What changed in this filing

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Item 1. Financial Statements

2020-07-29 compared with 2020-04-27 · 349 added, 209 removed, 400 unchanged (58% of the section changed)

3 unchanged sentences

(In thousands, except per share amounts)

Three-months Ended

March 29, 2020

March 31, 2019

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(unaudited) (unaudited)

Revenue $ 169,097 $ 199,047 $ 336,332 $ 372,531

Cost of revenue 50,320 50,967 91,520 97,251

Gross margin 118,777 148,080 244,812 275,280

Research, development, and engineering expenses 30,397 28,079 66,343 58,321

Selling, general, and administrative expenses 60,153 68,245 129,291 135,056

Operating income

Restructuring charges (Note 16) 14,798 — 14,798 —

Intangible asset impairment charges (Note 8) 19,571 — 19,571 —

Operating income (loss) ( 6,142 ) 51,756 14,809 81,903

Foreign currency gain (loss) 336 140 ( 2,667 ) ( 108 )

1 unchanged sentence

Other income (expense) 203 ( 144 ) 20 783

Income before income tax expense

Income tax expense

Net income per weighted-average common and common-equivalent share:

Income (loss) before income tax expense (benefit) ( 2,312 ) 56,975 20,682 92,706

Income tax expense (benefit) ( 1,170 ) 8,226 1,347 10,853

Net income (loss) $ ( 1,142 ) $ 48,749 $ 19,335 $ 81,853

Net income (loss) per weighted-average common and common-equivalent share:

Basic $ ( 0.01 ) $ 0.28 $ 0.11 $ 0.48

Diluted $ ( 0.01 ) $ 0.28 $ 0.11 $ 0.47

Weighted-average common and common-equivalent shares outstanding:

Basic 172,283 171,318 172,345 171,209

Diluted 172,283 175,448 175,499 175,528

Cash dividends per common share $ 0.055 $ 0.050 $ 0.110 $ 0.100

3 unchanged sentences

(In thousands)

Three-months Ended

March 29, 2020

March 31, 2019

Other comprehensive income (loss), net of tax:

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(unaudited) (unaudited)

Net income (loss) $ ( 1,142 ) $ 48,749 $ 19,335 $ 81,853

Other comprehensive income, net of tax:

Available-for-sale investments:

Net unrealized gain (loss), net of tax of ($952) and $268 in 2020 and 2019, respectively

Reclassification of credit loss on investments into current operations

Net unrealized gain (loss), net of tax of ($836) and $239 in the three-month periods and net of tax of ($1,788) and $507 in the six-month periods, respectively 12,451 2,311 8,590 4,562

Reclassification of credit (recovery) loss on investments into current operations ( 85 ) — 75 —

Reclassification of net realized (gain) loss into current operations ( 955 ) ( 382 ) ( 2,805 ) ( 422 )

3 unchanged sentences

Net change related to foreign currency translation adjustments 1,903 ( 663 ) ( 5,462 ) ( 445 )

Other comprehensive income (loss), net of tax

Other comprehensive income, net of tax 13,314 1,266 398 3,695

Total comprehensive income $ 12,172 $ 50,015 $ 19,733 $ 85,548

3 unchanged sentences

(In thousands)

March 29, 2020

December 31, 2019

June 28, 2020 December 31, 2019

Current assets:

3 unchanged sentences

Unbilled revenue 978 4,782

Inventories 52,953 60,261

Prepaid expenses and other current assets 51,768 26,840

3 unchanged sentences

Operating lease assets 25,819 17,522

Goodwill 242,436 243,445

Intangible assets, net 17,337 39,490

Deferred income taxes 443,732 449,519

Other assets 8,042 5,833

Total assets $ 1,934,864 $ 1,885,935

LIABILITIES AND SHAREHOLDERS’ EQUITY

27 unchanged sentences

(In thousands)

Three-months Ended

March 29, 2020

March 31, 2019

Six-months Ended

June 28, 2020 June 30, 2019

Cash flows from operating activities:

Net income $ 19,335 $ 81,853

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Amortization of intangible assets 2,582 1,538

Intangible asset impairment charges 19,571 —

Excess and obsolete inventory charges 8,783 1,713

Operating lease asset impairment charges 2,534 —

Amortization of discounts or premiums on investments 328 ( 342 )

Realized (gain) loss on sale of investments

Realized gain on sale of investments ( 2,805 ) ( 422 )

Credit loss on investments 75 —

4 unchanged sentences

Unbilled revenue 3,804 ( 1,989 )

Inventories ( 1,664 ) 8,681

Prepaid expenses and other current assets ( 25,461 ) ( 463 )

3 unchanged sentences

Deferred revenue and customer deposits 32,586 8,575

Other 2,520 ( 1,190 )

Net cash provided by operating activities 79,020 120,150

8 unchanged sentences

Payment of dividends ( 18,972 ) ( 17,146 )

Payment of contingent consideration ( 1,039 ) —

Net cash provided by (used in) financing activities ( 22,812 ) ( 52,419 )

7 unchanged sentences

(In thousands)

Paid-in Capital

Retained Earnings

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

Balance as of March 29, 2020 171,688 $ 344 $ 664,132 $ 713,208 $ ( 50,191 ) $ 1,327,493

Issuance of common stock under stock plans 1,359 2 38,262 — — 38,264

Repurchase of common stock — — — — — —

Stock-based compensation expense — — 8,018 — — 8,018

Payment of dividends — — — ( 9,469 ) — ( 9,469 )

Net income (loss) — — — ( 1,142 ) — ( 1,142 )

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($836) — — — — 12,451 12,451

Reclassification of credit (recovery) loss on investments — — — — ( 85 ) ( 85 )

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 955 ) ( 955 )

Foreign currency translation adjustment — — — — 1,903 1,903

Balance as of June 28, 2020 (unaudited) 173,047 $ 346 $ 710,412 $ 702,597 $ ( 36,877 ) $ 1,376,478

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

Balance as of March 31, 2019 171,537 $ 343 $ 555,834 $ 670,754 $ ( 38,072 ) $ 1,188,859

Issuance of common stock under stock plans 522 1 12,070 — — 12,071

Repurchase of common stock ( 1,398 ) ( 3 ) — ( 61,687 ) — ( 61,690 )

Stock-based compensation expense — — 10,967 — — 10,967

Payment of dividends — — — ( 8,582 ) — ( 8,582 )

Net income — — — 48,749 — 48,749

Net unrealized gain (loss) on available-for-sale investments, net of tax of $239 — — — — 2,311 2,311

