COGNEX CORP 10-Q

ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three-months Ended Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (unaudited) (unaudited) Revenue $ 251,073 $ 183,325 $ 587,405 $ 555,856 Cost of revenue 59,741 47,632 151,261 144,883 Gross margin 191,332 135,693 436,144 410,973 Research, development, and engineering expenses 30,240 28,115 96,583 86,436 Selling, general, and administrative expenses 64,206 64,486 193,497 199,542 Restructuring charges (Note 16) 251 — 15,049 — Intangible asset impairment charges (Note 8) — — 19,571 — Operating income 96,635 43,092 111,444 124,995 Foreign currency gain (loss) 2,357 ( 1,295 ) ( 310 ) ( 1,403 ) Investment income 2,490 5,114 11,010 15,242 Other income (expense) ( 173 ) 456 ( 153 ) 1,239 Income before income tax expense 101,309 47,367 121,991 140,073 Income tax expense 13,803 5,682 15,150 16,535 Net income $ 87,506 $ 41,685 $ 106,841 $ 123,538 Net income per weighted-average common and common-equivalent share: Basic $ 0.50 $ 0.24 $ 0.62 $ 0.72 Diluted $ 0.49 $ 0.24 $ 0.61 $ 0.71 Weighted-average common and common-equivalent shares outstanding: Basic 173,943 170,744 172,881 171,053 Diluted 177,138 174,449 176,038 175,164 Cash dividends per common share $ 0.055 $ 0.050 $ 0.165 $ 0.150 The accompanying notes are an integral part of these consolidated financial statements. 3 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Three-months Ended Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (unaudited) (unaudited) Net income $ 87,506 $ 41,685 $ 106,841 $ 123,538 Other comprehensive income (loss), net of tax: Available-for-sale investments: Net unrealized gain (loss), net of tax of $2,855 and ($5) in the three-month periods and net of tax of $1,067 and $502 in the nine-month periods, respectively ( 2,308 ) 265 6,282 4,827 Reclassification of credit (recovery) loss on investments into current operations — — 75 — Reclassification of net realized (gain) loss into current operations ( 786 ) ( 294 ) ( 3,591 ) ( 716 ) Net change related to available-for-sale investments ( 3,094 ) ( 29 ) 2,766 4,111 Foreign currency translation adjustments: Foreign currency translation adjustments 2,098 ( 1,099 ) ( 3,364 ) ( 1,544 ) Net change related to foreign currency translation adjustments 2,098 ( 1,099 ) ( 3,364 ) ( 1,544 ) Other comprehensive income (loss), net of tax ( 996 ) ( 1,128 ) ( 598 ) 2,567 Total comprehensive income $ 86,510 $ 40,557 $ 106,243 $ 126,105 The accompanying notes are an integral part of these consolidated financial statements. 4 COGNEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) September 27, 2020 December 31, 2019 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 298,356 $ 171,431 Current investments, amortized cost of $94,761 and $235,610 in 2020 and 2019, respectively, allowance for expected credit losses of $0 in 2020 and 2019 95,365 240,470 Accounts receivable, less reserves of $913 and $1,821 in 2020 and 2019, respectively 127,755 103,447 Unbilled revenue 15,389 4,782 Inventories 53,860 60,261 Prepaid expenses and other current assets 37,411 26,840 Total current assets 628,136 607,231 Non-current investments, amortized cost of $613,838 and $431,633 in 2020 and 2019, respectively, allowance for expected credit losses of $75 and $0 in 2020 and 2019, respectively 619,343 433,452 Property, plant, and equipment, net 81,225 89,443 Operating lease assets 24,942 17,522 Goodwill 243,129 243,445 Intangible assets, net 16,482 39,490 Deferred income taxes 439,574 449,519 Other assets 7,684 5,833 Total assets $ 2,060,515 $ 1,885,935 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 21,464 $ 17,866 Accrued expenses 68,348 52,199 Accrued income taxes 8,006 30,333 Deferred revenue and customer deposits 33,717 14,432 Operating lease liabilities 7,863 5,647 Total current liabilities 139,398 120,477 Non-current operating lease liabilities 20,053 12,326 Deferred income taxes 326,703 332,344 Reserve for income taxes 11,325 11,563 Non-current accrued income taxes 48,915 51,113 Other liabilities 8,292 2,402 Total liabilities 554,686 530,225 Shareholders’ equity: Preferred stock, $.01 par value – Authorized: 400 shares in 2020 and 2019, respectively, no shares issued and outstanding — — Common stock, $.002 par value – Authorized: 300,000 shares in 2020 and 2019, respectively, issued and outstanding: 174,633 and 172,440 shares in 2020 and 2019, respectively 349 345 Additional paid-in capital 762,832 639,372 Retained earnings 780,521 753,268 Accumulated other comprehensive loss, net of tax ( 37,873 ) ( 37,275 ) Total shareholders’ equity 1,505,829 1,355,710 Total liabilities and shareholders' equity $ 2,060,515 $ 1,885,935 The accompanying notes are an integral part of these consolidated financial statements. 