Payments upon Termination or Change in Control.”



## Grants of Plan-Based Awards Table

The following table sets forth information regarding plan-based awards to our Named Executive Officers in 2013:

<table><tr><td rowspan="2">Name</td><td rowspan="2">Grant Date</td><td colspan="4">Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (\()(1)</td><td rowspan="2">All Other Stock Awards: Number of Shares of Stock or Units(\#)(2)</td><td rowspan="2">Option Awards Number of Securities Underlying Options (\#)(2)</td><td rowspan="2">Exercise or Base Price of Option Awards (\) / Sh)</td><td rowspan="2">Grant Date Fair Value of Stock and Option Awards (\()(3)</td></tr><tr><td>Threshold</td><td>Target</td><td>Maximum</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>3/1/2013</td><td>101,775</td><td>407,100</td><td>1,221,300</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td rowspan="3">Timothy P.V. Mammen</td><td>3/1/2013</td><td>48,979</td><td>195,917</td><td>587,780</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>2,500</td><td>—</td><td>—</td><td>150,275</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>—</td><td>15,000</td><td>60.11</td><td>432,302</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>3/1/2013</td><td>54,068</td><td>216,272</td><td>648,848</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td rowspan="2"></td><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>2,200</td><td>—</td><td>—</td><td>132,242</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>—</td><td>14,000</td><td>60.11</td><td>403,482</td></tr><tr><td rowspan="3">Angelo P. Lopresti</td><td>3/1/2013</td><td>46,748</td><td>186,990</td><td>560,998</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>2,000</td><td>—</td><td>—</td><td>120,220</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>—</td><td>13,000</td><td>60.11</td><td>374,662</td></tr><tr><td rowspan="3">Alexander Ovtchinnikov, Ph.D.</td><td>3/1/2013</td><td>45,450</td><td>181,800</td><td>545,427</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>1,800</td><td>—</td><td>—</td><td>108,198</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>—</td><td>12,000</td><td>60.11</td><td>345,842</td></tr></table>

(1) Amounts shown represent potential amounts under the STIP for 2013 for achievement of financial performance measures, except that the possible payouts in the “Maximum” column represent the maximum permitted payout under the STIP for 2013 for both financial and individual performance measures. The performance goals used in determining STIP payments are discussed in the Compensation Discussion and Analysis above. Actual amounts paid for 2013 performance are shown in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table above.

(2) The amounts listed reflect restricted stock units and stock options granted under our 2006 Incentive Compensation Plan and are described in the Outstanding Equity Awards Table below.

(3) Valuation based upon the fair value of such award as of the grant date determined pursuant to ASC Topic 718. The assumptions that we used with respect to the valuation of restricted stock unit and stock option awards are set forth in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K filed with the SEC on February 28, 2014. The option exercise price has not been deducted from the amounts indicated above. Regardless of the value placed on a restricted stock unit or stock option on the grant date, the actual value of the restricted stock unit or stock option will depend on the market value of our common stock at such date in the future when the restricted stock unit vests or the stock option is exercised.



## Outstanding Equity Awards Table

The following table provides information regarding unexercised stock options and restricted stock units held by each of our Named Executive Officers as of December 31, 2013:

<table><tr><td>Name</td><td>Grant Date</td><td>Securities Underlying Unexercised Options (#) Exercisable</td><td>Securities Underlying Unexercised Options (#) Unexercisable</td><td>Option Exercise Price ($) (1)</td><td>Option Expiration Date</td><td>Number of Shares or Units of Stock That Have Not Vested (#)</td><td>Market Value of Shares or Units of Stock That Have Not Vested ($)(2)</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td rowspan="10">Timothy P.V. Mammen</td><td>5/9/2008</td><td>25,000</td><td>—</td><td>19.69</td><td>5/8/2018</td><td>—</td><td>—</td></tr><tr><td>2/26/2009</td><td>17,500</td><td>—</td><td>8.26</td><td>2/25/2019</td><td>—</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>26,250</td><td>(3)</td><td>15.82</td><td>2/25/2020</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>—</td><td>—</td><td>—</td><td>4,375</td><td>(3)</td></tr><tr><td>3/1/2011</td><td>—</td><td>21,600</td><td>(4)</td><td>53.76</td><td>2/28/2021</td><td>—</td></tr><tr><td>3/1/2011</td><td>—</td><td>—</td><td>—</td><td>—</td><td>3,700</td><td>(4)</td></tr><tr><td>2/14/2012</td><td>—</td><td>12,500</td><td>(5)</td><td>58.65</td><td>2/13/2022</td><td>—</td></tr><tr><td>2/14/2012</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,050</td><td>(5)</td></tr><tr><td>3/1/2013</td><td>—</td><td>15,000</td><td>(6)</td><td>60.11</td><td>2/28/2023</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>2/28/2023</td><td>2,500</td><td>(6)</td></tr><tr><td rowspan="10">Eugene Scherbakov, Ph.D.</td><td>2/26/2009</td><td>2,750</td><td>—</td><td>8.26</td><td>2/25/2019</td><td>—</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>26,250</td><td>(3)</td><td>15.82</td><td>2/25/2020</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>—</td><td>—</td><td>—</td><td>4,375</td><td>(3)</td></tr><tr><td>3/1/2011</td><td>—</td><td>19,000</td><td>(4)</td><td>53.76</td><td>2/28/2021</td><td>—</td></tr><tr><td>3/1/2011</td><td>—</td><td>—</td><td>—</td><td>—</td><td>3,285</td><td>(4)</td></tr><tr><td>2/14/2012</td><td>—</td><td>12,500</td><td>(5)</td><td>58.65</td><td>2/13/2022</td><td>—</td></tr><tr><td>2/14/2012</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2,050</td><td>(5)</td></tr><tr><td>3/1/2013</td><td>—</td><td>14,000</td><td>(6)</td><td>60.11</td><td>2/28/2023</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>2/28/2013</td><td>2,200</td><td>(6)</td></tr></table>