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 382 ) ( 382 )

Foreign currency translation adjustment — — — — ( 663 ) ( 663 )

Balance as of June 30, 2019 (unaudited) 170,661 $ 341 $ 578,871 $ 649,234 $ ( 36,806 ) $ 1,191,640

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ ( 37,275 ) $ 1,355,710

3 unchanged sentences

Payment of dividends — — — ( 18,972 ) — ( 18,972 )

Net income — — — 19,335 — 19,335

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($1,788) — — — — 8,590 8,590

2 unchanged sentences

Foreign currency translation adjustment — — — — ( 5,462 ) ( 5,462 )

Balance as of March 29, 2020 (unaudited)

Paid-in Capital

Retained Earnings

Balance as of June 28, 2020 (unaudited) 173,047 $ 346 $ 710,412 $ 702,597 $ ( 36,877 ) $ 1,376,478

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

Balance as of December 31, 2018 170,820 $ 342 $ 529,208 $ 646,214 $ ( 40,501 ) $ 1,135,263

Issuance of common stock under stock plans 1,239 2 26,415 — — 26,417

Repurchase of common stock ( 1,398 ) ( 3 ) — ( 61,687 ) — ( 61,690 )

Stock-based compensation expense — — 23,248 — — 23,248

Payment of dividends — — — ( 17,146 ) — ( 17,146 )

Net income — — — 81,853 — 81,853

Net unrealized gain (loss) on available-for-sale investments, net of tax of $507 — — — — 4,562 4,562

1 unchanged sentence

Foreign currency translation adjustment — — — — ( 445 ) ( 445 )

Balance as of March 31, 2019 (unaudited)

Balance as of June 30, 2019 (unaudited) 170,661 $ 341 $ 578,871 $ 649,234 $ ( 36,806 ) $ 1,191,640

The accompanying notes are an integral part of these consolidated financial statements.

5 unchanged sentences

Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a full description of other significant accounting policies.

In the opinion of the management of the Company, the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, and financial statement reclassifications necessary to present fairly the Company’s financial position as of March 29, 2020 , and the results of its operations for the three-month periods ended March 29, 2020 and March 31, 2019 , and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month period ended March 29, 2020 are not necessarily indicative of the results to be expected for the full year.

In the opinion of the management of the Company, the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, excess and obsolete inventory charges (Note 5), intangible asset impairment charges (Note 8), restructuring charges (Note 16), and financial statement reclassifications necessary to present fairly the Company’s financial position as of June 28, 2020, and the results of its operations for the three-month and six-month periods ended June 28, 2020 and June 30, 2019, and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month and six-month periods ended June 28, 2020 are not necessarily indicative of the results to be expected for the full year.

Cash, Cash Equivalents, and Investments

Money market instruments, as well as certificates of deposits and debt securities with original maturities of three months or less, are classified as cash equivalents and are stated at amortized cost.

Money market instruments, as well as certificates of deposit and debt securities with original maturities of three months or less, are classified as cash equivalents and are stated at amortized cost.

Certificates of deposit and debt securities with original maturities greater than three months and remaining maturities of one year or less are classified as current investments.

11 unchanged sentences

Credit losses on impaired securities continue to be measured in subsequent periods, using the present value of expected future cash flows, and changes in the expected credit losses are recorded in current operations.

Credit losses are included in "Other income (expense)" on the Consolidated Statement of Operations.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statement of Operations.

When developing an estimate of the expected credit losses, the Company considers all available information relevant to assessing the collectability of cash flows.

8 unchanged sentences

Accounts that are outstanding longer than the payment terms are considered to be past due.

The Company establishes an allowance against accounts receivable for potential credit losses and records bad debt expense in current operations when it determines receivables are at risk for collection based upon the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, general economic and industry conditions, reasonable forecasts about the future, as well as various other factors.

The Company establishes an allowance against accounts receivable for potential credit losses and records bad debt expense in current operations when it determines receivables are at risk for collection based upon the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, general economic and industry conditions, and reasonable forecasts about the future, as well as various other factors.

Receivables are written off against this allowance in the period they are determined to be uncollectible and payments subsequently received on previously written-off receivables are recorded as a reversal of the bad debt expense.

Credit losses are included in "Selling, general, and administrative expenses" on the Consolidated Statement of Operations.

N ew Pronouncements

New Pronouncements

Accounting Standards Update (ASU) 2019-12, "Simplifying the Accounting for Income Taxes"

28 unchanged sentences

Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of March 29, 2020 (in thousands):

The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of June 28, 2020 (in thousands):

Quoted Prices in

1 unchanged sentence

for Identical

Assets (Level 1)

Significant Other

Inputs (Level 2)

Inputs (Level 3)

Assets (Level 1) Significant Other

Inputs (Level 2) Unobservable Inputs (Level 3)

Money market instruments $ 50,222 $ — $ —

3 unchanged sentences

Sovereign bonds — 27,517 —

Agency bonds — 22,054 —

Municipal bonds — 1,638

Certificate of deposit

Economic hedge forward contracts — 46 —

8 unchanged sentences

The market participants are generally large commercial banks.

The Company's certificate of deposit is valued at cost, which approximates fair value given its short term to maturity.

The Company recorded credit losses on debt securities totaling $ 160,000 during the three -month period ended March 29, 2020 .

No credit losses were recorded during the three-month period ended March 31, 2019 .

The Company recorded gross credit losses and gross credit recoveries on debt securities totaling $ 0 and $ 85,000 , respectively, for the three-month period ended June 28, 2020, and $ 160,000 and $ 85,000 , respectively, for the six-month period ended June 28, 2020.

No credit losses or recoveries on debt securities were recorded for the three-month or six-month periods ended June 30, 2019.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.

The Company's contingent consideration liabilities are reported at fair value based upon probability-adjusted present values of the consideration expected to be paid using significant inputs that are not observable in the market, and are therefore classified as Level 3.

Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain revenue milestones.

The fair values of these contingent consideration liabilities were calculated using discount rates consistent with the level of risk of achievement, and are remeasured each reporting period with changes in fair value recorded in "Other income (expense)" on the Consolidated Statements of Operations.

The Company currently has two contingent consideration liabilities related to the Chiaro Technologies, LLC ("Chiaro") and GVi Ventures, Inc.

("GVi") acquisitions.

The fair value of the Chiaro contingent consideration liability was $ 1,153,000 as of March 29, 2020 and December 31, 2019.