5 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine-months Ended September 27, 2020 September 29, 2019 (unaudited) Cash flows from operating activities: Net income $ 106,841 $ 123,538 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 32,076 33,442 Depreciation of property, plant, and equipment 16,467 15,800 Amortization of intangible assets 3,437 2,119 Intangible asset impairment charges 19,571 — Excess and obsolete inventory charges 9,386 4,121 Operating lease asset impairment charges 2,534 — Amortization of discounts or premiums on investments 765 ( 563 ) Realized gain on sale of investments ( 3,591 ) ( 716 ) Credit loss on investments 75 — Revaluation of contingent consideration ( 114 ) ( 1,401 ) Change in deferred income taxes 3,194 ( 1,805 ) Change in operating assets and liabilities: Accounts receivable ( 23,878 ) 11,387 Unbilled revenue ( 10,606 ) ( 2,900 ) Inventories ( 3,065 ) 13,898 Prepaid expenses and other current assets ( 10,718 ) 5,827 Accounts payable 3,587 ( 3,398 ) Accrued expenses 17,028 ( 11,827 ) Accrued income taxes ( 23,627 ) ( 1,043 ) Deferred revenue and customer deposits 19,066 698 Other 1,022 ( 1,616 ) Net cash provided by operating activities 159,450 185,561 Cash flows from investing activities: Purchases of investments ( 601,447 ) ( 883,363 ) Maturities and sales of investments 567,245 781,929 Purchases of property, plant, and equipment ( 9,829 ) ( 13,518 ) Net cash provided by (used in) investing activities ( 44,031 ) ( 114,952 ) Cash flows from financing activities: Issuance of common stock under stock plans 91,390 31,780 Repurchase of common stock ( 51,036 ) ( 61,690 ) Payment of dividends ( 28,554 ) ( 25,682 ) Payment of contingent consideration ( 1,039 ) — Net cash provided by (used in) financing activities 10,761 ( 55,592 ) Effect of foreign exchange rate changes on cash and cash equivalents 745 ( 1,528 ) Net change in cash and cash equivalents 126,925 13,489 Cash and cash equivalents at beginning of period 171,431 108,212 Cash and cash equivalents at end of period $ 298,356 $ 121,701 The accompanying notes are an integral part of these consolidated financial statements. 6 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of June 28, 2020 173,047 $ 346 $ 710,412 $ 702,597 $ ( 36,877 ) $ 1,376,478 Issuance of common stock under stock plans 1,586 3 43,152 — — 43,155 Repurchase of common stock — — — — — — Stock-based compensation expense — — 9,268 — — 9,268 Payment of dividends — — — ( 9,582 ) — ( 9,582 ) Net income — — — 87,506 — 87,506 Net unrealized gain (loss) on available-for-sale investments, net of tax of $2,855 — — — — ( 2,308 ) ( 2,308 ) Reclassification of credit (recovery) loss on investments — — — — — — Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 786 ) ( 786 ) Foreign currency translation adjustment — — — — 2,098 2,098 Balance as of September 27, 2020 (unaudited) 174,633 $ 349 $ 762,832 $ 780,521 $ ( 37,873 ) $ 1,505,829 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of June 30, 2019 170,661 $ 341 $ 578,871 $ 649,234 $ ( 36,806 ) $ 1,191,640 Issuance of common stock under stock plans 236 1 5,362 — — 5,363 Repurchase of common stock — — — — — — Stock-based compensation expense — — 10,194 — — 10,194 Payment of dividends — — — ( 8,536 ) — ( 8,536 ) Net income — — — 41,685 — 41,685 Net unrealized gain (loss) on available-for-sale investments, net of tax of ($5) — — — — 265 265 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 294 ) ( 294 ) Foreign currency translation adjustment — — — — ( 1,099 ) ( 1,099 ) Balance as of September 29, 2019 (unaudited) 170,897 $ 342 $ 594,427 $ 682,383 $ ( 37,934 ) $ 1,239,218 The accompanying notes are an integral part of these consolidated financial statements. 7 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ ( 37,275 ) $ 1,355,710 Issuance of common stock under stock plans 3,408 6 91,384 — — 91,390 Repurchase of common stock ( 1,215 ) ( 2 ) — ( 51,034 ) — ( 51,036 ) Stock-based compensation expense — — 32,076 — — 32,076 Payment of dividends — — — ( 28,554 ) — ( 28,554 ) Net income — — — 106,841 — 106,841 Net unrealized gain (loss) on available-for-sale investments, net of tax of $1,067 — — — — 6,282 6,282 Reclassification of credit loss on investments — — — — 75 75 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 3,591 ) ( 3,591 ) Foreign currency translation adjustment — — — — ( 3,364 ) ( 3,364 ) Balance as of September 27, 2020 (unaudited) 174,633 $ 349 $ 762,832 $ 780,521 $ ( 37,873 ) $ 1,505,829 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity 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 1,475 3 31,777 — — 31,780 Repurchase of common stock ( 1,398 ) ( 3 ) — ( 61,687 ) — ( 61,690 ) Stock-based compensation expense — — 33,442 — — 33,442 Payment of dividends — — — ( 25,682 ) — ( 25,682 ) Net income — — — 123,538 — 123,538 Net unrealized gain (loss) on available-for-sale investments, net of tax of $502 — — — — 4,827 4,827 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 716 ) ( 716 ) Foreign currency translation adjustment — — — — ( 1,544 ) ( 1,544 ) Balance as of September 29, 2019 (unaudited) 170,897 $ 342 $ 594,427 $ 682,383 $ ( 37,934 ) $ 1,239,218 The accompanying notes are an integral part of these consolidated financial statements. 8 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: Summary of Significant Accounting Policies As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles (GAAP). As a result of the adoption of ASU 2016-13 "Measurement of Credit Losses on Financial Instruments," Cognex Corporation (the "Company") has provided new disclosures related to credit losses in this Quarterly Report on Form 10-Q. 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, 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 September 27, 2020, and the results of its operations for the three-month and nine-month periods ended September 27, 2020 and September 29, 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 nine-month periods ended September 27, 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 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. Debt securities with remaining maturities greater than one year are classified as non-current investments. It is the Company’s policy to invest in debt securities with effective maturities that do not exceed ten years. Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax and credit losses, recorded in shareholders’ equity as other comprehensive income (loss). Realized gains and losses are included in current operations, along with the amortization of the discount or premium on debt securities arising at acquisition, and are calculated using the specific identification method. The Company’s limited partnership interest is accounted for using the cost method because the Company’s investment is less than 5% of the partnership and the Company has no influence over the partnership’s operating and financial policies. The carrying value of this investment has been reduced to zero, and therefore, distributions are recorded as investment income as they occur. Management monitors the carrying value of its investments in debt securities compared to their fair value to determine whether a credit loss or other type of impairment has occurred. If the fair value of a debt security is less than its amortized cost, the Company assesses whether the decline has resulted from a credit loss or other factors. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss exists and an allowance for credit losses is recorded. The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis of the security. 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 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. This information includes internal and external factors, historical and current events, reasonable and supportable forecasts including management's 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. 9 An impairment is recognized as a write-down if (i) the Company has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. If impairment is considered upon condition (i) or (ii) described above, the debt security's amortized cost basis is written-down to its fair value and the impairment is recognized in current operations. Subsequent increases in the fair value of the debt securities after the write-down are included in shareholders' equity as other comprehensive income. The differences between the new amortized cost basis and the cash flows expected to be collected are accreted as interest income. Unrealized losses, that have not been recorded through an allowance for credit losses or write-down of the debt security, are recorded in shareholders' equity as other comprehensive loss, net of the applicable taxes. Accounts Receivable The Company extends credit with various payment terms to customers based upon an evaluation of their financial condition. 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, 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. NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2019-12, "Simplifying the Accounting for Income Taxes" ASU 2019-12 applies to all entities within the scope of Topic 740, Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the following exceptions: 1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; 2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and 4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also simplify the accounting for income taxes by doing the following: 1) requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; 2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; 3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and 4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that included the enacted date. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted; however, an entity that elects to early adopt the amendments must adopt all the amendments in the same period. The amendments in this ASU related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Management does not expect ASU 2019-12 to have a material impact on the Company's consolidated financial statements and disclosures. 10 Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (Topic 848)" The amendments in this ASU apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. Management does not expect ASU 2020-04 to have a material impact on the Company's consolidated financial statements and disclosures. 11 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3: Fair Value Measurements 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 September 27, 2020 (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Money market instruments $ 3,926 $ — $ — Treasury bills — 270,091 — Corporate bonds — 259,887 — Asset-backed securities — 129,543 — Agency bonds — 28,274 — Sovereign bonds — 24,496 — Municipal bonds — 2,417 — Economic hedge forward contracts — 313 — Liabilities: Economic hedge forward contracts — 121 — Contingent consideration liabilities — — — The Company’s money market instruments are reported at fair value based upon the daily market price for identical assets in active markets, and are therefore classified as Level 1. The Company’s debt securities and forward contracts are reported at fair value based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. Management is responsible for estimating the fair value of these financial assets and liabilities, and in doing so, considers valuations provided by a large, third-party pricing service. For debt securities, this service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the daily valuations. The Company's forward contracts are typically traded or executed in over-the-counter markets with a high degree of pricing transparency. The market participants are generally large commercial banks. The Company recorded no gross credit losses or gross credit recoveries on debt securities for the three-month period ended September 27, 2020, and $ 160,000 and $ 85,000 , respectively, for the nine-month period ended September 27, 2020. No credit losses or recoveries on debt securities were recorded for the three-month or nine-month periods ended September 29, 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. 