<table><tr><td>Name</td><td>Grant Date</td><td>Securities Underlying Unexercised Options (#) Exercisable</td><td>Securities Underlying Unexercised Options (#) Unexercisable</td><td>Option Exercise Price ($) (1)</td><td>Option Expiration Date</td><td>Number of Shares or Units of Stock That Have Not Vested (#)</td><td>Market Value of Shares or Units of Stock That Have Not Vested ($)(2)</td></tr><tr><td rowspan="10">Angelo P. Lopresti</td><td>5/9/2008</td><td>20,000</td><td>—</td><td>19.69</td><td>5/8/2018</td><td>—</td><td>—</td></tr><tr><td>2/26/2009</td><td>8,625</td><td>—</td><td>8.26</td><td>2/25/2019</td><td>—</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>26,250</td><td>(3)</td><td>15.82</td><td>2/25/2020</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>—</td><td>—</td><td>—</td><td>4,375</td><td>(3)</td></tr><tr><td>3/1/2011</td><td>—</td><td>19,000</td><td>(4)</td><td>53.76</td><td>2/28/2021</td><td>—</td></tr><tr><td>3/1/2011</td><td>—</td><td>—</td><td>—</td><td>—</td><td>3,285</td><td>(4)</td></tr><tr><td>2/14/2012</td><td>—</td><td>11,750</td><td>(5)</td><td>58.65</td><td>2/13/2022</td><td>—</td></tr><tr><td>2/14/2012</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1,920</td><td>(5)</td></tr><tr><td>3/1/2013</td><td>—</td><td>13,000</td><td>(6)</td><td>60.11</td><td>2/28/2023</td><td>—</td></tr><tr><td>3/1/2013</td><td></td><td></td><td></td><td></td><td>2/28/2023</td><td>2,000</td></tr><tr><td rowspan="10">Alexander Ovtchinnikov, Ph.D.</td><td>2/26/2010</td><td>—</td><td>26,250</td><td>(3)</td><td>15.82</td><td>2/25/2020</td><td>—</td></tr><tr><td>2/26/2010</td><td>—</td><td>—</td><td>—</td><td>—</td><td>4,375</td><td>(3)</td></tr><tr><td>3/1/2011</td><td>—</td><td>19,000</td><td>(4)</td><td>53.76</td><td>2/28/2021</td><td>—</td></tr><tr><td>3/1/2011</td><td>—</td><td>—</td><td>—</td><td>—</td><td>3,285</td><td>(4)</td></tr><tr><td>2/14/2012</td><td>—</td><td>11,750</td><td>(5)</td><td>58.65</td><td>2/13/2022</td><td>—</td></tr><tr><td>2/14/2012</td><td>—</td><td>—</td><td>—</td><td>—</td><td>1,920</td><td>(5)</td></tr><tr><td>3/1/2013</td><td>—</td><td>12,000</td><td>(6)</td><td>60.11</td><td>2/28/2023</td><td>—</td></tr><tr><td>3/1/2013</td><td>—</td><td>—</td><td>—</td><td>—</td><td>2/28/2023</td><td>1,800</td></tr></table>

(1) Represents the fair market value of a share of our common stock on the grant date.

(2) Based upon the closing price of our common stock on December 31, 2013, which was $77.61 per share.

(3) Assuming the continued service of the Named Executive Officer, the options and restricted stock units vest in four equal quarterly installments commencing on March 31, 2014.

(4) Assuming the continued service of the Named Executive Officer, the options and restricted stock units vest in four equal quarterly installments commencing on March 31, 2015.

(5) Assuming the continued service of the Named Executive Officer, the options and restricted stock units vest in four equal quarterly installments commencing on March 31, 2016.