The undiscounted potential outcomes related to future contingent consideration range from $ 0 to $ 1,250,000 based upon certain milestone revenue levels to be paid in 2020 if earned.

The GVi contingent consideration liability was written down to zero as of December 31, 2019 resulting from a lower level of revenue in the Americas' automotive industry, and the balance remains at zero as of March 29, 2020.

The fair values of these contingent consideration liabilities were calculated using discount rates consistent with the level of risk of achievement, and are remeasured each reporting period.

The fair value of the contingent consideration liability related to the Company's acquisition of Chiaro Technologies, LLC was $ 1,153,000 as of December 31, 2019.

During the three-month period ended June 28, 2020, the Company paid out $ 1,039,000 based upon the revenue levels achieved, with the remaining $ 114,000 recorded as a fair value adjustment in "Other income (expense)" on the Consolidated Statements of Operations.

The fair value of the contingent consideration liability related to the Company's acquisition of GVi Ventures, Inc.

was written down to zero as of December 31, 2019 resulting from a lower level of revenue in the Americas' automotive industry, and the balance remains at zero as of June 28, 2020.

The undiscounted potential outcomes related to future contingent consideration range from $ 0 to $ 2,500,000 based upon certain revenue levels over the next two years.

2 unchanged sentences

Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis

Non-financial assets such as property, plant and equipment, goodwill, and intangible assets are required to be measured at fair value only when an impairment loss is recognized.

The Company did not record an impairment charge related to these assets during the three -month periods ended March 29, 2020 and March 31, 2019 .

Non-financial assets, such as property, plant and equipment, operating lease assets, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized.

The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances, referred to as "triggering events," indicate the carrying value may not be recoverable.

Our business has been adversely and materially impacted by deteriorating global economic conditions resulting from the COVID-19 pandemic.

The significant decline in business levels triggered a review of long-lived assets for potential impairment as of May 26, 2020, which resulted in operating lease asset impairment charges of $ 2,534,000 (refer to Notes 6 and 16) that are included in "Restructuring charges" on the Consolidated Statements of Operations, and intangible asset impairment charges of $ 19,571,000 (refer to Note 8).

These fair value measurements are based upon the present values of future cash flows using significant inputs that are not observable in the market, and are therefore classified as Level 3.

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consisted of the following (in thousands):

March 29, 2020

December 31, 2019

June 28, 2020 December 31, 2019

Cash $ 235,799 $ 155,498

Money market instruments 50,222 15,933

3 unchanged sentences

Treasury bills 34,018 92,914

Sovereign bonds 14,869 6,294

Municipal bonds 1,638 4,630

Certificate of deposit — 4,328

Sovereign bonds

Current investments 143,084 240,470

2 unchanged sentences

Asset-backed securities 41,299 46,403

Agency bonds 22,054 5,914

Sovereign bonds 12,648 16,005

1 unchanged sentence

Non-current investments 467,087 433,452

$ 896,192 $ 845,353

Asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement;

1 unchanged sentence

treasury bills consist of debt securities issued by the U.S.

sovereign bonds consist of direct debt issued by foreign governments;

municipal bonds consist of debt securities issued by state and local government entities;

certificates of deposit are time deposits held by financial institutions with a fixed interest rate;

sovereign bonds consist of direct debt issued by foreign governments;

and agency bonds consist of domestic or foreign obligations of government agencies and government-sponsored enterprises that have government backing.

All securities are denominated in U.S.

Dollars and the certificate of deposit is denominated in Korean Won.

Dollars, with the exception of the certificate of deposit held as of December 31, 2019 that was denominated in Korean Won.

Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 1,958,000 and $ 2,874,000 as of June 28, 2020 and December 31, 2019, respectively.

COGNEX CORPORATION

2 unchanged sentences

The Company did not record an adjustment to retained earnings, as there were no debt securities with credit losses as of the adoption date.

The following table summarizes the Company’s available-for-sale investments as of March 29, 2020 (in thousands):

The following table summarizes the Company’s available-for-sale investments as of June 28, 2020 (in thousands):

Losses Fair Value

Asset-backed securities $ 49,899 $ 412 $ — $ 50,311

1 unchanged sentence

Treasury bills 33,480 538 — 34,018

Municipal bonds

Sovereign bonds 14,787 82 — 14,869

Municipal bonds 1,643 — ( 5 ) 1,638

Treasury bills 194,330 2,345 ( 1 ) 196,674

1 unchanged sentence

Asset-backed securities 40,817 484 ( 2 ) 41,299

Agency bonds 22,035 37 ( 18 ) 22,054

Sovereign bonds 12,533 115 — 12,648

The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of March 29, 2020 (in thousands):

$ 603,822 $ 6,747 $ ( 398 ) $ 610,171

The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of June 28, 2020 (in thousands):

Unrealized Loss Position For:

Less than 12 Months

12 Months or Greater

Less than 12 Months 12 Months or Greater Total

Fair Value Unrealized

Losses Fair Value Unrealized

Corporate bonds $ 49,525 $ ( 363 ) $ 1,181 $ ( 9 ) $ 50,706 $ ( 372 )

Treasury bills 12,962 ( 1 ) — — 12,962 ( 1 )

Asset-backed securities 5,749 ( 1 ) 260 ( 1 ) 6,009 ( 2 )

Sovereign bonds

The Company recorded credit losses on debt securities totaling $ 160,000 during the three-month period ended March 29, 2020.

No credit losses on debt securities were recorded during the three-month period ended March 31, 2019.

Credit losses are included in "Other income (expense)" on the Consolidated Statement of Operations.

Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $2,268,000 and $2,874,000 as of March 29, 2020 and December 31, 2019, respectively.

In its evaluation to determine expected credit losses, management considered all available historical and current information, expectations of future economic conditions, the type of security, the credit rating of the security, and the size of the loss position, as well as other relevant information.

The Company does not intend to sell, and is unlikely to be required to sell, any of these available-for-sale investments before their effective maturity or market price recovery.

The following table summarizes the allowance for credit losses activity for the three-month period ended March 29, 2020 (in thousands):

Balance as of December 31, 2019

Increases to the allowance for credit losses

Balance as of March 29, 2020

Agency bonds 3,128 ( 2 ) 2,784 ( 16 ) 5,912 ( 18 )

Municipal bonds 1,293 ( 5 ) — — 1,293 ( 5 )

$ 72,657 $ ( 372 ) $ 4,225 $ ( 26 ) $ 76,882 $ ( 398 )

No credit losses or recoveries on debt securities were recorded for the three-month or six-month periods ended June 30, 2019.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 1,865,000 and $ 15,000 , respectively, during the three-month period ended March 29, 2020 and $ 64,000 and $ 24,000 , respectively, during the three-month period ended March 31, 2019 .