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 second quarter of 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 September 27, 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. 12 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis 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. These conditions 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 in the second quarter of 2020 (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 in the second quarter of 2020 (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. NOTE 4: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of the following (in thousands): September 27, 2020 December 31, 2019 Cash $ 294,430 $ 155,498 Money market instruments 3,926 15,933 Cash and cash equivalents 298,356 171,431 Corporate bonds 43,436 65,624 Asset-backed securities 34,536 66,680 Sovereign bonds 16,086 6,294 Municipal bonds 1,307 4,630 Treasury bills — 92,914 Certificate of deposit — 4,328 Current investments 95,365 240,470 Treasury bills 270,091 216,334 Corporate bonds 216,451 146,474 Asset-backed securities 95,007 46,403 Agency bonds 28,274 5,914 Sovereign bonds 8,410 16,005 Municipal bonds 1,110 2,322 Non-current investments 619,343 433,452 $ 1,013,064 $ 845,353 Asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement; corporate bonds consist of debt securities issued by both domestic and foreign companies; treasury bills consist of debt securities issued by the U.S. government; 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; 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, 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 $ 1,912,000 and $ 2,874,000 as of September 27, 2020 and December 31, 2019, respectively. 13 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. 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 September 27, 2020 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 43,208 $ 254 $ ( 26 ) $ 43,436 Asset-backed securities 34,277 259 — 34,536 Sovereign bonds 15,978 108 — 16,086 Municipal bonds 1,298 9 — 1,307 Non-current: Treasury bills 268,071 2,030 ( 10 ) 270,091 Corporate bonds 213,850 2,717 ( 116 ) 216,451 Asset-backed securities 94,270 737 — 95,007 Agency bonds 28,193 81 — 28,274 Sovereign bonds 8,349 61 — 8,410 Municipal bonds 1,105 5 — 1,110 $ 708,599 $ 6,261 $ ( 152 ) $ 714,708 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 September 27, 2020 (in thousands): Unrealized Loss Position For: Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Corporate bonds $ 42,058 $ ( 142 ) $ — $ — $ 42,058 $ ( 142 ) Treasury bills 11,543 ( 10 ) — — 11,543 ( 10 ) $ 53,601 $ ( 152 ) $ — $ — $ 53,601 $ ( 152 ) The Company recorded no gross credit losses or gross credit recoveries on debt securities for the three-month period ended September 27, 2020, and $ 160,000 and $ 85,000 , respectively, for the nine-month period ended September 27, 2020. No credit losses or recoveries on debt securities were recorded for the three-month or nine-month periods ended September 29, 2019. Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations. The following table summarizes the allowance for credit losses activity for the nine-month period ended September 27, 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 ) Write-offs — Balance as of September 27, 2020 $ 75 14 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 $ 787,000 and $ 1,000 , respectively, for the three-month period ended September 27, 2020, and $ 361,000 and $ 67,000 , respectively, for the three-month period ended September 29, 2019. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 3,613,000 and $ 22,000 , respectively, for the nine-month period ended September 27, 2020, and $ 818,000 and $ 103,000 , respectively, for the nine-month period ended September 29, 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 September 27, 2020 (in thousands): <1 year 1-2 Years 2-3 Years 3-4 Years 4-5 Years Total Treasury bills $ — $ 167,677 $ 98,353 $ 4,061 $ — $ 270,091 Corporate bonds 43,436 86,619 126,966 2,866 — 259,887 Asset-backed securities 34,536 45,513 45,457 52 3,985 129,543 Agency bonds — 5,933 22,341 — — 28,274 Sovereign bonds 16,086 4,973 3,437 — — 24,496 Municipal bonds 1,307 1,110 — — — 2,417 $ 95,365 $ 311,825 $ 296,554 $ 6,979 $ 3,985 $ 714,708 NOTE 5: Inventories Inventories consisted of the following (in thousands): September 27, 2020 December 31, 2019 Raw materials $ 25,021 $ 27,285 Work-in-process 3,666 5,503 Finished goods 25,173 27,473 $ 53,860 $ 60,261 The Company recorded provisions for excess and obsolete inventories of $ 9,386,000 for the nine-month period ended September 27, 2020, which reduced the carrying value of the inventories to their net realizable value. Charges of $ 7,718,000 were recorded in the second quarter of 2020 due to lower projected sales of excess inventories as a result of deteriorating global economic conditions from the COVID-19 pandemic. 15 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6: Leases The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. 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 September 27, 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 September 27, 2020. The total operating lease expense for the three-month periods ended September 27, 2020 and September 29, 2019 was $ 2,047,000 and $ 1,749,000 , respectively. The total operating lease cash payments for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 2,041,000 and $ 1,708,000 , 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 $ 22,000 for both of the three-month periods ended September 27, 2020 and September 29, 2019. The total operating lease expense for the nine-month periods ended September 27, 2020 and September 29, 2019 was $ 6,100,000 and $ 4,976,000 , respectively. The total operating lease cash payments for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 5,995,000 and $ 4,778,000 , 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 $ 84,000 and $ 255,000 for the nine-month periods ended September 27, 2020 and September 29, 2019, respectively. Future operating lease cash payments are as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2020 $ 2,228 2021 8,641 2022 6,363 2023 5,080 2024 2,445 2025 1,359 Thereafter 4,641 $ 30,757 The discounted present value of the future lease cash payments resulted in a lease liability of $ 27,916,000 and $ 17,973,000 as of September 27, 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 September 27, 2020 or September 29, 2019. The weighted-average discount rate was 4.1 % and 4.6 % for the leases outstanding as of September 27, 2020 and December 31, 2019, respectively. The weighted-average remaining lease term was 5.2 and 3.7 years for the leases outstanding as of September 27, 2020 and December 31, 2019, respectively. As part of the Company's restructuring plan (refer to Note 16), management closed ten leased offices as of the end of the second quarter of 2020, prior to the end of their lease terms. The carrying value of the lease assets associated with these ten offices was reduced to zero , resulting in operating lease asset impairment charges of $ 2,534,000 in the second quarter of 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 second quarter of 2020. Rental income was $ 0 and $ 76,000 for the three-month periods ended September 27, 2020 and September 29, 2019, respectively, and $ 77,000 and $ 234,000 for the nine-month periods ended September 27, 2020 and September 29, 2019, respectively. The Company is now fully occupying this building for its operations. 16 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Balance as of December 31, 2019 $ 243,445 Foreign exchange rate changes ( 316 ) Balance as of September 27, 2020 $ 243,129 The adverse impact of the COVID-19 pandemic on our business triggered a review of long-lived assets, including goodwill, for potential impairment during the second quarter of 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 nine-month periods ended September 27, 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. NOTE 8: Intangible Assets Amortized intangible assets consisted of the following (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value Distribution networks $ 38,060 $ 38,060 $ — Completed technologies 21,917 11,678 10,239 Customer relationships 10,578 6,980 3,598 In-process technologies 2,300 — 2,300 Non-compete agreements 710 422 288 Trademarks 110 53 57 Balance as of September 27, 2020 $ 73,675 $ 57,193 $ 16,482 Gross Carrying Value Accumulated Amortization Net Carrying Value Distribution networks $ 38,060 $ 38,060 $ — Completed technologies 31,987 9,160 22,827 Customer relationships 14,407 6,402 8,005 In-process technologies 8,200 — 8,200 Non-compete agreements 710 350 360 Trademarks 110 12 98 Balance as of December 31, 2019 $ 93,474 $ 53,984 $ 39,490 The adverse impact of the COVID-19 pandemic on our business triggered a review of long-lived assets, including intangible assets, for potential impairment during the second quarter of 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. 17 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 in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab Co. Ltd. ("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 September 27, 2020, estimated future amortization expense related to intangible assets was as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2020 $ 831 2021 3,272 2022 2,902 2023 2,211 2024 1,697 2025 1,374 Thereafter 1,895 $ 14,182 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. 18 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9: 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 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. An adverse change in any of these factors may result in the need for additional warranty provisions. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets. The changes in the warranty obligation were as follows (in thousands): Balance as of December 31, 2019 $ 4,713 Provisions for warranties issued during the period 2,671 Fulfillment of warranty obligations ( 1,798 ) Balance as of September 27, 2020 $ 5,586 NOTE 10: Derivative Instruments The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates. Currently, the Company enters into economic hedges to manage this risk. The economic hedges utilize foreign currency forward contracts with maturities of up to 45 days to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables. The gains and losses on these derivatives are intended to be offset by the changes in the fair value of the assets and liabilities being hedged. These economic hedges are not designated as hedging instruments for hedge accounting treatment. The Company had the following outstanding forward contracts (in thousands): September 27, 2020 December 31, 2019 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Euro 66,500 $ 77,643 18,000 $ 20,249 Korean Won 14,840,000 12,695 161,951,500 139,688 Mexican Peso 165,000 7,324 80,000 4,223 Japanese Yen 450,000 4,259 575,000 5,291 Hungarian Forint 1,305,000 4,174 870,000 2,962 British Pound 2,000 2,543 2,700 3,569 Taiwanese Dollar 41,675 1,430 37,450 1,256 Canadian Dollar 1,430 1,066 1,300 1,000 Singapore Dollar 1,310 951 845 628 Information regarding the fair value of the outstanding forward contracts was as follows (in thousands): Asset Derivatives Liability Derivatives Balance Fair Value Balance Fair Value Sheet Location September 27, 2020 December 31, 2019 Sheet Location September 27, 2020 December 31, 2019 Derivatives Not Designated as Hedging Instruments: Economic hedge forward contracts Prepaid expenses and other current assets $ 313 $ 857 Accrued expenses $ 121 $ 23 19 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 September 27, 2020 December 31, 2019 September 27, 2020 December 31, 2019 Gross amounts of recognized assets $ 313 $ 857 Gross amounts of recognized liabilities $ 121 $ 23 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 313 $ 857 Net amount of liabilities presented $ 121 $ 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 Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ ( 1,521 ) $ 469 $ ( 9,701 ) $ 535 20 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11: 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 Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Americas $ 86,482 $ 64,983 $ 215,696 $ 207,161 Europe 60,189 61,092 144,758 180,251 Greater China 77,292 30,624 135,593 89,256 Other Asia 27,110 26,626 91,358 79,188 $ 251,073 $ 183,325 $ 587,405 $ 555,856 The following table summarizes disaggregated revenue information by revenue type (in thousands): Three-months Ended Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Standard products and services $ 174,797 $ 139,887 $ 486,458 $ 473,610 Application-specific customer solutions 76,276 43,438 100,947 82,246 $ 251,073 $ 183,325 $ 587,405 $ 555,856 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 $ 12,708,000 and $ 3,963,000 as of September 27, 2020 and December 31, 2019, respectively. Accounts Receivable, Contract Assets, and Contract Liabilities Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value. 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 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. On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. 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 $ 0 and $ 600,000 for the three-month and nine-month periods ended September 27, 2020, respectively. The Company recorded credit losses on accounts receivable of $ 125,000 and $ 215,000 for the three-month and nine-month periods ended September 29, 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 nine-month period ended September 27, 2020 (in thousands): Balance as of December 31, 2019 $ 530 Increases to the allowance for credit losses 600 Write-offs ( 217 ) Balance as of September 27, 2020 $ 913 21 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the deferred revenue and customer deposits activity for the nine-month period ended September 27, 2020 (in thousands): Balance as of December 31, 2019 $ 14,432 Increases to deferred revenue and customer deposits 93,830 Recognition of revenue ( 75,023 ) Foreign exchange rate changes 478 Balance as of September 27, 2020 $ 33,717 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. 22 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 12: Stock-Based Compensation Expense Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units ("RSUs"). As of September 27, 2020, the Company had 16,450,000 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. RSUs generally vest upon three years of continuous employment or incrementally over such three-year period. Participants are not entitled to dividends on RSUs. Stock Options The following table summarizes the Company’s stock option activity for the nine-month period ended September 27, 2020: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 12,899 $ 37.95 Granted 975 51.58 Exercised ( 3,408 ) 26.82 Forfeited or expired ( 529 ) 50.34 Outstanding as of September 27, 2020 9,937 $ 42.45 7.03 $ 191,245 Exercisable as of September 27, 2020 3,807 $ 33.58 5.83 $ 107,040 Options vested or expected to vest as of September 27, 2020 (1) 9,125 $ 41.73 6.92 $ 182,232 (1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options. The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Three-months Ended Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Risk-free rate — % 2.7 % 1.6 % 2.7 % Expected dividend yield — % 0.39 % 0.43 % 0.39 % Expected volatility — % 37 % 37 % 37 % Expected term (in years) — 5.1 6.0 