(6) Assuming the continued service of the Named Executive Officer, the options and restricted stock units vest in one installment on March 1, 2017.

## Option Exercises and Stock Vested Table

The following table provides information regarding stock option exercises by our Named Executive Officers in 2013:

<table><tr><td rowspan="2">Name</td><td colspan="2">Option Awards</td></tr><tr><td>Number of Shares Acquired on Exercise (#)</td><td>Value Realized on Exercise($)(1)</td></tr><tr><td>Valentin P. Gapontsev, Ph.D.</td><td>—</td><td>—</td></tr><tr><td>Timothy P.V. Mammen</td><td>35,448</td><td>1,961,076</td></tr><tr><td>Eugene Scherbakov, Ph.D.</td><td>36,378</td><td>1,955,298</td></tr><tr><td>Angelo P. Lopresti</td><td>22,000</td><td>1,327,068</td></tr><tr><td>Alexander Ovtchinnikov, Ph.D.</td><td>15,583</td><td>904,899</td></tr></table>

(1) The value realized is based on the difference between the reported closing common stock price on the date of exercise and the exercise price of the stock option.



## Pension Benefits

None of our Named Executive Officers participates in or has an account balance in qualified or nonqualified defined benefit pension plans sponsored by us. The Compensation Committee may elect to adopt qualified or nonqualified defined benefit pension plans in the future.

## Nonqualified Deferred Compensation

None of our Named Executive Officers participates in or has an account balance in any nonqualified defined contribution plans or other nonqualified deferred compensation plans maintained by us. The Compensation Committee may elect to adopt non-qualified defined contribution plans or other nonqualified deferred compensation plans in the future.

## Potential Payments upon Termination or Change in Control

If the Company terminates the employment of any of the Named Executive Officers without cause (as defined in the respective employment agreements) or any of the Named Executive Officers terminates his employment for good reason (as defined in the respective employment agreements) (“cause” and “good reason” are referred to below as “Involuntary Terminations”), then the officer would receive:

(a) continuation of salary for eighteen months, except in the case of Dr. Gapontsev, who would receive continuation of salary for thirty-six months;

(b) a portion of the annual bonus that the executive would have received had he remained employed through the end of the applicable bonus period, including the individual performance element (the portion based upon the percentage of the year that he was employed by the Company);

(c) continuation of health benefits for eighteen months, except in the case of Dr. Gapontsev, who would receive continuation of health benefits for thirty-six-months; and

(d) accelerated vesting of equity compensation awards that otherwise would have vested within twelve months of termination of employment.

Upon an Involuntary Termination within twenty-four months following a change in control of the Company, the Named Executive Officer would be entitled to continuation of salary and health benefits for twenty-four months, plus a payment of two times the average annual bonus paid to the Named Executive Officer for the three years preceding the termination. In the case of the Chief Executive Officer, he would be entitled to continuation of salary and health benefits for thirty-six months, plus a payment of three times the average annual bonus paid to him for the three years preceding the termination. Upon a change in control, the officers' employment periods under the agreements would automatically be extended to the second anniversary of the change in control if such date is later than expiration of the current term. Under the employment agreements, all equity awards vest fully if a change in control occurs followed within two years by an Involuntary Termination.

If the employment period of any of the Named Executive Officers terminates and the Company does not offer such officer continued employment in the same or a substantially similar position or in a higher position than the officer’s position at the end of the employment period and at a compensation level that is the same or substantially similar to the compensation level in effect at the end of the employment period, then such officer may resign from employment and would receive continuation of salary and health benefits for twelve months, except for the Chief Executive Officer who would receive the same for twenty-four months, plus a portion of the annual bonus that the executive would have received had he remained employed through the end of the applicable bonus period, including the individual performance element (the portion based upon the percentage of the year that he was employed by the Company).

A Named Executive Officer would also receive the payments described in clause (b) above if his employment is terminated by death or disability. Under the employment agreements, the Company would not be obligated to make any cash payments if employment were terminated by the Company for cause or by the executive not for good reason.



Severance payments to the officers are conditioned upon the release of claims by the Named Executive Officer in favor of the Company. Each of the Named Executive Officers also has an agreement with the Company that prohibits him from competing with the Company for a period of one year after the termination of his employment with the Company for any reason and from hiring or attempting to hire the Company’s employees or soliciting customers or suppliers of the Company for a period ending eighteen months following the termination of his employment for any reason. Each of the Named Executive Officers is entitled to receive his base salary for the period during which the Company enforces the non-competition provisions of the agreement but not for more than one year following termination of his employment.

The following table provides information regarding compensation and benefits that would be payable to our Named Executive Officers as of December 31, 2013, upon an Involuntary Termination absent a change in control and preceded by a change in control. The bonus severance was calculated assuming attainment of the financial performance targets and the maximum individual performance under the 2013 STIP. There can be no assurance that the event triggering payments would produce the same or similar results as those described below if such event occurs on any other date or at any other price, or if any other assumption used to estimate the potential payments and benefits is incorrect. Any actual payments and benefits may be different due to a number of factors that affect the nature and amount of any potential payments or benefits.

<table><tr><td>Name</td><td>Benefit</td><td>Termination Without Cause or For Good Reason (\()(1)</td><td>Termination Without Cause or For Good Reason Following a Change in Control (\))</td></tr><tr><td rowspan="4">Valentin P. Gapontsev, Ph.D.</td><td>Salary, Severance and Benefits</td><td></td><td></td></tr><tr><td>Continuation</td><td>1,659,537</td><td>1,659,537</td></tr><tr><td>Incentive Plan Severance</td><td>1,221,300</td><td>2,912,138</td></tr><tr><td>Equity acceleration</td><td>—</td><td>—</td></tr><tr><td></td><td>Total</td><td>2,880,837</td><td>4,571,675</td></tr><tr><td rowspan="4">Timothy P.V. Mammen</td><td>Salary, Severance and Benefits</td><td></td><td></td></tr><tr><td>Continuation</td><td>611,553</td><td>815,404</td></tr><tr><td>Incentive Plan Severance</td><td>587,780</td><td>1,184,191</td></tr><tr><td>Equity acceleration</td><td>1,961,531</td><td>3,422,449</td></tr><tr><td></td><td>Total</td><td>3,160,864</td><td>5,422,044</td></tr><tr><td rowspan="4">Eugene Scherbakov, Ph.D.</td><td>Salary, Severance and Benefits</td><td></td><td></td></tr><tr><td>Continuation</td><td>656,379</td><td>875,171</td></tr><tr><td>Incentive Plan Severance</td><td>648,848</td><td>1,331,856</td></tr><tr><td>Equity acceleration</td><td>1,961,531</td><td>3,310,731</td></tr><tr><td></td><td>Total</td><td>3,266,758</td><td>5,517,758</td></tr><tr><td rowspan="4">Angelo P. Lopresti</td><td>Salary, Severance and Benefits</td><td></td><td></td></tr><tr><td>Continuation</td><td>560,970</td><td>747,960</td></tr><tr><td>Incentive Plan Severance</td><td>560,998</td><td>1,157,409</td></tr><tr><td>Equity acceleration</td><td>1,961,531</td><td>3,268,921</td></tr><tr><td></td><td>Total</td><td>3,083,499</td><td>5,174,290</td></tr><tr><td rowspan="4">Alexander Ovtchinnikov, Ph.D.</td><td>Salary, Severance and Benefits</td><td></td><td></td></tr><tr><td>Continuation</td><td>566,237</td><td>538,973</td></tr><tr><td>Incentive Plan Severance</td><td>545,427</td><td>1,123,655</td></tr><tr><td>Equity acceleration</td><td>1,961,531</td><td>3,251,421</td></tr><tr><td></td><td>Total</td><td>3,073,195</td><td>4,914,049</td></tr></table>

(1) Equity acceleration is calculated using the full value of restricted stock units based upon the closing sale price of our common stock on December 31, 2013 of $77.61 per share and the aggregate difference between the exercise prices of stock options and the closing sale price of our common stock on December 31, 2013.



## Compensation Risk Assessment Review

Management conducts an annual risk assessment of the Company’s compensation policies and practices for all employees, including non-executive officers, and reports its findings to the Compensation Committee. In 2013, management concluded that the Company’s compensation policies and practices are balanced and do not motivate imprudent risk taking. The Company’s compensation programs reward consistent, long-term performance by heavily weighting compensation to long-term incentives that reward sustainable financial and operating performance and imposing lengthy vesting schedules. The Company’s annual incentive compensation is based on performance measures that promote progress towards longer-term goals and is capped at sustainable levels. The Company believes that it has appropriate procedures in place to mitigate material risks, if any, from its compensation practices and policies.

The Compensation Committee does not believe that our compensation policies and practices for our employees give rise to risks that are reasonably likely to have a material adverse effect on our Company. In reaching this conclusion, we considered the following factors:

• our compensation program is designed to provide a mix of both fixed and variable incentive compensation;

• our senior executives are subject to stock ownership guidelines, which we believe incentivize our executives to consider the long-term interests of the Company and our stockholders and discourage excessive risk-taking that could negatively impact our stock price; and

• our incentive compensation programs are designed with vesting terms that are relatively consistent, spread out over several years, and do not contain steep payout “cliffs” that might encourage short-term business decisions in order to meet a vesting or payout threshold.

## EQUITY COMPENSATION PLANS

## Equity Plans

In February 2006, our Board of Directors adopted our 2006 Incentive Compensation Plan, which was approved by our stockholders as a successor plan to the 2000 Incentive Compensation Plan (under which awards may no longer be made). The 2006 Plan was amended in May 2011 upon approval by our stockholders at the 2011 annual stockholders meeting. The maximum number of shares that may be awarded under the 2006 Plan is 10,084,273. Other than the number of shares reserved, the plans are substantially similar. Each plan terminates ten years after its adoption, unless terminated earlier by our Board.

The 2000 Plan and the 2006 Plan, as amended, are administered by the Compensation Committee. The Compensation Committee approves awards under the Plans, including the exercise price and other terms of each award, subject to the provisions of the Plans and has general authority to administer the Plans.

Each Plan authorizes the grant of options to purchase common stock intended to qualify as incentive stock options, as defined in Section 422 of the Internal Revenue Code, and nonstatutory stock options. The Plans also provide for awards of restricted stock, stock units, performance shares, performance units, stock appreciation rights and cash awards.

Our officers, directors, employees, consultants and advisors are eligible to receive awards under the Plans. No participant may receive awards for over 1,666,667 shares of common stock in any calendar year under the 2006 Plan, as amended.

In June 2006, our Board adopted our Non-Employee Directors Stock Plan (the Non-Employee Director Plan) which was approved by our stockholders. Only our non-employee directors are eligible to receive awards under the Non-Employee Director Plan. A total of 486,666 shares are reserved for issuance under the Non-Employee Director Plan. The Non-Employee Director Plan terminates ten years after its adoption, unless terminated earlier by our Board. The Non-Employee Director Plan authorizes the grant of options to purchase common stock that are not intended to qualify as incentive stock options, as defined in Section 422 of the Code. The Plan also provides for awards of stock appreciation rights, stock units, stock awards and cash awards.

Awards granted or paid under the 2006 Plan will be subject to any compensation recovery policy established by the Company and amended from time to time. The 2006 Plan expressly forbids the repricing or cancellation of underwater stock options.



The 2000 Plan provides that, upon a change in control of our company, the Compensation Committee may, in its sole discretion, accelerate the time for exercise or payout of all outstanding awards, cancel the award after notice to the holder of an outstanding award as long as the holder receives a payment equal to the difference between the fair market value of the award on the date of the change in control and the exercise price per share, if any, of such award, or provide that all outstanding awards will be either assumed by the entity that acquires control or substituted for similar awards by such entity. The 2006 Plan provides for accelerated vesting of an award only if the participant experiences a termination of employment without cause or the employee terminates employment for good reason within two years after a change in control (a so-called “double-trigger”), rather than providing for immediate vesting upon a change in control (“single-trigger”).

In addition, in the event that the 2000 Plan or 2006 Plan is terminated due to a merger or acquisition of the Company, the Compensation Committee has the right, but not the obligation, to direct the repurchase of outstanding stock options at a price equal to the fair market value of the shares subject to the repurchased options less the exercise price per share.

The Non-Employee Director Plan provides that awards become fully vested and exercisable upon a change in control. The Plan defines a “change in control” as the occurrence of any of the following:

• any person becomes a beneficial owner of our securities representing at least 50% of the combined voting power of our then-outstanding securities;

• persons who, at the beginning of any period of two consecutive years, were members of the Board of Directors cease to constitute a majority of the Board of Directors unless the election or nomination for election by the stockholders of each new director during that two-year period is approved by at least two-thirds of the incumbent directors then still in office;

• the occurrence of a merger, sale of all or substantially all of our assets, cash tender or exchange offer, contested election or other business combination under circumstances in which our stockholders immediately prior to such merger or other such transaction do not, after such transaction, own shares representing at least a majority of our voting power or the surviving or resulting corporation, as the case may be; or

• our stockholders approve a complete liquidation.

## Employee Stock Purchase Plan

We maintain an employee stock purchase plan, which is intended to be qualified under Section 423 of the Code. Each of our U.S. employees and a limited group of our German employees who customarily work more than 20 hours per week and more than five months in any calendar year is eligible to participate in this plan after completing six months of service. To participate in the plan, an employee may designate prior to the commencement of a six-month offering period the amount of payroll deductions to be made from his or her paycheck for the purchase of shares of our common stock under the plan, which amount may not exceed 10% of his compensation. On each purchase date, shares of our stock are purchased automatically for each participant with the amounts withheld from his or her payroll deductions at a price equal to 85% of the lesser of the fair market value of the shares on the purchase date or the fair market value of the shares on the first day of the offering period. An employee may not participate in an offering period if, immediately after the purchase of shares, the employee would own shares or hold options to purchase shares of our stock possessing 5% or more of the total combined voting power or value of all classes of our stock. The employee stock purchase plan includes a “Non-Code Section 423 Component” for the employees of subsidiaries outside the United States.

## PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION

The Board recognizes that executive compensation is an important matter for our stockholders. The guiding principles of our executive compensation philosophy and practice continue to be: pay for performance; accountability for short- and long-term performance; alignment to stockholders' interests; and providing competitive pay to attract and retain executives. We believe our compensation programs are strongly aligned with the long-term interests of our stockholders.

We believe our compensation program strikes the appropriate balance between utilizing responsible, measured pay practices and effectively incentivizing our executives to dedicate themselves fully to value creation for our stockholders. This balance is evidenced by IPG Photonics' best pay practices:



## What We Do

## Align our Officer Pay with Performance:

Our Named Executive Officer compensation is tied to Company performance and stockholder returns. Performance drives pay.

## Balance Short-Term and Long-Term Incentives:

The incentive programs provide an appropriate balance of annual and long-term incentives and include multiple measures of performance.

## Use Long-Term Incentives to Link Executive Pay to Company Performance:

35% of pay for our Named Executive Officers consists of long-term incentives linked to increasing our stock price. We conserve equity by not awarding long-term incentives to our Chief Executive Officer, the founder, whose interests are aligned with the stockholders. We have four-year cliff vesting for annual equity awards.

## Cap Incentive Awards:

Short-term incentive plan awards are capped.

## Maximize Stockholder Value While Mitigating Risk:

Our equity incentives drive performance and reward growth over the long-term, which discourages short-term risk taking. The Committee reviews the Company's risk assessment.

## Require Named Executive Officers to Maintain Stock Ownership:

All substantially exceed our ownership guidelines.

## Require Non-compete, Non-solicitation and Confidentiality Agreements:

We require executives to enter into non-competition, non-solicitation and confidentiality agreements as a condition of employment and as a condition of severance payments.

## What We Don't Do

## No Retirement Benefits:

We have no supplemental executive retirement plans (SERPs) or defined benefit pension plans with any of our Named Executive Officers.

## No Tax Gross-Ups:

We do not provide tax gross reimbursements for change in control payments or executive perquisites, which are minimal.

## No Hedging and Limits on Pledging of Company Stock:

Our Named Executive Officers are prohibited from hedging their company stock. In 2013, we added a policy limiting the pledging of Company stock.

## No Option Repricing without Stockholder Approval

## No Single-Trigger Change in Control Provisions:

Our agreements do not make automatic payments to executives solely upon a change in control, i.e., no “single-trigger” arrangements.

## No Severance For "Cause" Terminations: We do not pay severance for "cause"

terminations.

Pursuant to Section 14A of the Exchange Act, we are asking you to vote, in an advisory manner, to approve the executive compensation philosophy, policies and procedures described in the Compensation Discussion and Analysis (“CD&A”) section of this proxy statement, and the compensation of our Named Executive Officers, as disclosed in this proxy statement.

As an advisory vote, the results of this vote will not be binding upon the Board or the Company. However, the Board values the opinions of our stockholders, and will consider the outcome of the vote when making future decisions on the compensation of our Named Executive Officers and our executive compensation philosophy, policies and procedures.

The Board has determined to hold tri-annual advisory votes on executive compensation. At our stockholders meeting in 2011, the advisory proposal to hold “say-on-pay” advisory votes every three years received the greatest amount of votes. Accordingly, the next advisory vote on executive compensation will occur at the 2017 annual meeting of stockholders, unless the Board of Directors modifies its policy on the frequency of holding such advisory votes.

Before you vote, we encourage you to review the Compensation Discussion and Analysis on pages 19-30 of this proxy statement for additional details on our executive compensation.

OUR BOARD RECOMMENDS AN ADVISORY VOTE "FOR" THE APPROVAL OF THE COMPANY'S EXECUTIVE COMPENSATION PHILOSOPHY, POLICIES AND PROCEDURES DESCRIBED IN THE CD&A SECTION OF THIS PROXY STATEMENT AND THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT



## AUDIT COMMITTEE REPORT

The primary role of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing the financial information proposed to be provided to stockholders and others, the adequacy of the system of internal control over financial reporting and disclosure controls and procedures established by management and the Board, and the audit process and the independent registered public accounting firm’s qualifications, independence and performance.

Management has primary responsibility for the financial statements and is responsible for establishing and maintaining the Company’s system of internal controls and for preparation of the Company’s financial statements. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, is responsible for performing an integrated audit of the Company’s consolidated financial statements and the effectiveness of internal controls over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and issuing an opinion on the financial statements and the effectiveness of internal controls over financial reporting. The Audit Committee also employs an international auditing firm to conduct internal audits throughout the Company of various financial, operational and information technology areas as selected each year by the Audit Committee. The Audit Committee has met and held discussions with management, the internal auditors and the Company’s independent registered public accounting firm, and has also met separately with the internal auditors and the Company’s independent registered public accounting firm, without management present, to review the adequacy of the Company’s internal controls, financial reporting practices and audit process.

The Audit Committee has reviewed and discussed the Company’s audited consolidated financial statements for the year ended December 31, 2013 with management and the independent registered public accounting firm. As part of this review, the Audit Committee discussed with Deloitte & Touche LLP the required communications described in PCAOB AU Section 380, Communication with Audit Committees, and those matters required to be reviewed pursuant to Rule 2-07 of Regulation S-X as well as the results of their audit of the effectiveness of internal controls over financial reporting.

The Audit Committee has received from Deloitte & Touche LLP a written statement describing all relationships between that firm and the Company that might bear on their independence, consistent with PCAOB Ethics and Independence Rule 3526, Communications with Audit Committees Concerning Independence. The Audit Committee has discussed the written statement with the independent registered public accounting firm and has considered whether its provision of any other non-audit services to the Company is compatible with maintaining the auditors’ independence.

Based on the above-mentioned reviews and discussions, the Audit Committee recommended to the Board of Directors that the Company’s audited consolidated financial statements be included in its Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

AUDIT COMMITTEE

William S. Hurley, Chair
Michael C. Child
Henry E. Gauthier

February 25, 2014

## PROPOSAL 3: RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP currently serves as our independent registered public accounting firm and audited our consolidated financial statements for the year ended December 31, 2013. Our Audit Committee has appointed Deloitte & Touche LLP to serve as our independent registered public accounting firm for 2014, and to conduct an integrated audit of our consolidated financial statements for the year ending December 31, 2014 and of our internal control over financial reporting as of December 31, 2014.

Our Audit Committee is responsible for selecting and appointing our independent registered public accounting firm, and this appointment is not required to be ratified by our stockholders. However, our Audit Committee has



recommended that the Board submit this matter to the stockholders as a matter of good corporate practice. If the stockholders fail to ratify the appointment, the Audit Committee will reconsider whether to retain Deloitte & Touche LLP, and may retain that firm or another without re-submitting the matter to our stockholders. Even if the appointment is ratified, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

We expect that representatives of Deloitte & Touche LLP will attend the annual meeting of stockholders, will have an opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.

Fees Paid to Deloitte & Touche. The fees for services provided by Deloitte & Touche LLP, member firm of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”), to the Company in the last three fiscal years were as follows:

<table><tr><td rowspan="2">Fee Category</td><td colspan="4">Fees</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Audit fees</td><td>$ 1,197,733</td><td>$ 1,086,580</td><td>$ 1,016,013</td><td></td></tr><tr><td>Audit-related fees</td><td>$ 37,000</td><td>146,200</td><td>24,000</td><td></td></tr><tr><td>Tax fees</td><td>$ 200,000</td><td>7,500</td><td>—</td><td></td></tr><tr><td>Total Fees</td><td>$ 1,434,733</td><td>$ 1,240,280</td><td>$ 1,040,013</td><td></td></tr></table>

Audit fees. These fees comprise fees for professional services rendered in connection with the audit of the Company’s consolidated financial statements that are customary under auditing standards generally accepted in the United States. Audit fees also include fees for consents and reviews related to SEC filings and quarterly services with respect to the preparation of our unaudited quarterly financial statements.

Audit-related fees. These fees comprise fees for services that are reasonably related to the performance of the audit or review of the Company’s financial statements. The audit-related fees in 2013 were principally for audit work related to acquisitions, and valuation of goodwill and contingent consideration.

Tax fees. Fees for tax services consist of fees for tax compliance services and tax planning and advice services. Tax compliance services are services rendered based upon facts already in existence or transactions that have already occurred to document, compute and obtain government approval for amounts to be included in tax filings. Tax planning and advice are services rendered with respect to proposed transactions or that alter a transaction to obtain a particular tax result. The tax fees in 2013 relate to assistance with documentation of research and development tax credits.

Policy on Pre-Approval of Audit and Permissible Non-Audit Services. The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services and tax services as well as specifically designated non-audit services that, in the opinion of the Audit Committee, will not impair the independence of the independent registered public accounting firm. Pre-approval is generally provided for each fiscal year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and our management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with the pre-approval, including the fees for the services performed to date. In addition, the Audit Committee also may pre-approve particular services on a case-by-case basis, as required.

## OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2014



## OTHER MATTERS

## Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of ownership of, and transactions in, our securities with the SEC. These directors, executive officers and 10% stockholders are also required to furnish us with copies of all Section 16(a) forms that they file. Based solely on its review of such forms received by it and the written representations of its Reporting Persons, the Company has determined that no such persons known to it were delinquent with respect to their reporting obligations as set forth in Section 16(a) of the Exchange Act.

## 2015 Annual Meeting and Nominations

Stockholders may present proposals for action at a future meeting and nominations for director if they comply with applicable SEC rules and our by-laws. If you would like us to consider including a proposal in our proxy statement pursuant to Rule 14a-8 under the Exchange Act, it must be received by our Secretary, at IPG Photonics Corporation, 50 Old Webster Road, Oxford, Massachusetts 01540, on or before December 16, 2014. If you would like to present a proposal at the 2015 annual meeting or nominate a director next year, but not to have such proposal or nominee included in our proxy statement relating to that meeting, such proposal or nomination must be received by our Secretary not earlier than February 3, 2015 and not later than March 5, 2015. Our by-laws contain additional specific requirements regarding a stockholder’s ability to nominate a director or to submit a proposal for consideration at an upcoming meeting. Our by-laws require that the notice to the Company include (i) information relating to the name, age and experience of the nominee and such other information concerning such nominee as would be required under the then-current rules of the SEC to be included in a proxy statement soliciting proxies for the election of the nominee, (ii) the nominee’s written consent to being named in the proxy statement and serving as a director, if elected and (iii) the name and address of the record holder and beneficial holder of the shares, the number of shares held of record or beneficially owned, and representations as described in our by-laws. If the Nominating and Corporate Governance Committee or the Board determines that any nomination made by a stockholder was not made in accordance with the Company’s procedures, the rules and regulations of the SEC or other applicable laws or regulations, such nomination will be void. If you would like a copy of the requirements contained in our by-laws, please contact our Secretary.

## No Incorporation by Reference

In our filings with the SEC, information is sometimes “incorporated by reference.” This means that we are referring you to information that has previously been filed with the SEC and the information should be considered as part of the particular filing. As provided under SEC regulations, the Compensation Committee Report and the Audit Committee Report contained in this proxy statement specifically are not incorporated by reference into any of our other filings with the SEC, are not to be deemed soliciting materials or subject to the liabilities of Section 18 of the Exchange Act. In addition, this proxy statement includes several website addresses. These website addresses are intended to provide inactive, textual references only. The information on these websites is not part of this proxy statement.



## directors

Valentin P. Gapontsev, Ph.D.
Chief Executive Officer and Chairman of the Board

Eugene Scherbakov, Ph.D.
Director

Igor Samartsev
Director

Robert A. Blair \( ^{(1)(2)} \) 
Director

Michael C. Child \( ^{(2)(3)} \) 
Director

Henry E. Gauthier \( ^{(3)} \) 
Presiding Independent Director

William S. Hurley \( ^{(1)(3)} \) 
Director

William F. Krupke, Ph.D. \( ^{(2)} \) 
Director

John R. Peeler \( ^{(1)(2)} \) 
Director

## executive officers

Valentin P. Gapontsev, Ph.D.
Chief Executive Officer and Chairman of the Board

Eugene Scherbakov, Ph.D.
Managing Director, IPG Laser GmbH
and Senior Vice President, Europe

Timothy P.V. Mammen
Chief Financial Officer and Senior Vice President

Angelo P. Lopresti
General Counsel, Secretary and Senior Vice President

Alexander Ovtchinnikov, Ph.D.
Senior Vice President, Components

Trevor D. Ness
Senior Vice President, World Wide Sales and Marketing

Felix Stukalin
Senior Vice President, U.S. Operations

Igor Samartsev
Chief Technology Officer

William Shiner
Vice President, Industrial Markets

George BuAbbud, Ph.D.
Vice President, Telecommunication Products

Thomas Burgomaster
Vice President, Corporate Controller

Yuri Erokhin, Ph.D.
Vice President, Strategic Marketing

Paolo Sinni
Vice President, Treasurer and US Controller

## general information

CORPORATE OFFICE
IPG Photonics Corporation
50 Old Webster Road
Oxford, Massachusetts 01540
Tel: (508) 373-1100

http://www.ipgphotonics.com

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116

TRANSFER AGENT
Computershare Investor Services
250 Royall Street
Canton, MA 02021
Tel: (800) 942-5909

STOCK SYMBOL
IPG is listed on the Nasdaq Global Market. Ticker symbol: IPGP

INVESTOR RELATIONS
Corporate news releases, our Annual Report and Forms 10-K and 10-Q are available online at: http://investor.ipgphotonics.com.

For printed materials, please request at http://investor.ipgphotonics.com/investorkit.cfm.

ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m. ET on Tuesday, June 3, 2014
IPG Photonics Corporation
50 Old Webster Road
Oxford, Massachusetts

FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that involve risks and uncertainties that could cause results to differ materially from those projected. Please refer to the introductory paragraphs which precede Item 1 and “Risk Factors” in Item 1A of the Annual Report on Form 10-K for a discussion of these risks and uncertainties.

(1) Compensation Committee
(2) Nominating and Corporate Governance Committee
(3) Audit Committee



IPG PHOTONICS CORPORATION

50 old webster road

oxford, ma 01540 usa

www.ipgphotonics.com