The following table summarizes the allowance for credit losses activity for the six-month period ended June 28, 2020 (in thousands):

Balance as of December 31, 2019 $ —

Increases to the allowance for credit losses 160

Decreases to the allowance for credit losses ( 85 )

Balance as of June 28, 2020 $ 75

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 962,000 and $ 7,000 , respectively, for the three-month period ended June 28, 2020, and $ 394,000 and $ 12,000 , respectively, for the three-month period ended June 30, 2019.

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 2,826,000 and $ 21,000 , respectively, for the six-month period ended June 28, 2020, and $ 458,000 and $ 36,000 , respectively, for the six-month period ended June 30, 2019.

These gains and losses are included in "Investment income" on the Consolidated Statements of Operations.

Prior to the sale of these securities, unrealized gains and losses for these debt securities, net of tax, are recorded in shareholders’ equity as accumulated other comprehensive loss.

The following table presents the effective maturity dates of the Company’s available-for-sale investments as of March 29, 2020 (in thousands):

The following table presents the effective maturity dates of the Company’s available-for-sale investments as of June 28, 2020 (in thousands):

<1 year 1-2 Years 2-3 Years 3-4 Years 4-5 Years Total

Corporate bonds $ 42,248 $ 81,987 $ 102,034 $ 10,391 $ — $ 236,660

2 unchanged sentences

Sovereign bonds 14,869 9,218 3,430 — — 27,517

Agency bonds — — 22,054 — — 22,054

Municipal bonds 1,638 — — — — 1,638

$ 143,084 $ 243,567 $ 208,888 $ 10,391 $ 4,241 $ 610,171

Inventories consisted of the following (in thousands):

March 29, 2020

December 31, 2019

June 28, 2020 December 31, 2019

Raw materials $ 20,736 $ 27,285

1 unchanged sentence

Finished goods 28,106 27,473

$ 52,953 $ 60,261

The Company recorded provisions for excess and obsolete inventories of $ 7,718,000 and $ 8,783,000 for the three-month and six-month periods ended June 28, 2020, respectively, which reduced the carrying value of the inventories to their net realizable value.

The charges for the three-month period ended June 28, 2020 were due to lower projected sales of excess inventories as a result of deteriorating global economic conditions from the COVID-19 pandemic.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations.

1 unchanged sentence

Certain leases may contain options to extend or terminate the lease at the Company's sole discretion.

There were no options to extend or terminate that were included in the determination of the lease term for the leases outstanding as of March 29, 2020 .

There were no options to extend or terminate that were included in the determination of the lease term for the leases outstanding as of June 28, 2020.

Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index.

There were no restrictions or covenants for the leases outstanding as of March 29, 2020 .

The total operating lease expense for the three-month periods ended March 29, 2020 and March 31, 2019 was $ 1,906,000 and $ 1,485,000 , respectively.

The total operating lease cash payments for the three-month periods ended March 29, 2020 and March 31, 2019 were $ 1,863,000 and $ 1,401,000 , respectively.

The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 39,000 and $ 169,000 for the three-month periods ended March 29, 2020 and March 31, 2019, respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

There were no restrictions or covenants for the leases outstanding as of June 28, 2020.

The total operating lease expense for the three-month periods ended June 28, 2020 and June 30, 2019 was $ 2,147,000 and $ 1,742,000 , respectively.

The total operating lease cash payments for the three-month periods ended June 28, 2020 and June 30, 2019 were $ 2,091,000 and $ 1,669,000 , respectively.

The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 23,000 and $ 64,000 for the three-month periods ended June 28, 2020 and June 30, 2019, respectively.

The total operating lease expense for the six-month periods ended June 28, 2020 and June 30, 2019 was $ 4,053,000 and $ 3,227,000 , respectively.

The total operating lease cash payments for the six-month periods ended June 28, 2020 and June 30, 2019 were $ 3,954,000 and $ 3,070,000 , respectively.

The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 62,000 and $ 233,000 for the six-month periods ended June 28, 2020 and June 30, 2019, respectively.

Future operating lease cash payments are as follows (in thousands):

Year Ended December 31,

Remainder of fiscal 2020

The discounted present value of the future lease cash payments resulted in a lease liability of $ 17,966,000 and $ 17,973,000 as of March 29, 2020 and December 31, 2019, respectively.

The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of March 29, 2020 or March 31, 2019.

The weighted-average discount rate was 4.4 % and 4.8 % for the leases outstanding as of March 29, 2020 and March 31, 2019, respectively.

The weighted-average remaining lease term was 3.7 and 4.1 for the leases outstanding as of March 29, 2020 and March 31, 2019, respectively.

The Company owns a building adjacent to its corporate headquarters that is partially occupied by a tenant who has a lease agreement that will expire in 2022.

Rental income was $ 77,000 for both periods ended March 29, 2020 and March 31, 2019 , respectively.

Future minimum rental receipts under non-cancelable lease agreements are as follows (in thousands):

Year Ended December 31,

Year Ended December 31, Amount

Remainder of fiscal 2020 $ 4,335

Thereafter 4,462

The discounted present value of the future lease cash payments resulted in a lease liability of $ 28,836,000 and $ 17,973,000 as of June 28, 2020 and December 31, 2019, respectively.

The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of June 28, 2020 or June 30, 2019.

The weighted-average discount rate was 4.1 % and 4.8 % for the leases outstanding as of June 28, 2020 and June 30, 2019, respectively.

The weighted-average remaining lease term was 5.3 and 3.6 years for the leases outstanding as of June 28, 2020 and June 30, 2019, respectively.

As part of the Company's restructuring plan (refer to Note 16), management closed ten leased offices as of June 28, 2020 prior to the end of their lease terms.

The carrying value of the lease assets associated with these ten offices has been reduced to zero as of June 28, 2020, resulting in operating lease asset impairment charges of $ 2,534,000 for the three-month period ended June 28, 2020 that are included in "Restructuring charges" on the Consolidated Statements of Operations.

Management is currently negotiating early contract terminations for the remaining lease liability obligations associated with these abandoned offices.

The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant for a portion of the current year.

This lease was terminated prior to the end of its lease term during the three-month period ended June 28, 2020.