5.2 No stock options were granted during the three-month period ended September 27, 2020. Risk-free rate The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option. Expected dividend yield Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date. Expected volatility The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock. 23 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Expected term The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. There were no stock options granted during the three-month period ended September 27, 2020. The weighted-average grant-date fair values of stock options granted during the three-month period ended September 29, 2019 was $ 18.42 . The weighted-average grant-date fair values of stock options granted during the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 18.52 and $ 18.58 , respectively. The total intrinsic values of stock options exercised for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 62,787,000 and $ 5,746,000 , respectively. The total intrinsic values of stock options exercised for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 116,600,000 and $ 42,545,000 , respectively. The total fair values of stock options vested for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 1,331,000 and $ 1,213,000 , respectively. The total fair values of stock options vested for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 39,282,000 and $ 32,072,000 , respectively. Restricted Stock Units (RSUs) The following table summarizes the Company's RSUs activity for the nine-month period ended September 27, 2020: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2019 150 $ 48.63 Granted 438 51.73 Vested — — Forfeited or expired ( 34 ) 50.60 Nonvested as of September 27, 2020 554 $ 50.96 The weighted-average grant-date fair values of RSUs granted during the three-month periods ended September 27, 2020 and September 29, 2019 were $ 67.14 and $ 45.20 , respectively. The weighted-average grant-date fair values of RSUs granted during the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 51.73 and $ 45.20 , respectively. There were no RSUs that vested during the three-month and nine-month periods ended September 27, 2020 and September 29, 2019. Stock-Based Compensation Expense The Company stratifies its employee population into two groups: 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 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 September 27, 2020, total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was $ 56,150,000 , which is expected to be recognized over a weighted-average period of 1.8 years. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended September 27, 2020 were $ 9,268,000 and $ 1,524,000 , respectively, and for the three-month period ended September 29, 2019 were $ 10,194,000 and $ 1,804,000 , respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended September 27, 2020 were $ 32,076,000 , which includes credits of $ 1,401,000 relating to grants cancelled as a result of the Company's workforce reduction, and $ 5,365,000 , respectively, and for the nine-month period ended September 29, 2019 were $ 33,442,000 and $ 5,839,000 , respectively. No compensation expense was capitalized as of September 27, 2020 or December 31, 2019. 24 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Cost of revenue $ 324 $ 334 $ 1,041 $ 1,114 Research, development, and engineering 2,815 3,616 10,582 11,633 Selling, general, and administrative 6,129 6,244 20,453 20,695 $ 9,268 $ 10,194 $ 32,076 $ 33,442 NOTE 13: 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 September 27, 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 nine-month period ended September 27, 2020, leaving a remaining balance of $ 78,652,000 . No shares were repurchased during the three-month period ended September 27, 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. Purchases under this March 2020 program will commence upon completion of the October 2018 program. The Company may repurchase shares under these programs in future periods depending upon a variety of factors, including, among other things, the impact of dilution from employee equity awards, stock price, share availability, and cash requirements. 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. NOTE 14: Income Taxes 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 Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Income tax expense at U.S. federal statutory corporate tax rate 21 % 21 % 21 % 21 % State income taxes, net of federal benefit 1 % 1 % 1 % 1 % Foreign tax rate differential ( 5 ) % ( 7 ) % ( 5 ) % ( 7 ) % Tax credit ( 1 ) % ( 1 ) % ( 1 ) % ( 1 ) % Discrete tax benefit related to stock options ( 4 ) % ( 1 ) % ( 9 ) % ( 3 ) % Discrete tax expense (benefit) related to tax return filings — % ( 3 ) % 3 % ( 1 ) % Other 2 % 2 % 2 % 2 % Income tax expense 14 % 12 % 12 % 12 % The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United States, Ireland, and China. The statutory tax rate is 12.5 % in Ireland and 25 % in China, compared to the U.S. federal statutory corporate tax rate of 21 %. These differences resulted in a favorable impact to the effective tax rate of 5 percentage points for both the three-month and nine-month periods ended September 27, 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 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 4 and 9 percentage points for the