Rental income was $ 0 and $ 81,000 for the three-month periods ended June 28, 2020 and June 30, 2019, respectively, and $ 77,000 and $ 158,000 for the six-month periods ended June 28, 2020 and June 30, 2019, respectively.

The Company is now fully occupying this building for its operations.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The changes in the carrying value of goodwill were as follows (in thousands):

1 unchanged sentence

Foreign exchange rate changes ( 1,009 )

Balance as of March 29, 2020

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Balance as of June 28, 2020 $ 242,436

The significant decline in business levels resulting from the COVID-19 pandemic triggered a review of long-lived assets, including goodwill, for potential impairment during the three-month period ended June 28, 2020.

Based upon this assessment, management concluded that the reporting unit fair value was not less than its carrying value, and therefore no goodwill impairment charge was recognized for the three-month and six-month periods ended June 28, 2020.

Factors that management considered in this assessment included macroeconomic conditions, industry and market conditions, overall financial performance (both current and projected), changes in management or strategy, changes in the composition or carrying value of net assets, and market capitalization.

Intangible Assets

Amortized intangible assets consisted of the following (in thousands):

Value Accumulated

Amortization Net

Distribution networks $ 38,060 $ 38,060 $ —

3 unchanged sentences

Non-compete agreements 710 409 301

Balance as of March 29, 2020

Trademarks 110 39 71

Balance as of June 28, 2020 $ 73,675 $ 56,338 $ 17,337

Value Accumulated

Amortization Net

Distribution networks $ 38,060 $ 38,060 $ —

3 unchanged sentences

Non-compete agreements 710 350 360

Trademarks 110 12 98

Balance as of December 31, 2019 $ 93,474 $ 53,984 $ 39,490

In connection with the acquisition of Sualab Co., Ltd.

("Sualab") in the fourth quarter of 2019, the Company acquired in-process technologies valued at $ 8,200,000 .

In-process technology is an indefinite-lived intangible asset until the technology is finalized, at which point it is amortized over its estimated useful life.

As of March 29, 2020 , estimated future amortization expense related to intangible assets is as follows (in thousands):

Year Ended December 31,

The significant decline in business levels resulting from the COVID-19 pandemic triggered a review of long-lived assets, including intangible assets, for potential impairment during the three-month period ended June 28, 2020.

For finite-lived intangible assets that are subject to amortization, the Company follows a two-step process for impairment testing.

In step one, known as the recoverability test, the carrying value of the asset is compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

If the sum of the undiscounted future cash flows is less than the carrying value, the asset is not recoverable and step two is performed.

In step two, the impairment charge is measured as the amount by which the carrying value of the asset exceeds its fair value.

For indefinite-lived intangible assets that are not subject to amortization, the fair value of the asset is measured and an impairment charge is recorded as the amount by which the carrying value of the asset exceeds its fair value.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Based upon this assessment, management concluded that certain of the Company's finite-lived intangible assets failed the recoverability test, and recorded impairment charges for these assets equal to the amount by which their carrying value exceeded their fair value.

The Company also measured the fair value and recorded an impairment charge for its indefinite-lived intangible asset related to in-process technologies.

The fair values were established, with the assistance of an outside valuation advisor, using the income approach based upon a discounted cash flow model that estimated future revenue streams and expenses attributable to those revenue streams provided by management.

This review resulted in intangible asset impairment charges totaling $ 19,571,000 for the three-month period ended June 28, 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab Co.

("Sualab") as a result of the deteriorating global economic conditions from the COVID-19 pandemic.

Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $ 10,070,000 , $ 5,900,000 , and $ 3,382,000 , respectively.

In addition, customer relationships acquired from EnShape GmbH that had a gross carrying value of $ 447,000 and accumulated amortization of $ 228,000 on the measurement date were reduced to zero , resulting in an impairment charge of $ 219,000 .

As of June 28, 2020, estimated future amortization expense related to intangible assets was as follows (in thousands):

Year Ended December 31, Amount

Remainder of fiscal 2020 $ 1,686

Thereafter 1,895

In-process technology is an indefinite-lived intangible asset until the technology is finalized, at which point it is amortized over its estimated useful life.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Warranty Obligations

The Company records the estimated cost of fulfilling product warranties at the time of sale based upon historical costs to fulfill claims.

Obligations may also be recorded subsequent to the time of sale whenever specific events or circumstances impacting product quality become known that would not have been taken into account using historical data.

Obligations may also be recorded subsequent to the time of sale whenever specific events or changes in circumstances impacting product quality become known that would not have been taken into account using historical data.

While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure.

1 unchanged sentence

Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The changes in the warranty obligation were as follows (in thousands):

2 unchanged sentences

Fulfillment of warranty obligations ( 927 )

Balance as of March 29, 2020

Balance as of June 28, 2020 $ 5,279

Derivative Instruments

5 unchanged sentences

The Company had the following outstanding forward contracts (in thousands):

March 29, 2020

December 31, 2019

June 28, 2020 December 31, 2019

Currency Notional

Equivalent Notional

Derivatives Not Designated as Hedging Instruments:

British Pound

Korean Won 138,690,000 $ 115,604 161,951,500 $ 139,688

Euro 50,000 56,137 18,000 20,249

Mexican Peso 184,700 8,051 80,000 4,223

Japanese Yen 600,000 5,587 575,000 5,291

Hungarian Forint 1,085,000 3,443 870,000 2,962

Canadian Dollar

British Pound 1,940 2,406 2,700 3,569

Taiwanese Dollar 42,765 1,455 37,450 1,256

Canadian Dollar 1,130 827 1,300 1,000

Singapore Dollar 1,090 784 845 628

Information regarding the fair value of the outstanding forward contracts was as follows (in thousands):

Asset Derivatives

Liability Derivatives

March 29, 2020

December 31, 2019

March 29, 2020

December 31, 2019

Asset Derivatives Liability Derivatives

Balance Fair Value Balance Fair Value

Location June 28, 2020 December 31, 2019 Sheet

Location June 28, 2020 December 31, 2019

Derivatives Not Designated as Hedging Instruments:

Economic hedge forward contracts

Prepaid expenses and other current assets

Accrued expenses

Economic hedge forward contracts Prepaid expenses and other current assets $ 46 $ 857 Accrued expenses $ 458 $ 23

COGNEX CORPORATION

1 unchanged sentence

The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands):

Asset Derivatives

Liability Derivatives

March 29, 2020

December 31, 2019

March 29, 2020

December 31, 2019

Gross amounts of recognized assets

Gross amounts of recognized liabilities

Gross amounts offset

Net amount of assets presented

Net amount of liabilities presented

Asset Derivatives Liability Derivatives

June 28, 2020 December 31, 2019 June 28, 2020 December 31, 2019

Gross amounts of recognized assets $ 46 $ 857 Gross amounts of recognized liabilities $ 458 $ 23

Gross amounts offset — — Gross amounts offset — —

Net amount of assets presented $ 46 $ 857 Net amount of liabilities presented $ 458 $ 23

Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands):

Location in Financial Statements

Three-months Ended

March 29, 2020

March 31, 2019

Location in Financial Statements Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Derivatives Not Designated as Hedging Instruments:

Gains (losses) recognized in current operations

Foreign currency gain (loss)

Gains (losses) recognized in current operations Foreign currency gain (loss) $ 60 $ ( 439 ) $ ( 8,180 ) $ 66

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue Recognition

The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands):

Three-months Ended

March 29, 2020

March 31, 2019

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Americas $ 68,966 $ 77,408 $ 129,214 $ 142,178

Europe 35,987 59,620 84,569 119,158

Greater China 31,898 35,816 58,301 58,632

Other Asia 32,246 26,203 64,248 52,563

$ 169,097 $ 199,047 $ 336,332 $ 372,531

The following table summarizes disaggregated revenue information by revenue type (in thousands):

Three-months Ended

March 29, 2020

March 31, 2020

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Standard products and services $ 158,807 $ 173,368 $ 311,662 $ 334,420

Application-specific customer solutions 10,290 25,679 24,670 38,111

$ 169,097 $ 199,047 $ 336,332 $ 372,531

Costs to Fulfill a Contract

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 5,835,000 and $ 3,963,000 as of March 29, 2020 and December 31, 2019, respectively.

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 10,888,000 and $ 3,963,000 as of June 28, 2020 and December 31, 2019, respectively.

Accounts Receivable, Contract Assets, and Contract Liabilities

1 unchanged sentence

The Company maintains an allowance against its accounts receivable for potential credit losses.

Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

certain application-specific customer solutions contracts.

Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts.

Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.

1 unchanged sentence

The Company did not record an adjustment to retained earnings as this ASU did not have a material impact on the Company's consolidated allowance for credit losses.

The Company recorded credit losses on accounts receivable of $ 300,000 for the three-month period ended March 29, 2020 .

No credit losses on accounts receivables were recorded during the three-month period ended March 31, 2019 .

The following table summarizes the allowance for credit losses activity for the three-month period ended March 29, 2020 (in thousands):

The Company recorded credit losses on accounts receivable of $ 300,000 and $ 600,000 for the three-month and six-month periods ended June 28, 2020, respectively.

The Company recorded credit losses on accounts receivable of $ 90,000 for the three-month and six-month periods ended June 30, 2019.

The Company's estimate of expected credit losses takes into account the deteriorating global economic conditions from the COVID-19 pandemic.

The following table summarizes the allowance for credit losses activity for the six-month period ended June 28, 2020 (in thousands):

Balance as of December 31, 2019 $ 530

Increases to the allowance for credit losses 600

Write-offs ( 186 )

Foreign exchange rate changes 1

Balance as of March 29, 2020

The following table summarizes the deferred revenue and customer deposits activity for the three-month period ended March 29, 2020 (in thousands):

Balance as of June 28, 2020 $ 945

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the deferred revenue and customer deposits activity for the six-month period ended June 28, 2020 (in thousands):

Balance as of December 31, 2019 $ 14,432

2 unchanged sentences

Foreign exchange rate changes ( 105 )

Balance as of March 29, 2020

Balance as of June 28, 2020 $ 46,738

As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock-Based Compensation Expense

The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units ("RSUs").

As of March 29, 2020 , the Company had 16,115,000 shares available for grant.

As of June 28, 2020, the Company had 16,335,000 shares available for grant under its stock plans.

Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four or five years based upon continuous service and expire ten years from the grant date.

1 unchanged sentence

Participants are not entitled to dividends on RSUs.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock Options

The following table summarizes the Company’s stock option activity for the three -month period ended March 29, 2020 :

(in thousands)

Term (in years)

The following table summarizes the Company’s stock option activity for the six-month period ended June 28, 2020:

(in thousands) Weighted-

Price Weighted-

Term (in years) Aggregate

(in thousands)

Outstanding as of December 31, 2019 12,899 $ 37.95

Granted 975 51.58

Exercised ( 1,822 ) 26.47

Forfeited or expired ( 421 ) 50.28

Outstanding as of March 29, 2020

Exercisable as of March 29.

Options vested or expected to vest as of March 29, 2020 (1)

Outstanding as of June 28, 2020 11,631 $ 40.45 6.98 $ 212,847

Exercisable as of June 28, 2020 5,331 $ 31.59 5.81 $ 144,694

Options vested or expected to vest as of June 28, 2020 (1) 10,683 $ 39.58 6.85 $ 204,795

(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future.

1 unchanged sentence

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:

Three-months Ended

March 29, 2020

March 31, 2019

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Risk-free rate 1.6 % 2.7 % 1.6 2.7 %

10 unchanged sentences

The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.

The weighted-average grant-date fair values of stock options granted during the three-month periods ended March 29, 2020 and March 31, 2019 were $ 18.46 and $ 18.59 , respectively.

The total intrinsic values of stock options exercised for the three-month periods ended March 29, 2020 and March 31, 2019 were $ 14,454,000 and $ 22,579,000 , respectively.

The total fair values of stock options vested for the three-month periods ended March 29, 2020 and March 31, 2019 were $ 36,664,000 and $ 29,972,000 , respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The weighted-average grant-date fair values of stock options granted during the three-month periods ended June 28, 2020 and June 30, 2019 were $ 19.13 and $ 18.68 , respectively.

The weighted-average grant-date fair values of stock options granted during the six-month periods ended June 28, 2020 and June 30, 2019 were $ 18.52 and $ 18.59 , respectively.

The total intrinsic values of stock options exercised for the three-month periods ended June 28, 2020 and June 30, 2019 were $ 39,359,000 and $ 14,220,000 , respectively.

The total intrinsic values of stock options exercised for the six-month periods ended June 28, 2020 and June 30, 2019 were $ 53,814,000 and $ 36,799,000 , respectively.