three-month and nine-month periods ended September 27, 2020, respectively, and 1 and 3 percentage points for the same periods in 2019. In addition, the Company recorded other discrete tax items primarily related to the final true-up of the prior year tax accrual upon 25 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) filing the related tax return that resulted in an unfavorable impact to the effective tax rate of 3 percentage points for the nine-month period ended September 27, 2020, and a favorable impact to the effective tax rate of 3 and 1 percentage points for the three-month and nine-month periods ended September 29, 2019, respectively. Excluding the impact of these discrete items, the Company’s effective tax rate was 18 % of pre-tax income for the three-month and nine-month periods ended September 27, 2020, respectively, compared to 16 % for the same periods in 2019. The increase in the effective tax rate, excluding the impact of discrete items, was due to more of the Company's profits being earned and taxed in higher tax jurisdictions. During the nine-month period ended September 27, 2020, the Company recorded a $ 198,000 decrease in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled $ 212,000 for the nine-month period ended September 27, 2020. The Company’s reserve for income taxes, including gross interest and penalties, was $ 12,353,000 as of September 27, 2020, which included $ 11,325,000 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 $ 1,192,000 . 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. 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 2017 through 2019 remain open to examination by the Internal Revenue Service ("IRS") and various state tax authorities. The tax years 2016 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. The Company has filed its U.S. federal tax return in the fourth quarter of 2020 for tax year 2019, and as a result, is expected to record a discrete tax benefit in excess of $12,000,000 in the fourth quarter. This benefit was the result of new regulations issued by the IRS relating to the use of foreign tax credits as allowable to reduce the tax associated with foreign operations under Global Intangible Low-Taxed Income (“GILTI”). These credits were generated from taxes paid relating to the acquisition of Sualab in October 2019. NOTE 15: Weighted-Average Shares Weighted-average shares were calculated as follows (in thousands): Three-months Ended Nine-months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 Basic weighted-average common shares outstanding 173,943 170,744 172,881 171,053 Effect of dilutive equity awards 3,195 3,705 3,157 4,111 Weighted-average common and common-equivalent shares outstanding 177,138 174,449 176,038 175,164 Stock options to purchase 1,416,000 and 5,540,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 27, 2020, respectively, and 6,078,000 and 5,695,000 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 3,000 and 2,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 27, 2020, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. There were no anti-dilutive restricted stock units outstanding, on a weighted-average basis, during the three-month and nine-month periods ended September 29, 2019. 26 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 16: 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 $ 15,388,000 , of which $ 14,798,000 was recorded in the second quarter and $ 251,000 was recorded in the third quarter of 2020 and are included in “Restructuring charges” on the Consolidated Statements of Operations. The remaining charges are expected to be recognized during the fourth quarter of 2020. The following table summarizes the restructuring charges (in thousands): Total Amount Expected to be Incurred Incurred in the Three-months Ended September 27, 2020 Incurred in the Nine-months Ended September 27, 2020 One-time termination benefits $ 10,503 $ ( 36 ) $ 10,350 Contract termination costs 4,099 104 4,099 Other associated costs 786 183 600 $ 15,388 $ 251 $ 15,049 One-time termination benefits include severance, health insurance, and outplacement services for 181 employees who were either terminated during the second quarter of 2020, or were notified during the second quarter of 2020 that they would 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 second quarter of 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 primarily recognized in the second quarter of 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 11,117 3,995 600 15,712 Cash payments ( 8,133 ) ( 230 ) ( 412 ) ( 8,775 ) Non-cash restructuring charges — ( 3,145 ) — ( 3,145 ) Restructuring adjustments ( 767 ) 104 — ( 663 ) Foreign exchange rate changes 158 13 17 188 Balance as of September 27, 2020 $ 2,375 $ 737 $ 205 $ 3,317 Restructuring adjustments related to one-time termination benefits consisted primarily of the favorable true-up of severance estimates based on final agreements and health insurance estimates based on employee elections. Adjustments related to contract termination costs consisted primarily of lease early termination fees. 27 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 17: Subsequent Events On October 28, 2020, the Company’s Board of Directors declared a cash dividend of $ 0.06 per share. The dividend is payable on November 27, 2020 to all shareholders of record as of the close of business on November 13, 2020. 28