The total fair values of stock options vested for the three-month periods ended June 28, 2020 and June 30, 2019 were $ 1,287,000 and $ 887,000 , respectively.

The total fair values of stock options vested for the six-month periods ended June 28, 2020 and June 30, 2019 were $ 37,951,000 and $ 30,859,000 , respectively.

Restricted Stock Units (RSUs)

The following table summarizes the Company's RSUs activity for the three-month period ended March 29, 2020:

Shares (in thousands)

Weighted-Average Grant Date Fair Value

The following table summarizes the Company's RSUs activity for the six-month period ended June 28, 2020:

(in thousands) Weighted-Average

Grant Date Fair Value

Nonvested as of December 31, 2019 150 $ 48.63

Granted 432 51.53

Forfeited or expired ( 21 ) 50.54

Nonvested as of March 29, 2020

The weighted-average grant-date fair values of RSUs granted during the three-month period ended March 29, 2020 was $ 50.94 .

There were no RSUs that vested during the three-month period ended March 29, 2020.

There were no RSUs granted or vested during the three-month period ended March 31, 2019.

Nonvested as of June 28, 2020 561 $ 50.79

The weighted-average grant-date fair values of RSUs granted during the three-month and six-month periods ended June 28, 2020 were $ 56.97 and $ 51.53 , respectively.

There were no RSUs that vested during the three-month and six-month periods ended June 28, 2020.

There were no RSUs granted or vested during the three-month and six-month periods ended June 30, 2019.

Stock-Based Compensation Expense

1 unchanged sentence

one consisting of senior management and another consisting of all other employees.

The Company currently applies an estimated annual forfeiture rate of 7 % to all equity awards for senior management and a rate of 12 % for all other employees.

The Company currently applies an estimated annual forfeiture rate of 7 % to all stock-based awards for senior management and a rate of 12 % for all other employees.

Each year during the first quarter, the Company revises its forfeiture rate.

This resulted in an increase to compensation expense of $ 1,787,000 in 2020 and a decrease to compensation expense of $ 499,000 in 2019.

As of March 29, 2020 , total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was $ 72,823,000 , which is expected to be recognized over a weighted-average period of 2.21 years.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended March 29, 2020 were $ 14,790,000 and $ 2,564,000 , respectively, and for the three-month period ended March 31, 2019 were $ 12,281,000 and $ 2,222,000 , respectively.

No compensation expense was capitalized as of March 29, 2020 or December 31, 2019 .

As of June 28, 2020, total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was $ 65,128,000 , which is expected to be recognized over a weighted-average period of 2.0 years.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended June 28, 2020 were $ 8,018,000 , which includes credits of $ 1,401,000 relating to grants cancelled as a result of the Company's workforce reduction, and $ 1,277,000 , respectively, and for the three-month period ended June 30, 2019 were $ 10,967,000 and $ 1,813,000 , respectively.

The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended June 28, 2020 were $ 22,808,000 and $ 3,841,000 , respectively, and for the six-month period ended June 30, 2019 were $ 23,248,000 and $ 4,035,000 , respectively.

No compensation expense was capitalized as of June 28, 2020 or December 31, 2019.

The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):

Three-months Ended

March 29, 2020

March 31, 2019

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Cost of revenue $ 363 $ 329 $ 717 $ 780

1 unchanged sentence

Selling, general, and administrative 5,254 7,088 14,324 14,451

$ 8,018 $ 10,967 $ 22,808 $ 23,248

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock Repurchase Program

In October 2018, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock.

As of March 29, 2020 , the Company repurchased 2,816,000 shares at a cost of $ 121,348,000 under this program, including 1,215,000 shares at a cost of $ 51,036,000 during the three-month period ended March 29, 2020 , leaving a remaining balance of $ 78,652,000 .

As of June 28, 2020, the Company repurchased 2,816,000 shares at a cost of $ 121,348,000 under this program, including 1,215,000 shares at a cost of $ 51,036,000 during the three-month period ended March 29, 2020, leaving a remaining balance of $ 78,652,000 .

No shares were repurchased during the three-month period ended June 28, 2020.

On March 12, 2020, the Company's Board of Directors authorized the repurchase of an additional $ 200,000,000 of the Company's common stock.

2 unchanged sentences

The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A reconciliation of the United States federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows:

Three-months Ended

March 29, 2020

March 31, 2019

Income tax expense at U.S.

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Income tax expense (benefit) at U.S.

federal statutory corporate tax rate ( 21 ) % 21 % 21 % 21 %

1 unchanged sentence

Foreign tax rate differential 5 % ( 7 ) % ( 5 ) % ( 7 ) %

Tax credit 2 % ( 1 ) % ( 2 ) % ( 1 ) %

Discrete tax benefit related to stock options ( 191 ) % ( 2 ) % ( 29 ) % ( 4 ) %

Other discrete tax events

Discrete tax expense related to tax return filings 141 % — % 17 % — %

Tax rate adjustment 18 % — % — % — %

Other ( 4 ) % 2 % 4 % 2 %

Income tax expense ( 51 ) % 14 % 7 % 12 %

2 unchanged sentences

federal statutory corporate tax rate of 21 %.

These differences resulted in a decrease in the effective tax rate by 6 and 9 percentage points for the three-month periods ended March 29, 2020 and March 31, 2019, respectively.

These differences resulted in a favorable impact to the effective tax rate of 5 percentage points for both the three-month and six-month periods ended June 28, 2020, and 7 percentage points for the same periods in 2019.

Management has determined that earnings from its legal entity in China will be indefinitely reinvested to provide local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested.

The excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises resulted in a decrease in the effective tax rate by 7 and 8 percentage points for the three-month periods ended March 29, 2020 and March 31, 2019 , respectively.

During the three -month period ended March 29, 2020 , the Company recorded a $ 306,000 increase in reserves for income taxes, net of deferred tax benefit.

Estimated interest and penalties included in these amounts totaled $ 155,000 for the three -month period ended March 29, 2020 .

The Company’s reserve for income taxes, including gross interest and penalties, was $ 12,919,000 as of March 29, 2020 , which included $ 11,891,000 classified as a non-current liability and $ 1,028,000 recorded as an increase to a non-current deferred tax liability.

The Company recorded discrete tax benefits arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock exercises that resulted in a favorable impact to the effective tax rate of 191 and 29 percentage points for the three-month and six-month periods ended June 28, 2020, respectively, and 2 and 4 percentage points for the same periods in 2019.

In addition, the Company recorded discrete tax expenses related to the final true-up of the prior year tax accrual upon filing the related tax return that resulted in an unfavorable impact to the effective tax rate of 141 and 17 percentage points for the three-month and six-month periods ended June 28, 2020, respectively.

Excluding the impact of these discrete items, the Company’s effective tax rate was a benefit of 1 % of pre-tax loss and an expense of 19 % of pre-tax income for the three-month and six-month periods in 2020, respectively, compared to an expense of 17 % and 16 % of pre-tax income for the same periods in 2019.

The increase in the effective tax rate, excluding the impact of discrete items, for the six-month period from 16 % in 2019 to 19 % in 2020 was due to more of the Company's profits being earned and taxed in higher tax jurisdictions.

This adjustment to the effective tax rate resulted in an 18 percentage-point impact on the effective tax rate for the three-month period ended June 28, 2020.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the six-month period ended June 28, 2020, the Company recorded a $ 710,000 increase in reserves for income taxes, net of deferred tax benefit.

Estimated interest and penalties included in these amounts totaled $ 283,000 for the six-month period ended June 28, 2020.

The Company’s reserve for income taxes, including gross interest and penalties, was $ 13,330,000 as of June 28, 2020, which included $ 12,302,000 classified as a non-current liability and $ 1,028,000 recorded as an increase to a non-current deferred tax liability.

The amount of gross interest and penalties included in these balances was $ 1,301,000 .

If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period.

As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $ 1,300,000 to $ 1,400,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts.

Within the United States, the tax years 2016 through 2019 remain open to examination by the Internal Revenue Service and various state tax authorities.

Within the United States, the tax years 2016 through 2019 remain open to examination by the Internal Revenue Service ("IRS") and various state tax authorities.

The tax years 2015 through 2019 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.

The Company has recently been notified that it is under audit by the IRS for the tax year 2017.

Management believes the Company is adequately reserved for this audit.

Weighted-Average Shares

Weighted-average shares were calculated as follows (in thousands):

Three-months Ended

March 29, 2020

March 31, 2019

Three-months Ended Six-months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

Basic weighted-average common shares outstanding 172,283 171,318 172,345 171,209

1 unchanged sentence

Weighted-average common and common-equivalent shares outstanding 172,283 175,448 175,499 175,528

Stock options to purchase 6,273,000 and 4,832,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month periods ended March 29, 2020 and March 31, 2019, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

There were no anti-dilutive

Stock options to purchase 5,801,000 and 6,328,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended June 28, 2020, respectively, and 6,113,000 and 5,503,000 for the same periods in 2019, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

Restricted stock units totaling 27,000 and 14,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended June 28, 2020.

Additionally, because the Company recorded a cumulative net loss during the three-month period ended June 28, 2020, potential common stock equivalents of 3,120,000 were not included in the calculation of diluted net loss per share for this period.

There were no anti-dilutive restricted stock units outstanding, on a weighted-average basis, during the three-month and six-month periods ended June 30, 2019, respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

restricted stock units outstanding, on a weighted-average basis, during the three-month periods ended March 29, 2020 and March 31, 2019, respectively.

Restructuring Charges

On May 26, 2020, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs, optimize its business model, and address the impact of the COVID-19 pandemic.

The restructuring plan included a global workforce reduction of approximately 8 % and office closures.

The Company estimates the total restructuring charges from these actions to be approximately $ 16,445,000 , of which $ 14,798,000 has been recorded in the three-month period ended June 28, 2020 and included in “Restructuring charges” on the Consolidated Statements of Operations.

The remaining charges are expected to be recognized during the second half of 2020.

The following table summarizes the restructuring charges (in thousands):

Total Amount Expected to be Incurred Incurred in the Three-months Ended June 28, 2020

One-time termination benefits $ 11,387 $ 10,386

Contract termination costs 3,995 3,995

Other associated costs 1,063 417

$ 16,445 $ 14,798

One-time termination benefits include severance, health insurance, and outplacement services for 181 employees who were either terminated or have been notified that they will be terminated at a future date.

For employees not required to render service beyond a minimum retention period, the one-time termination benefits were recognized in the three-month period ended June 28, 2020.

Otherwise, these benefits, including retention bonuses for selected employees, are being recognized over the service period, which is not expected to exceed the fourth quarter of 2020.

Contract termination costs include remaining lease liability obligations and operating lease asset impairments for offices closed prior to the end of the contractual lease term.

These costs also include the write-off of leasehold improvements and other equipment related to these abandoned offices that had no alternative use.

These contract termination costs were recognized in the three-month period ended June 28, 2020 when the Company ceased using the property for economic benefit.

Other associated costs primarily include legal fees related to the employee termination actions, which are being recognized when the services are performed.

The following table summarizes the activity in the Company’s restructuring reserve, which is included in “Accrued expenses” on the Consolidated Balance Sheets (in thousands):

One-time Termination Benefits Contract Termination Costs Other Associated Costs Total

Balance as of December 31, 2019 $ — $ — $ — $ —

Restructuring charges 10,386 3,995 417 14,798

Cash payments ( 4,654 ) ( 26 ) ( 9 ) ( 4,689 )

Non-cash restructuring charges — ( 3,145 ) — ( 3,145 )

Foreign exchange rate changes 60 5 7 72

Balance as of June 28, 2020 $ 5,792 $ 829 $ 415 $ 7,036

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Subsequent Events

On April 27, 2020, the Company’s Board of Directors declared a cash dividend of $ 0.055 per share.

The dividend is payable on May 29, 2020 to all shareholders of record as of the close of business on May 15, 2020 .

In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights have emerged.

The Company is currently evaluating this law and any related impact to its financial position or results of operations.

The COVID-19 (also referred to as "coronavirus") outbreak had a modest adverse impact on our business in the first quarter of 2020, primarily near the end of the quarter.

This impact has expanded and accelerated into the second quarter, as we have noted lower demand for our products in certain industries, additional disruptions to our supply chain, longer customer delivery times, higher delivery costs, and further shutdowns of customer facilities.

While it is difficult for us to quantify the duration and severity of this impact due to many factors beyond our control and knowledge, including changing governmental regulations and the scope and duration of social distancing and commerce restrictions, we expect the impact on our business to be more significant in the second quarter than the first quarter of 2020.

On July 29, 2020, the Company’s Board of Directors declared a cash dividend of $ 0.055 per share.

The dividend is payable on August 28, 2020 to all shareholders of record as of the close of business on August 14, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements