What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-11 compared with 2020-02-13 · 515 added, 448 removed, 766 unchanged (56% of the section changed)

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Schedule II – Valuation and Qualifying Accounts for the Years Ended December 31, 2020, 2019, and 2018

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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As described further in Notes 1 and 14 to the consolidated financial statements, the Company recognizes revenue from application-specific customer solutions.

For these transactions, revenue is recognized at the point in time control is transferred to the customer, which is when the solution is validated, and the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligation in the contract.

For these transactions, revenue is recognized at the point in time when the solution is validated, which is when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligation in the contract.

We identified revenue recognition related to application-specific customer solutions as a critical audit matter.

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Our audit procedures related to the revenue recognition of application-specific customer solutions included the following, among others.

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• We tested the design and operating effectiveness of internal controls related to the monitoring of application-specific customer solutions and the determination of the timing of revenue recognition.

• We evaluated management’s significant accounting policies related to these customer contracts for appropriate revenue recognition based on key terms and provisions.

For a sample of transactions, we inspected source documents, including the customer contract or purchase order, third-party shipping information, invoice, and relevant communications.

Income Taxes - Fair Value of Intellectual Property and Change in Accounting Policy for Global Intangible Low-Taxed Income (GILTI)

As described further in Notes 1 and 18 to the consolidated financial statements, effective December 31, 2019, the Company executed an intercompany sale of intellectual property that resulted in the establishment of a deferred tax asset and an income tax benefit in Ireland based on the fair value of the intellectual property.

From a United States tax perspective the sale is disregarded and any future tax deduction in Ireland will not be regarded when determining Global Intangible Low-Taxed Income (GILTI).

The Company determined that changing their accounting policy to recognize deferred tax assets and liabilities for basis differences that are expected to affect the amount of GILTI inclusion upon reversal is preferable.

As a result of this change in accounting policy, the Company recorded a deferred tax liability and corresponding deferred income tax expense representing the future GILTI tax implications related to the fair value of intellectual property transferred to Ireland.

We identified the Company’s determination of the fair value of the intellectual property sold and related change in accounting policy as a critical audit matter.

The principal considerations for our determination that the sale of intellectual property and change in accounting policy is a critical audit matter are that the determination of the fair value of the intellectual property relies on the use of management estimates related to forecasted future cash flows and discount rates.

This requires management to evaluate historical results and expectations of future operating performance based on relevant information available to them regarding expectations of industry performance, as well as, expectations for company-specific performance.

Determining the discount rate requires management to evaluate the appropriate risk premium based on their judgment of industry and company-specific risks.

Significant management judgments and estimates utilized to determine the fair value are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.

In addition, changing the Company’s accounting policy requires management to make a judgment as to the preferability of the accounting policy in relation to the financial statements taken as a whole.

Our audit procedures related to this critical audit matter included the following, among others.

We tested the design and operating effectiveness of internal controls related to management’s determination of the fair value of the Company’s intellectual property, including controls over the determination of key inputs related to forecasting of future cash flows and determination of the discount rate.

We evaluated management’s historical ability to achieve forecasted revenue and operating results.

We compared management’s forecasts of future revenue and operating results to third-party industry projections and historical operating results.

We performed sensitivity analysis on the Company’s future cash flows and discount rate to evaluate the reasonableness of management’s forecasts.

We utilized a valuation specialist to assist in testing the Company’s discounted cash flow model and in evaluating the reasonableness of significant assumptions to the model, including the discount rate.

We consulted with our national office and utilized individuals with specialized skill and knowledge in income tax accounting in evaluating the preferability of the change in accounting policy.

Business Combinations - Acquisition of Sualab Co., Ltd.

As described further in notes 1 and 21 to the consolidated financial statements, on October 16, 2019, the Company acquired Sualab Co., Ltd.

In accordance with ASC 805, Business Combinations , the Company allocated the purchase price to the identifiable assets acquired based on their fair values.

We identified the Company’s determination of the fair value of the identifiable intangible assets acquired as a critical audit matter.

The principal considerations for our determination that the fair value of identifiable intangible assets acquired is a critical audit matter are that the determination of the fair value of the intangible assets relies on the use of management estimates related to forecasted future cash flows and discount rates.

• For a sample of transactions, we inspected source documents, including the customer contract or purchase order, third-party shipping information, invoice, and evidence of acceptance.

Impairment Loss – Long Lived Assets of Sualab Co., Ltd.

As described further in Notes 1 and 9 to the consolidated financial statements, during the second quarter of the fiscal year ended December 31, 2020, the Company recorded an impairment charge of $19.6M related to certain definite and indefinite lived intangible assets.

The Company evaluates the recoverability of the carrying value of its intangible assets whenever events or circumstances indicate the carrying value may not be recoverable.

The identified assets did not pass the recoverability test, and accordingly, the Company recognized an impairment charge for the amount the carrying values of the assets exceeded their fair values.

The fair values were determined based on the present values of future cash flows using significant inputs and assumptions not observable in the market.

We identified the Company’s determination of the fair value of the identified indefinite and definite-lived intangible assets as a critical audit matter.

The principal considerations for our determination that the fair value of the identified indefinite and definite-lived intangible assets evaluated for impairment is a critical audit matter are that the determination of the fair value of the intangible assets relies on the use of management estimates related to forecasted future cash flows and discount rates.

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Our audit procedures related to the determination of the fair value of acquired intangible assets included the following, among others.

We tested the design and operating effectiveness of internal controls relating to management’s determination of the fair value of the acquired identifiable intangible assets, including controls over the determination of key inputs related to forecasting of future cash flows and determination of the discount rate.

Our audit procedures related to the determination of the fair value of the identified indefinite and definite-lived intangible assets evaluated for impairment included the following, among others.

• We tested the design and operating effectiveness of internal controls relating to management’s determination of the fair value of the identified indefinite and definite-lived intangible assets evaluated for impairment, including controls over the determination of key inputs and assumptions related to forecasting of future cash flows and determination of the discount rate.

• We evaluated management’s historical ability to achieve forecasted revenue and operating results.

• We compared management’s forecasts of future revenue and operating margin to third-party industry projections and historical operating results.

We performed sensitivity analysis on the Company’s future cash flows and discount rate to evaluate the reasonableness of management’s forecasts.

• We utilized a valuation specialist to assist in testing the Company’s discounted cash flow model and in evaluating the reasonableness of significant assumptions to the model, including the discount rate.

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February 11, 2021

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COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

2020 2019 2018

(In thousands, except per share amounts)

Revenue $ 811,020 $ 725,625 $ 806,338

Cost of revenue 206,421 189,754 206,052

Gross margin 604,599 535,871 600,286

Research, development, and engineering expenses 130,982 119,427 116,445

Selling, general, and administrative expenses 267,593 273,842 262,699

Restructuring charges (Note 22) 15,924 — —

Intangible asset impairment charges (Note 9) 19,571 — —

Operating income 170,529 142,602 221,142

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Other income (expense) ( 309 ) 1,212 ( 219 )

Income before income tax expense

Income before income tax expense (benefit) 186,911 162,994 234,574

Income tax expense (benefit) 10,725 ( 40,871 ) 15,307

Net income $ 176,186 $ 203,865 $ 219,267

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

Basic $ 1.02 $ 1.19 $ 1.27

Diluted $ 1.00 $ 1.16 $ 1.24

Weighted-average common and common-equivalent shares outstanding:

Basic 173,489 171,194 172,333

Diluted 176,592 175,269 177,406

Cash dividends per common share $ 2.225 $ 0.205 $ 0.185

(1) Prior period results have been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend which occurred in the fourth quarter of 2017.

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

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COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

2020 2019 2018

(In thousands)

Net income $ 176,186 $ 203,865 $ 219,267

Other comprehensive income (loss), net of tax:

Cash flow hedges:

Net unrealized gain (loss), net of tax of $0, $0, and ($5) in 2019, 2018, and 2017, respectively

Reclassification of net realized (gain) loss into current operations

Net change related to cash flow hedges

Available-for-sale investments:

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

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COGNEX CORPORATION – CONSOLIDATED BALANCE SHEETS

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Cash and cash equivalents $ 269,073 $ 171,431

Current investments

Accounts receivable, less reserves of $1,821 and $1,646 in 2019 and 2018, respectively

Current investments, amortized cost of $102,258 and $235,610 in 2020 and 2019, respectively, allowance for credit losses of $0 in 2020 and 2019 103,240 240,470

Accounts receivable, allowance for credit losses of $831 and $530 in 2020 and 2019, respectively 125,696 103,447

Unbilled revenue 5,632 4,782

Inventories 60,830 60,261

Prepaid expenses and other current assets 37,220 26,840

Total current assets 601,691 607,231

Non-current investments

Non-current investments, amortized cost of $390,417 and $431,633 in 2020 and 2019, respectively, allowance for credit losses of $0 in 2020 and 2019 395,125 433,452

Property, plant, and equipment, net 79,173 89,443

Operating lease assets 22,582 17,522

Goodwill 244,078 243,445

Intangible assets, net 15,555 39,490

Deferred income taxes 434,704 449,519

Other assets 7,794 5,833

Total assets $ 1,800,702 $ 1,885,935

LIABILITIES AND SHAREHOLDERS’ EQUITY

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Total shareholders’ equity 1,262,202 1,355,710

Total liabilities and shareholders' equity $ 1,800,702 $ 1,885,935

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

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COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2020 2019 2018

(In thousands)

Cash flows from operating activities:

Net income $ 176,186 $ 203,865 $ 219,267

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

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Depreciation of property, plant, and equipment 22,139 21,527 18,473

Loss (gain) on disposal of property, plant, and equipment 1,817 324 —

Amortization of intangible assets 4,364 3,373 3,076

Impairment of intangible assets

Intangible asset impairment charges 19,571 — —

Excess and obsolete inventory charges 9,908 5,296 2,985

Operating lease asset impairment charges 3,427 — —

Amortization of discounts or premiums on investments 1,274 ( 618 ) 108

Realized (gain) loss on sale of investments

Realized gain on sale of investments ( 4,119 ) ( 1,452 ) ( 501 )

Revaluation of contingent consideration ( 114 ) ( 1,401 ) ( 3 )

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Unbilled revenue ( 848 ) 3,530 ( 906 )

Inventories ( 10,319 ) 17,841 ( 19,931 )

Prepaid expenses and other current assets ( 9,909 ) 7,405 ( 9,750 )

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Deferred revenue and customer deposits 6,571 3,875 1,434

Other 4,548 4,255 ( 838 )

Net cash provided by operating activities 242,400 253,311 223,454

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Purchases of property, plant, and equipment ( 13,303 ) ( 21,745 ) ( 37,095 )

Cash paid for acquisition of business, net of cash acquired

Net cash paid from sale of discontinued business

Net cash used in investing activities

Business acquisitions 1,004 ( 166,911 ) ( 4,265 )

Net cash provided by (used in) investing activities 169,439 ( 157,336 ) ( 10,827 )

Cash flows from financing activities:

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

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COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Common Stock (1)

Common Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Shareholders’

(In thousands)

(In thousands) Shares Par Value

Balance as of December 31, 2017 173,507 $ 347 $ 461,338 $ 668,587 $ ( 34,599 ) $ 1,095,673

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Payment of dividends — — — ( 31,865 ) — ( 31,865 )

Net unrealized gain (loss) on cash flow hedges, net of tax of ($5)

Reclassification of net realized (gain) loss on cash flow hedges

Adjustment as a result of the adoption of ASU 2016-06 "Income Taxes - Intra-Entity Transfers Other than Inventory" — — — ( 5,961 ) — ( 5,961 )

Net income — — — 219,267 — 219,267

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($188) — — — — ( 1,185 ) ( 1,185 )

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Payment of dividends — — — ( 35,124 ) — ( 35,124 )

Adjustment as a result of the adoption of ASU 2016-06 "Income Taxes - Intra-Entity Transfers Other than Inventory" (Note 18)

Net income — — — 203,865 — 203,865

Net unrealized gain (loss) on available-for-sale investments, net of tax of $515 — — — — 5,219 5,219

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Payment of dividends — — — ( 390,508 ) — ( 390,508 )

Net income — — — 176,186 — 176,186

Net unrealized gain (loss) on available-for-sale investments, net of tax of $981 — — — — 6,478 6,478

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Balance as of December 31, 2020 175,790 $ 352 $ 807,739 $ 487,912 $ ( 33,801 ) $ 1,262,202

(1) Prior period amounts have been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend which occurred in the fourth quarter of 2017.

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

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Actual results could differ from those estimates.

Significant estimates and judgments include those related to revenue recognition, investments, accounts receivable, inventories, leases, long-lived assets, internal-use software, goodwill, warranty obligations, contingencies, derivative instruments, stock-based compensation, income taxes, and business combinations.

Significant estimates and judgments include those related to revenue recognition, investments, inventories, intangible assets, stock-based compensation, income taxes, business combinations, and restructuring charges.

Basis of Consolidation

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The financial statements of the Company’s foreign subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at the end of the year for assets and liabilities and average exchange rates during the year for results of operations.

The resulting foreign currency translation adjustment, net of tax, is recorded in shareholders’ equity as other comprehensive income (loss).

The resulting foreign currency translation adjustment, net of tax, is included in shareholders’ equity as other comprehensive income (loss).

Fair Value Measurements

The Company applies a three-level valuation hierarchy for fair value measurements.

The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.

The categorization of assets and liabilities within the valuation hierarchy is based on the lowest level of input that is significant to the measurement of fair value.

Level 1 inputs to the valuation methodology utilize unadjusted quoted market prices in active markets for identical assets and liabilities.

Level 2 inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

Level 3 inputs to the valuation methodology are unobservable inputs based on management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

A change to the level of an asset or liability within the fair value hierarchy is determined at the end of a reporting period.

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.

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

Debt securities with remaining maturities greater than one year are classified as long-term 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, 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.

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 investment-grade 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, included in shareholders’ equity as other comprehensive income (loss).

Realized gains and losses are calculated using the specific identification method.

Realized gains and losses, interest income, and the amortization of the discount or premium on debt securities arising at acquisition, are included in "Investment income" on the Consolidated Statements of Operations.

Management monitors its debt securities to determine whether a loss exists related to the credit quality of the issuer.

If the present value of the cash flows expected to be collected from the security is less than the amortized cost basis of the security, then a credit loss exists and an allowance against the security for credit losses is recorded.

The allowance is limited to the amount by which fair value is below amortized cost, recognizing that the investment could be sold at fair value.

Credit losses continue to be remeasured in subsequent reporting periods.

Credit losses and

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management monitors the carrying value of its investments in debt securities compared to their fair value to determine whether an other-than-temporary impairment has occurred.

If the fair value of a debt security is less than its amortized cost, the Company assesses whether the impairment is other-than-temporary.

In considering whether a decline in fair value is other-than-temporary, we consider many factors.

In its evaluation of its debt securities, management considers the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, our intent and ability to hold the security to expected recovery of value, and other meaningful information.

An impairment is considered other-than-temporary if (i) the Company has the intent to sell the security, (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, or (iii) the Company does not expect to recover the entire amortized cost basis of the security.

If impairment is considered other-than-temporary based upon condition (i) or (ii) described above, the entire difference between the amortized cost and the fair value of the security is recognized in current operations.

If an impairment is considered other-than-temporary based upon condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the security) is recognized in current operations and the amount relating to all other factors is recognized in shareholders' equity as other comprehensive income (loss).

recoveries related to debt securities are included in “Other income (expense)” on the Consolidated Statements of Operations.

When developing an estimate of expected credit losses, management considers all relevant information including historical experience, current conditions, and reasonable forecasts that project the expected future cash flows.

Accounts Receivable

The Company extends credit with various payment terms to customers based upon an evaluation of their financial condition.

The Company extends credit with various payment terms to customers based on an evaluation of their financial condition.

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

The Company establishes reserves 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, as well as various other factors.

Receivables are written off against these reserves 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.

The Company establishes an allowance against accounts receivable for credit losses when it determines receivables are at risk for collection based on 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 recovery of the credit loss.

Credit losses and recoveries related to accounts receivable are included in "Selling, general, and administrative expenses" on the Consolidated Statements of Operations.

Inventories are stated at the lower of cost and net realizable value.

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The Company’s inventory is subject to technological change or obsolescence.

The Company reviews inventory quantities on hand and estimates excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions, and records reserves to reduce the carrying value of inventories to their net realizable value.

The Company reviews inventory quantities on hand and estimates excess and obsolescence exposures based on assumptions about future demand, product transitions, and market conditions, and records reserves to reduce the carrying value of inventories to their net realizable value.

If actual future demand is less than estimated, additional inventory write-downs would be required.

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Upon retirement or disposition, the cost and related accumulated depreciation of the disposed assets are removed from the accounts, with any resulting gain or loss included in current operations.

The Company accounts for leases in accordance with Accounting Standard Codification (ASC) 842, "Leases." The core principle of ASC 842 is that a lessee should recognize on the balance sheet the assets and liabilities that arise from leases.

Internal-use Software

Internal-use software is software acquired, internally developed, or modified solely to meet the entity's internal needs, and during the software's development, no substantive plan exists to sell the software.

The accounting treatment for computer software developed for internal use depends upon the nature of activities performed at each stage of development.

The preliminary project stage includes conceptual formulation of design alternatives, determination of system requirements, vendor demonstrations, and final selection of vendors, and during this stage costs are expensed as incurred.

The application development stage includes software configuration, coding, hardware installation, and testing.

During this stage, certain costs are capitalized, including external direct costs of materials and services, as well as payroll and payroll-related costs for employees who are directly associated with the project, while certain costs are expensed as incurred, including training and data conversion costs.

The post-implementation stage includes support and maintenance, and during this stage costs are expensed as incurred.

Capitalization begins when both the preliminary project stage is completed and management commits to funding the project.

Capitalization ceases at the point the project is substantially complete and ready for its intended use, that is,

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

after all substantial testing is completed.

Costs of specified upgrades and enhancements to internal-use software are capitalized if it is probable that those expenditures result in additional functionality.

Capitalized costs are amortized on a straight-line basis over the estimated useful life.

At inception of a contract, the Company determines whether that contract is or contains a lease.

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The Company classifies a lease as a finance lease when it meets any of the following criteria at the lease commencement date:

a) the lease transfers ownership of the underlying asset to the Company by the end of the lease term;

b) the lease grants the Company an option to purchase the underlying asset that the Company is reasonably certain to exercise;

c) the lease term is for the major part of the remaining economic life of the underlying asset (the Company considers a major part to be 75% or more of the remaining economic life of the underlying asset);

d) the present value of the sum of the lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset (the Company considers substantially all the fair value to be 90% or more of the fair value of the underlying asset amount);

or e) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

(1) the lease transfers ownership of the underlying asset to the Company by the end of the lease term;

(2) the lease grants the Company an option to purchase the underlying asset that the Company is reasonably certain to exercise;

(3) the lease term is for the major part of the remaining economic life of the underlying asset (the Company considers a major part to be 75% or more of the remaining economic life of the underlying asset);

(4) the present value of the sum of the lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset (the Company considers substantially all the fair value to be 90% or more of the fair value of the underlying asset amount);

or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

When none of the criteria above are met, the Company classifies the lease as an operating lease.

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The lease liability is reduced by the cash payment less the interest each period.

Internal-use Software

The accounting treatment for computer software developed for internal use depends upon the nature of activities performed at each stage of development.

The application development stage includes software configuration, coding, hardware installation, and testing.

The post-implementation stage includes support and maintenance, and during this stage costs are expensed as incurred.

Capitalization begins when both the preliminary project stage is completed and management commits to funding the project.

Capitalization ceases at the point the project is substantially complete and ready for its intended use, that is, after all substantial testing is completed.

Costs of specified upgrades and enhancements to internal-use software are capitalized if it is probable that those expenditures result in additional functionality.

Capitalized costs are amortized on a straight line basis over the estimated useful life.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill is stated at cost.

The Company evaluates the possible impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of the goodwill may not be recoverable.

The Company evaluates the potential impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of the goodwill may not be recoverable.

The Company performs a qualitative assessment of goodwill to determine whether further impairment testing is necessary.

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

If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would proceed to perform a quantitative impairment test.

If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company would proceed to perform a quantitative impairment test.

Under this quantitative analysis, the fair value of the reporting unit is compared with its carrying value, including goodwill.

If the carrying amount exceeds the fair value of the reporting unit, the Company recognizes an impairment charge.

The Company estimates the fair value of its reporting unit using the income approach based upon a discounted cash flow model.

In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar businesses, to support the conclusions based upon the income approach.

If the carrying value exceeds the fair value of the reporting unit, the Company recognizes an impairment charge.

The Company estimates the fair value of its reporting unit using the income approach based on a discounted cash flow model.

Intangible Assets

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The useful lives of distribution networks range from eleven to twelve years , of completed technologies from five to eight years , of customer relationships from five to eight years , of non-compete agreements from three to seven years , and trademarks two years .

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.

The Company evaluates the possible impairment of long-lived assets, including intangible assets, whenever events or circumstances indicate the carrying value of the assets may not be recoverable.

At the occurrence of a certain event or change in circumstances, the Company evaluates the potential impairment of an asset by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset.

If the sum of the estimated future cash flows is less than the carrying value, the Company determines the amount of such impairment by comparing the fair value of the asset to its carrying value.

The fair value is based upon the present value of the estimated future cash flows using a discount rate commensurate with the risks involved.

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

The Company evaluates the potential impairment of intangible assets whenever events or circumstances indicate the carrying value of the assets may not be recoverable.

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.

Warranty Obligations

The Company warrants its products to be free from defects in material and workmanship for periods primarily ranging from one to three years from the time of sale based upon the product being purchased and the terms of the customer arrangement.

Warranty obligations are evaluated and recorded at the time of sale since it is probable that customers will make claims under warranties related to products that have been sold and the amount of these claims can be reasonably estimated based upon historical costs to fulfill claims.

The Company warrants its products to be free from defects in material and workmanship for periods primarily ranging from one to three years from the time of sale based on the product being purchased and the terms of the customer arrangement.

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.

1 unchanged sentence

Loss contingencies are accrued if the loss is probable and the amount of the loss can be reasonably estimated.

Legal costs associated with potential loss contingencies, such as patent infringement matters, are expensed as incurred.

Legal costs associated with potential loss contingencies are expensed as incurred.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments

Derivative instruments are recorded on the Consolidated Balance Sheets at fair value.

Changes in the fair value of the Company’s economic hedges utilizing foreign currency forward contracts are included in "Foreign currency gain (loss)" on the Consolidated Statements of Operations.

The Company recognizes all derivative instruments as either current assets or current liabilities at fair value on the Consolidated Balance Sheets.

When the Company is engaged in more than one outstanding derivative contract with the same counterparty and also has a legally enforceable master netting agreement with that counterparty, the “net” mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty.

The cash flows from derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the category for the cash flows from the hedged item.

Generally, this accounting policy election results in cash flows related to derivative instruments being classified as an operating activity on the Consolidated Statements of Cash Flows.

Revenue Recognition

8 unchanged sentences

The Company identifies contracts with customers as agreements that create enforceable rights and obligations, which typically take the form of customer contracts or purchase orders.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility of consideration is probable.

Identifying the Performance Obligations in the Contract

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On-site support services that are provided to the customer after the solution is deployed are accounted for as a separate performance obligation.

These solutions are provided to customers in a variety of industries, including the consumer electronics, logistics, and automotive industries.

These solutions are provided to customers in a variety of industries, including the consumer electronics and logistics industries.

Shipping and handling activities for which the Company is responsible under the terms and conditions of the sale are not accounted for as performance obligations but as fulfillment costs.

8 unchanged sentences

The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances.

The Company does not grant customers the explicit right to return product.

However, from time to time, the Company may allow a customer to return a product.

As a practical expedient, the Company estimates the transaction price using the expected value based on its history of return experience using a portfolio approach in

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

which the Company’s total revenue is reduced by an estimate of total customer returns.

Management reasonably expects that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately.

Allocating the Transaction Price to the Performance Obligations

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When credit is granted to customers, payment is typically due 30 to 90 days from billing.

The Company's contracts have an original expected duration of less than one year, and therefore as a practical expedient, the Company has elected to ignore the impact of the time value of money on a

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contract and to expense sales commissions.

The Company's contracts have an original expected duration of less than one year, and therefore as a practical expedient, the Company has elected to ignore the impact of the time value of money on a contract and to expense sales commissions.

The Company recognizes an asset for costs to fulfill a contract if the costs relate directly to the contract and to future performance, and the costs are expected to be recovered.

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Research and Development

Research and development costs for internally-developed or acquired products are expensed when incurred until technological feasibility has been established for the product.

Research and development costs primarily include personnel-related costs, outside services, and prototyping materials.

Research and development costs are expensed when incurred until technological feasibility has been established for the product.

Thereafter, all software costs may be capitalized until the product is available for general release to customers.

1 unchanged sentence

Historically, the time incurred between beta and general release to customers has been short, and therefore, the costs have been insignificant.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising Costs

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

The Company has reserved a specific number of shares of its authorized but unissued shares for issuance upon the exercise of stock options or the settlement of restricted stock units.

When a stock option is exercised or a restricted stock unit is settled, the Company issues new shares from this pool.

The Company has reserved a specific number of shares of its authorized but unissued shares for issuance upon the exercise of stock options or the settlement of RSUs.

When a stock option is exercised or an RSU is settled, the Company issues new shares from this pool.

The fair values of stock options are estimated on the grant date using a binomial lattice model.

Management is responsible for determining the appropriate valuation model and estimating these fair values, and in doing so, considers a number of factors, including information provided by an outside valuation advisor.

The fair value of RSUs are determined based upon the market value of the Company's common stock on the grant date.

The fair value of RSUs is determined based on the market value of the Company's common stock on the grant date.

The Company recognizes compensation expense related to stock options and RSUs using the graded attribution method, in which expense is recognized on a straight-line basis over the service period for each separately vesting portion of the stock option or RSU as if the award was, in substance, multiple awards.

The amount of compensation expense recognized at the end of the vesting period is based upon the number of awards for which the requisite service has been completed.

The amount of compensation expense recognized at the end of the vesting period is based on the number of awards for which the requisite service has been completed.

No compensation expense is recognized for awards that are forfeited for which the employee does not render the requisite service.

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The Company applies estimated forfeiture rates to its unvested awards to arrive at the amount of compensation expense that is expected to be recognized over the requisite service period.

At the end of each separately vesting portion of an award, the expense that was recognized by applying the estimated forfeiture rate is compared to the expense that should be recognized based upon the employee’s service, and an increase or decrease to compensation expense is recorded to true up the final expense.

At the end of each separately vesting portion of an award, the expense that was recognized by applying the estimated forfeiture rate is compared to the expense that should be recognized based on the employee’s service, and an increase or decrease to compensation expense is recorded to true up the final expense.

The Company recognizes a tax position in its financial statements when that tax position, based solely upon its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority.

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It is the Company’s policy to record estimated interest and penalties as income tax expense and tax credits as a reduction in income tax expense.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.

Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

In December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law.

The Tax Act imposed a minimum tax on foreign earnings related to intangible assets, known as the Global Intangible Low-Taxed Income (GILTI) tax In the fourth quarter of 2019, the Company elected to account for the impact of the GILTI minimum tax in deferred taxes, a change from the Company’s initial election made in the third quarter of 2018 whereby the GILTI minimum tax was included in income tax expense as incurred on an annual basis.

Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.

Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Tax Cuts and Jobs Act of 2017 imposed a minimum tax on foreign earnings related to intangible assets, known as the Global Intangible Low-Taxed Income (GILTI) tax.

In 2019, the Company elected to account for the impact of the GILTI minimum tax in deferred taxes, a change from the Company’s initial election made in 2018 whereby the GILTI minimum tax was included in income tax expense as incurred on an annual basis.

The change is considered preferable, as it appropriately matches the Company’s current and deferred income tax implications.

1 unchanged sentence

Amounts collected from customers and retained by the Company during tax holidays are recognized as non-operating income when earned.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Income Per Share

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Accumulated other comprehensive loss, net of tax, consists of foreign currency translation adjustment losses of $ 36,912,000 and $ 38,027,000 , as of December 31, 2020 and December 31, 2019, respectively;

net unrealized gains on available-for-sale investments of $ 2,023,000 as of December 31, 2019 and net unrealized losses on available-for-sale investments of $ 1,744,000 as of December 31, 2018;

net unrealized gains on available-for-sale investments of $ 4,382,000 and $ 2,023,000 as of December 31, 2020 and December 31, 2019, respectively;

and losses on currency swaps, net of gains on long-term intercompany loans of $ 1,271,000 at each year end.

1 unchanged sentence

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade receivables.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and accounts receivable.

The Company has certain domestic and foreign cash balances that exceed the insured limits set by the Federal Deposit Insurance Corporation (FDIC) in the United States and equivalent regulatory agencies in foreign countries.

The Company primarily invests in investment-grade debt securities and has established guidelines relative to credit ratings, diversification, and maturities of its debt securities that maintain safety and liquidity.

The Company has not experienced any significant realized losses on its debt securities.

The Company has historically not experienced any significant realized losses on its debt securities.

The Company has two large customers that each represented a significant portion of revenue in 2020 and accounts receivable as of December 31, 2020.

The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.

The Company has not experienced any significant losses related to the collection of its accounts receivable.

The Company has historically not experienced any significant losses related to the collection of its accounts receivable.

A significant portion of the Company's product is manufactured by a third-party contractor located in Indonesia.

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Certain components are presently sourced from a single vendor that is selected based on price and performance considerations.

In the event of a supply disruption from a single-source vendor, these components may be purchased from alternative vendors, which may result in manufacturing delays based on the lead time of the new vendor.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

key electronic and mechanical components that are purchased from strategic suppliers, such as processors or imagers, are fundamental to the design of Cognex products.

Certain key electronic and mechanical components that are purchased from strategic suppliers, such as processors or imagers, are fundamental to the design of Cognex products.

A disruption in the supply of these key components, such as a last-time-buy announcement, natural disaster, financial bankruptcy, or other event, may require us to purchase a significant amount of inventory at unfavorable prices resulting in lower gross margins and higher risk of carrying excess inventory.

If we are unable to secure adequate supply from alternative sources, we may have to redesign our products, which may lead to a delay in manufacturing and a possible loss of sales.

Derivative Instruments

Derivative instruments are recorded on the Consolidated Balance Sheets at fair value.

Changes in the fair value of derivatives are recorded each period in current operations or in shareholders' equity as other comprehensive income (loss), depending upon whether the derivative is designated as a hedge transaction and, if it is, the effectiveness of the hedge.

At the inception of the contract, the Company designates foreign currency forward exchange contracts as either a cash flow hedge of certain forecasted foreign currency denominated sales and purchase transactions or as an economic hedge.

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in shareholders' equity as other comprehensive income (loss), and reclassified into current operations in the same period during which the hedged transaction affects current operations and in the same financial statement line item as that of the forecasted transaction.

Cash flow hedges are evaluated for effectiveness quarterly.

Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current operations in the period in which ineffectiveness is determined.

Changes in the fair value of the Company’s economic hedges (not designated as a cash flow hedge) are reported in current operations.

The cash flows from derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the category for the cash flows from the hedged item.

Generally, this accounting policy election results in cash flows related to derivative instruments being classified as an operating activity on the Consolidated Statements of Cash Flows.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions.

This process includes linking all derivatives that are designated as cash flow hedges to specific forecasted transactions.

The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods.

When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.

The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item;

(2) the derivative expires or is sold, terminated, or exercised;

(3) it is no longer probable that the forecasted transaction will occur;

or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate or desired.

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income (loss) and is reclassified into current operations when the forecasted transaction affects current operations.

However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gain or loss that was accumulated in other comprehensive income (loss) is recognized immediately in current operations.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company carries the derivative at fair value on the Consolidated Balance Sheets, recognizing changes in the fair value in current operations, unless it is designated in a new hedging relationship.

The Company recognizes all derivative instruments as either current assets or current liabilities at fair value on the Consolidated Balance Sheets.

Accordingly, cash flow hedges are presented net on the Consolidated Balance Sheets.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Acquisitions

The Company determines whether a transaction qualifies as a business combination by applying the definition of a business, which requires the assets acquired and liabilities assumed to be inputs and processes that have the ability to contriubte to the creation of outputs.

The Company accounts for business combinations under the acquisition method of accounting, which requires the following steps:

(1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring the identifiable assets acquired and the liabilities assumed, and (4) recognizing and

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

measuring goodwill.

(1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring the identifiable assets acquired and the liabilities assumed, and (4) recognizing and measuring goodwill.

The Company measures the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.

Management is responsible for determining the appropriate valuation model and estimated fair values, and in doing so, considers a number of factors, including information provided by an outside valuation advisor.

Management primarily establishes fair value using the income approach based upon a discounted cash flow model.

Management primarily establishes fair value using the income approach based on a discounted cash flow model.

The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors.

Contingent consideration liabilities are reported at their estimated fair values based upon probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates.

Contingent consideration liabilities are reported at their estimated fair values based on probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates.

Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement.

The fair values of these contingent consideration liabilities are remeasured each reporting period with changes in fair value recorded in "Other income (expense)" on the Consolidated Statements of Operations.

The fair values of these contingent consideration liabilities are remeasured each reporting period with changes in fair value included in "Other income (expense)" on the Consolidated Statements of Operations.

Goodwill is recognized as of the acquisition date as the excess of the consideration transferred over the net amount of assets acquired and liabilities assumed.

Transaction costs are expensed as incurred.

New Pronouncements

Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Measurement of Credit Losses"

ASU 2016-13 applies to all reporting entities holding financial assets that are not accounted for at fair value through net income.

The amendments in this ASU eliminate the probable initial recognition threshold to recognize a credit loss under current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses.

In addition, this ASU broadens the information an entity must consider in developing the credit loss estimate, including the use of reasonable and supportable forecasted information.

The amendments in this ASU require that credit losses be presented as an allowance rather than as a write-down, and an entity will be able to record reversals of credit losses in current period net income.

The guidance in this ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.

This ASU should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

Available-for-sale debt securities and accounts receivable are the account balances primarily impacted by the guidance in this ASU.

Management adopted this ASU on January 1, 2020, and we do not expect this ASU to have a material impact on the Company's consolidated financial statements and disclosures.

Accounting Standards Update (ASU) 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software"

ASU 2018-15 applies to entities that are a customer in a hosting arrangement that is a service contract.

The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

Accordingly, the amendments in this ASU require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense.

Further, it requires the entity to expense the capitalized implementation costs over the term of the hosting arrangement.

In addition, it requires the presentation of the expenses related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and the classification of the payments for the capitalized implementation costs in the statement of cash flows in the same manner as the payments made for the fees associated with the hosting element.

The amendments in this ASU are effective for public entities for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019.

Management adopted this ASU on January 1, 2020, and we do not expect this ASU to have a material impact on the Company's consolidated financial statements and disclosures.

Restructuring Charges

One-time employee termination benefits as part of a restructuring activity exist at the date the plan of termination has been communicated to employees (the “communication date”) and meets all of the following criteria:

(1) management, having the authority to approve the action, has committed to the plan of termination, (2) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (3) the plan establishes the terms of the benefit arrangement in sufficient detail, and (4) actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made.

If employees are not required to render service until they are terminated in order to receive the termination benefits or will not be retained to render service beyond a minimum retention period, a liability for the termination benefits is recognized and measured at fair value at the communication date.

Otherwise, a liability is measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period.

Changes to the fair value of the liability are recorded as restructuring adjustments.

Closures of leased offices as part of a restructuring activity prior to the end of the contractual lease term are treated as abandoned right-to-use assets when the Company ceases to use the property for economic benefit and lacks either the intent or ability to sublease.

The lease asset is written down to zero as of the abandonment date.

Estimates of contract termination costs assume the Company will be obligated to pay the remaining rent over the contract period, and the lease liability continues to be recorded on the balance sheet.

Subsequent negotiations that result in early contract terminations are recorded as favorable restructuring adjustments.

Other associated costs typically associated with restructuring activities include costs to consolidate facilities, costs to relocate employees, and legal fees incurred to research local statutory requirements and prepare termination agreements.

These costs are recognized in the period in which the liability is incurred, which generally corresponds to the period in which the services are rendered.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Pronouncements

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

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Management does not expect ASU 2019-12 to have a material impact on the Company's consolidated financial statements and disclosures.

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.

Accounting Standards Update (ASU) 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs"

The amendments in this ASU clarify that for each reporting period, for callable debt with multiple call dates and call prices that may change at each call date, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess is amortized to the next call date.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early application is not permitted.

The amendments in this ASU should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.

Management does not expect ASU 2020-08 to have a material impact on the Company's consolidated financial statements and disclosures.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

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for Identical

Assets (Level 1)

Significant Other

Inputs (Level 2)

Unobservable Inputs (Level 3)

Assets (Level 1) Significant Other

Inputs (Level 2) Unobservable Inputs (Level 3)

Money market instruments $ 2,464 $ — $ —

Treasury bills

Corporate bonds — 236,142 —

Treasury bills 131,861

Asset-backed securities — 92,218 —

Agency bonds — 19,006 —

Sovereign bonds — 12,100 —

Municipal bonds — 7,038

Certificate of deposit

Economic hedge forward contracts — 265 —

Economic hedge forward contracts — 38 —

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.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The Company’s money market instruments are reported at fair value based on 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 on 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.

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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 did not record an other-than-temporary impairment of these financial assets in 2019 , 2018 , or 2017 .

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.

The Company's contingent consideration liabilities are reported at fair value based on 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 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.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the activity for the Company's liabilities measured at fair value using Level 3 inputs (in thousands):

Balance as of December 31, 2018 $ 2,554

Payment of GVi contingent consideration

Fair value adjustment to GVi contingent consideration ( 1,646 )

Fair value adjustment to Manatee contingent consideration

Fair value adjustment to Chiaro contingent consideration 245

Balance as of December 31, 2019 1,153

Fair value adjustment to GVi contingent consideration

Fair value adjustment to Chiaro contingent consideration ( 114 )

Payment of Chiaro contingent consideration ( 1,039 )

Balance as of December 31, 2020 $ —

The contingent consideration liability as of December 31, 2019 in the amount of $ 1,153,000 relates to the Company's acquisition of Chiaro Techologies, LLC in 2016.

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

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

in 2017 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 December 31, 2020.

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

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.

In 2017, the Company determined that the carrying value of the customer relationships arising from the acquisition of AQSense, S.L.

was impaired and reduced this value to zero, resulting in an impairment charge of $ 469,000 .

The Company did not record an impairment charge related to non-financial assets in 2019 or 2018.

Refer to Note 21 to the Consolidated Financial Statements for further information regarding acquisitions.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $ 3,427,000 (refer to Notes 7 and 22) that are included in "Restructuring charges" on the Consolidated Statements of Operations, and intangible asset impairment charges of $ 19,571,000 (refer to Note 9).

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

The Company did not record impairment charges related to non-financial assets in 2019 and 2018.

Cash, Cash Equivalents, and Investments

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

Cash $ 266,609 $ 155,498

Money market instruments 2,464 15,933

1 unchanged sentence

Treasury bills 35,403 92,914

Asset-backed securities

Corporate bonds 32,714 65,624

Asset-backed securities 25,160 66,680

Sovereign bonds 8,660 6,294

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Current investments 103,240 240,470

Treasury bills

Corporate bonds 203,428 146,474

Treasury bills 96,458 216,334

Asset-backed securities 67,058 46,403

Sovereign bonds

Agency bonds 19,006 5,914

Municipal bonds 5,735 2,322

Sovereign bonds 3,440 16,005

Non-current investments 395,125 433,452

$ 767,438 $ 845,353

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s cash balance included foreign bank balances totaling $ 225,853,000 and $ 123,499,000 as of December 31, 2020 and 2019, respectively.

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

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;

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

sovereign bonds consist of direct debt issued by foreign governments;

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

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

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

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 1,560,000 and $ 2,874,000 as of December 31, 2020 and 2019, respectively.

The following table summarizes the Company’s available-for-sale investments as of December 31, 2020 (in thousands):

Treasury bills

Asset-backed securities

Corporate bonds

Sovereign bonds

Municipal bonds

Losses Fair Value

Treasury bills $ 34,978 $ 425 $ — $ 35,403

3 unchanged sentences

Municipal bonds 1,297 6 — 1,303

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 December 31, 2019 (in thousands):

Unrealized Loss

Position For Less than

Unrealized Loss

Position For Greater than

Corporate bonds 200,549 2,879 — 203,428

Treasury bills 95,522 936 — 96,458

Asset-backed securities 66,329 729 — 67,058

Sovereign bonds

Corporate bonds

Agency bonds 18,913 93 — 19,006

Municipal bonds 5,725 10 5,735

As of December 31, 2019 , the Company did not recognize any other-than-temporary impairment of these investments.

In its evaluation, management considered the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, our intent and ability to hold the security to expected recovery of value, and other meaningful information.

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

Sovereign bonds 3,379 61 — 3,440

$ 492,675 $ 5,690 $ — $ 498,365

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 changes in the allowance for credit losses (in thousands):

Balance as of December 31, 2018 $ —

Balance as of December 31, 2019 —

Increases to the allowance for credit losses 160

Decreases to the allowance for credit losses ( 160 )

Balance as of December 31, 2020 $ —

The Company recorded gross realized gains on the sale of debt securities totaling $ 4,283,000 in 2020, $ 1,581,000 in 2019, and $ 669,000 in 2018, and gross realized losses on the sale of debt securities totaling $ 164,000 in 2020, $ 129,000 in 2019, and $ 168,000 in 2018.

These gains and losses are included in "Investment income" on the Consolidated Statement 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 other comprehensive income (loss).

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the effective maturity dates of the Company’s available-for-sale investments as of December 31, 2020 (in thousands):

Treasury bills

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

Corporate bonds $ 32,714 $ 69,534 $ 119,328 $ 13,488 $ 1,078 $ 236,142

Treasury bills 35,403 68,217 28,241 — — 131,861

Asset-backed securities 25,160 46,842 18,755 1,461 — 92,218

Agency bonds — 2,805 16,201 — — 19,006

Sovereign bonds 8,660 — 3,440 — — 12,100

Municipal bonds 1,303 5,096 639 — — 7,038

$ 103,240 $ 192,494 $ 186,604 $ 14,949 $ 1,078 $ 498,365

Inventories consisted of the following (in thousands):

2 unchanged sentences

Finished goods 29,250 27,473

$ 60,830 $ 60,261

The Company recorded provisions for excess and obsolete inventories of $ 9,908,000 and $ 5,296,000 in 2020 and 2019, respectively, which reduced the carrying value of the inventories to their net realizable value.

Estimates in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

Property, Plant, and Equipment

Property, plant, and equipment consisted of the following (in thousands):

Land $ 3,951 $ 3,951

Buildings 24,533 24,533

Building improvements 45,978 49,289

3 unchanged sentences

Furniture and fixtures 6,372 6,800

181,494 194,115

accumulated depreciation ( 102,321 ) ( 104,672 )

The cost of disposed property, plant, and equipment totaling $ 8,883,000 and $ 6,367,000 was removed from the asset balance in 2019 and 2018 , respectively.

The cost of disposed property, plant, and equipment totaling $ 8,559,000 and $ 6,367,000 was removed from the accumulated depreciation balance in 2019 and 2018 , respectively.

Gains and losses on these disposals were immaterial in both years.

Buildings include rental property with a cost basis of $ 800,000 as of December 31, 2019 and 2018 , and accumulated depreciation of $ 255,000 and $ 234,000 as of December 31, 2019 and 2018 , respectively.

On January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842, “Leases,” using the transition method of adoption, which allowed the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to the opening balance sheet as of the adoption date.

Accordingly, the Company recorded lease assets of $ 17,522,000 , current lease liabilities of $ 4,736,000 , and non-current lease liabilities of $ 12,669,000 on its Consolidated Balance Sheet as of January 1, 2019.

As part of the adoption, the Company elected a practical expedient package to be applied to all of its leases upon transition, and as a result, the Company did not reassess:

1) whether any expired or existing contracts contain leases;

$ 79,173 $ 89,443

The Company disposed of property, plant, and equipment with a cost basis of $ 26,829,000 and accumulated depreciation of $ 24,977,000 in 2020, resulting in a loss of $ 1,852,000 .

Disposals in 2020 included leasehold improvements and other assets associated with office closures.

The Company disposed of property, plant, and equipment with a cost basis of $ 8,883,000 and accumulated depreciation of $ 8,559,000 in 2019, resulting in a loss of $ 324,000 .

Buildings included rental property with a cost basis of $ 800,000 and accumulated depreciation of $ 255,000 as of December 31, 2019.

This rental property lease was terminated during the second quarter of 2020.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2) the lease classification for any expired or existing leases;

and 3) the accounting for initial direct costs for any existing leases.

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 December 31, 2019 .

As of December 31, 2020, there was one option to terminate that was accounted for in the determination of the lease term for one of the Company's leases outstanding, and no options to extend that were included in the determination of the lease term for leases outstanding.

As of December 31, 2019 there were no options to extend or terminate that were included in the determination of the lease term for leases outstanding.

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 December 31, 2019 .

There were no restrictions or covenants for the leases outstanding as of December 31, 2020 or December 31, 2019.

The total operating lease expense and operating lease cash payments in 2020 were $ 8,180,000 and $ 8,009,000 , 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 $ 275,000 in 2019.

Annual rental expense prior to the adoption of ASC 842 was $ 8,186,000 in 2018 and $ 6,738,000 in 2017 .

The total operating lease expense and operating lease cash payments in 2019 were $ 6,893,000 and $ 6,530,000 , 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 $ 123,000 and $ 275,000 in 2020 and 2019, respectively.

Annual rental expense was $ 8,186,000 in 2018.

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

Year Ended December 31,

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

The weighted-average discount rate was 4.6 % for the leases outstanding as of December 31, 2019 .

The weighted-average remaining lease term was 3.7 years for the leases outstanding as of December 31, 2019 .

The Company did not have any leases that have not yet commenced but that create significant rights and obligations as of December 31, 2019 .

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

Year Ended December 31, Amount

Thereafter 4,960

The discounted present value of the future lease cash payments resulted in a lease liability of $ 26,230,000 and $ 17,973,000 as of December 31, 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 December 31, 2020 or December 31, 2019.

The weighted-average discount rate was 4.0 % and 4.6 % for the leases outstanding as of December 31, 2020 and December 31, 2019, respectively.

The weighted-average remaining lease term was 5.1 and 3.7 years for the leases outstanding as of December 31, 2020 and December 31, 2019, respectively.

As part of the Company's restructuring plan (refer to Note 22), management closed eleven leased offices in 2020, prior to the end of their lease terms.

The carrying value of the lease assets associated with these offices was reduced to zero , resulting in operating lease asset impairment charges of $ 3,427,000 in 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, which totaled $ 2,877,000 as of December 31, 2020 and are included in "Operating lease liabilities" on the Consolidated Balance Sheets.

The Company did not record impairment charges related to operating lease assets in 2019 or 2018.

The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant during a portion of 2020, and for the entirety of 2019 and 2018.

This lease terminated prior to the end of its lease term during the second quarter of 2020, and the Company is now fully occupying this building for its operations.

Annual rental income totaled $ 77,000 in 2020, $ 311,000 in 2019, and $ 1,116,000 in 2018.

Rental income and related expenses are included in "Other income (expense)" on the Consolidated Statements of Operations.

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

Year Ended December 31,

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Balance as of December 31, 2018 $ 113,208

Balance as of December 31, 2018

Acquisition of Sualab Co., Ltd.

1 unchanged sentence

Balance as of December 31, 2019 243,445

Sualab Co., Ltd.

purchase price adjustment ( 1,004 )

Foreign exchange rate changes 1,637

Balance as of December 31, 2020 $ 244,078

Refer to Note 21 to the Consolidated Financial Statements for further information regarding acquisitions.

For its 2019 analysis of goodwill, management elected to perform a qualitative assessment.

Based upon this assessment, management believes that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount.

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

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 on this assessment, management concluded that events and circumstances did not indicate the fair value of the reporting unit was less than its carrying value.

For its 2020 annual analysis of goodwill, management elected to perform a qualitative assessment.

Based on this assessment, management believes it is more likely than not that the fair value of the reporting unit exceeds its carrying value.

Factors that management considered in these qualitative assessments include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management or strategy, changes in the composition or carrying amount of net assets, and market capitalization.

The Company did not record impairment charges related to goodwill in 2019 or 2018.

In the fourth quarter of 2020, the Company recorded a credit to goodwill in the amount of $ 1,004,000 , representing a purchase price adjustment related to the Company's 2019 acquisition of Sualab Co., Ltd.

Intangible Assets

I ntangible assets consisted of the following (in thousands):

Intangible assets consisted of the following (in thousands):

Value Accumulated

Amortization Net

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

1 unchanged sentence

Customer relationships 10,578 7,160 3,418

In-process technologies

Non-compete agreements 710 436 274

Trademarks 110 67 43

Balance as of December 31, 2020 $ 73,675 $ 58,120 $ 15,555

Value Accumulated

Amortization Net

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

1 unchanged sentence

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

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

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.

Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows (in thousands):

Year Ended December 31,

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Based on 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 on 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.

("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 .

Sualab in-process technologies were completed in the fourth quarter of 2020 and were accordingly reported as completed technologies subject to amortization as of December 31, 2020.

The Company did not record impairment charges related to intangible assets in 2019 or 2018.

Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows (in thousands):

Year Ended December 31, Amount

Thereafter 2,182

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

Company bonuses $ 19,343 $ —

Salaries, commissions, and payroll taxes 14,025 11,500

1 unchanged sentence

Warranty obligations 5,406 4,713

Acquisition deferred and contingent liabilities

Company bonuses

Vacation 3,641 4,708

Other 27,963 25,132

$ 77,264 $ 52,199

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

2 unchanged sentences

Fulfillment of warranty obligations ( 3,871 )

Foreign exchange rate changes

Balance as of December 31, 2019 4,713

2 unchanged sentences

Balance as of December 31, 2020 $ 5,406

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

15 unchanged sentences

In the ordinary course of business, the Company also accepts limited indemnification provisions from time to time, whereby it indemnifies customers for certain direct damages incurred in connection with bodily injury and property damage arising from the use of the Company’s products.

The maximum potential amount of future payments the Company could be required to make under these provisions is generally limited and is likely recoverable under the

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company’s insurance policies.

The maximum potential amount of future payments the Company could be required to make under these provisions is generally limited and is likely recoverable under the Company’s insurance policies.

As a result of this coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions, the Company believes the estimated fair value of these provisions is not material.

1 unchanged sentence

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.

The Company may enter into two types of hedges to manage this risk.

The first are economic hedges which 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 Company enters into economic hedges utilizing 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 second are cash flow hedges which utilize foreign currency forward contracts with maturities of up to 18 months to hedge specific forecasted transactions of the Company's foreign subsidiaries with the goal of protecting our budgeted revenues and expenses against foreign currency exchange rate changes compared to our budgeted rates.

These cash flow hedges are designated as hedging instruments for hedge accounting treatment.

The Company did not have any cash flow hedges as of December 31, 2019 and 2018.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2019

December 31, 2018

Notional Value

USD Equivalent

Notional Value

USD Equivalent

December 31, 2020 December 31, 2019

Currency Notional Value USD Equivalent Notional Value USD Equivalent

Derivatives Not Designated as Hedging Instruments:

British Pound

Euro 50,000 $ 61,342 18,000 $ 20,249

Mexican Peso 155,000 7,776 80,000 4,223

Korean Won 6,925,000 6,377 161,951,500 139,688

Japanese Yen 600,000 5,808 575,000 5,291

Hungarian Forint 1,330,000 4,494 870,000 2,962

British Pound 1,675 2,287 2,700 3,569

Taiwanese Dollar 38,035 1,362 37,450 1,256

Canadian Dollar

Singapore Dollar 1,465 1,110 845 628

Canadian Dollar 1,285 1,010 1,300 1,000

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

Asset Derivatives

Liability Derivatives

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Asset Derivatives Liability Derivatives

Location Fair Value Balance

Location Fair Value

December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Derivatives Not Designated as Hedging Instruments:

Economic hedge forward contracts

Prepaid expenses and other current assets

Accrued expenses

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Economic hedge forward contracts Prepaid expenses and other current assets $ 265 $ 857 Accrued expenses $ 38 $ 23

The following table summarizes 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

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

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

December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Gross amounts of recognized assets $ 265 $ 857 Gross amounts of recognized liabilities $ 38 $ 23

Gross amounts offset — — Gross amounts offset — —

Net amount of assets presented $ 265 $ 857 Net amount of liabilities presented $ 38 $ 23

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

Location in Financial Statements

Year Ended December 31,

Derivatives Designated as Hedging Instruments:

Gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations (effective portion)

Research, development, and engineering expenses

Selling, general, and administrative expenses

Total gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations

Location in Financial Statements Year Ended December 31,

2020 2019 2018

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) $ ( 12,308 ) $ 1,305 $ ( 285 )

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

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

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

Year Ended December 31,

2020 2019 2018

Americas $ 310,027 $ 277,155 265,175

Europe 208,787 227,738 311,914

Greater China 168,287 115,061 123,708

Other Asia 123,919 105,671 105,541

$ 811,020 $ 725,625 $ 806,338

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

Year Ended December 31,

2020 2019 2018

Standard products and services $ 674,830 $ 629,220 $ 654,509

Application-specific customer solutions 136,190 96,405 151,829

Costs to Fulfill a Contract

$ 811,020 $ 725,625 $ 806,338

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 6,846,000 and $ 3,963,000 as of December 31, 2020 and 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 reserves against its accounts receivable for potential credit losses.

Credit losses recognized on accounts receivable were immaterial for the year ended December 31, 2019 and 2018.

The Company maintains an allowance against its accounts receivable for 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.

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 following table summarizes changes in the allowance for credit losses (in thousands):

Balance as of December 31, 2018 $ 596

Increases to the allowance for credit losses 215

Write-offs ( 286 )

Foreign exchange rate changes 5

Balance as of December 31, 2019 530

Increases to the allowance for credit losses 600

Write-offs ( 300 )

Foreign exchange rate changes 1

Balance as of December 31, 2020 $ 831

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's estimate of expected credit losses in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

The following table summarizes the deferred revenue and customer deposits activity (in thousands):

13 unchanged sentences

The Company has 400,000 shares of authorized but unissued $ .01 par value preferred stock.

On April 25, 2018, the Company's shareholders approved an amendment to the Company's Articles of Organization to increase the authorized number of shares of common stock from 200,000,000 to 300,000,000 .

On April 25, 2018, the Company's shareholders approved an amendment to the Company's Articles of Organization to increase the authorized number of shares of $ .002 par value common stock from 200,000,000 to 300,000,000 .

In addition, on April 25, 2018, the Company's shareholders approved an amendment and restatement of the Company's 2001 General Stock Option Plan which provides for an increase in the number of available shares by 10,000,000 .

In October 2017, the Company’s Board of Directors declared a two -for-one stock split, effected in the form of a stock dividend, on the shares of the Company’s common stock.

Each shareholder of record on November 17, 2017 received an additional share of common stock for each share of common stock then held.

The stock was distributed on December 1, 2017.

The Company retained the current par value of $ .002 per share for all shares of common stock.

All references in the financial statements to the number of shares outstanding, number of shares repurchased, per-share amounts, and stock option data related to the Company’s common stock have been adjusted to reflect the effect of the stock split for all periods presented.

Shareholders’ equity reflects the stock split by reclassifying from “Additional paid in capital” and "Retained earnings" to “Common stock” an amount equal to the par value of the additional shares arising from the split.

Each outstanding share of common stock entitles the record holder to one vote on all matters submitted to a vote of the Company’s shareholders.

12 unchanged sentences

Total stock repurchases amounted to $ 203,822,000 in 2018.

The Company repurchased 1,398,000 shares at a cost of $ 61,690,000 in 2019 under this October 2018 program.

As of December 31, 2019, the Company repurchased 1,601,000 shares at a cost of $ 70,312,000 under this October 2018 program, leaving a remaining balance of $ 129,688,000 .

The Company repurchased 1,398,000 shares at a cost of $ 61,690,000 in 2019 and 1,215,000 shares at a cost of $ 51,036,000 in 2020 under this October 2018 program, leaving a remaining balance of $ 78,652,000 .

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 this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock 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.

The Company’s Board of Directors declared and paid cash dividends of $0.050 per share in the first, second, and third quarters of 2019, and $0.055 in the fourth quarter of 2019, as well as in the first, second, and third quarters of 2020.

The dividend was increased to $0.060 per share in the fourth quarter of 2020.

Total dividends amounted to $ 35,124,000 and $ 31,865,000 in 2019 and 2018, respectively.

Also, in the fourth quarter of 2020, an additional special cash dividend of $ 2.00 per share was declared and paid.

Total dividends amounted to $ 390,508,000 in 2020, which included $ 351,428,000 paid for the special cash dividend, $ 35,124,000 in 2019, and $ 31,865,000 in 2018.

Future dividends will be declared at the discretion of the Company's Board of Directors and will depend upon such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations.

2 unchanged sentences

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

As of December 31, 2019 , the Company had 17,300,802 shares available for grant.

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 employment and expire ten years from the grant date.

As of December 31, 2020, the Company had 16,260,393 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 on continuous employment and expire ten years from the grant date.

RSUs generally vest upon three years of continuous employment or incrementally over such three-year period.

2 unchanged sentences

The following table summarizes the Company’s stock option activity:

(in thousands)

(in thousands) Weighted-

Price Weighted-

(in years) Aggregate

Intrinsic Value

1 unchanged sentence

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

Granted 1,245 54.68

Exercised ( 4,565 ) 27.54

Forfeited or expired ( 609 ) 50.28

7 unchanged sentences

Year Ended December 31,

2020 2019 2018

Risk-free rate 1.4 % 2.7 % 2.9 %

3 unchanged sentences

Risk-free rate

The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.

The risk-free rate was based on a treasury instrument whose term was consistent with the contractual term of the option.

Expected dividend yield

1 unchanged sentence

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.

The expected volatility was based on 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.

Expected term

6 unchanged sentences

The following tables summarizes the Company's RSU activity:

(in thousands)

(in thousands) Weighted-Average

Grant Date Fair Value

Nonvested as of December 31, 2019 150 $ 48.63

Granted 446 52.09

Forfeited or expired ( 42 ) 50.61

Nonvested as of December 31, 2020 554 $ 51.27

The weighted-average grant-date fair value of RSUs granted in 2019 was $ 48.61 .

There were no RSUs granted in 2018.

There were no RSUs that vested in 2020, 2019, and 2018.

Stock-Based Compensation Expense

3 unchanged sentences

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

This resulted in a decrease to compensation expense of $ 499,000 in 2019, an increase to compensation expense of $ 1,283,000 in 2018 , and a decrease to compensation expense of $ 673,000 in 2017 .

This resulted in an increase to compensation expense of $ 1,787,000 in 2020, a decrease to compensation expense of $ 499,000 in 2019, and an increase to compensation expense of $ 1,283,000 in 2018.

As of December 31, 2020, total unrecognized compensation expense related to non-vested stock-based awards, including stock options and RSUs, was $ 51,825,000 , which is expected to be recognized over a weighted-average period of 1.7 years.

The total stock-based compensation expense and the related income tax benefit recognized was $ 45,589,000 and $ 7,756,000 , respectively, in 2019 , $ 41,090,000 and $ 7,317,000 , respectively, in 2018 , and $ 31,942,000 and $ 10,473,000 , respectively, in 2017 .

The total stock-based compensation expense and the related income tax benefit recognized was $ 42,661,000 , which includes credits of $ 1,401,000 relating to grants cancelled as a result of the Company's workforce reduction, and $ 6,569,000 , respectively, in 2020, $ 45,589,000 and $ 7,756,000 , respectively, in 2019, and $ 41,090,000 and $ 7,317,000 , respectively, in 2018.

No compensation expense was capitalized in 2020, 2019, or 2018.

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

Cost of revenue $ 1,365 $ 1,504 $ 2,447

1 unchanged sentence

Selling, general, and administrative 27,909 28,337 24,065

$ 42,661 $ 45,589 $ 41,090

Employee Savings Plan

5 unchanged sentences

Cognex stock is not an investment alternative and Company contributions are not made in the form of Cognex stock.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Domestic income before taxes was $ 39,425,000 in 2020, $ 31,396,000 in 2019, and $ 39,042,000 in 2018.

Foreign income before taxes was $ 147,486,000 in 2020, $ 131,598,000 in 2019, and $ 195,532,000 in 2018.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense consisted of the following (in thousands):

Income tax expense (benefit) consisted of the following (in thousands):

Year Ended December 31,

2020 2019 2018

Federal $ 160 $ 15,854 $ 10,624

State 921 2,108 ( 879 )

Foreign 13,197 30,670 6,307

14,278 48,632 16,052

Federal ( 18,266 ) 352,808 ( 1,271 )

State ( 556 ) 183 554

Foreign 15,269 ( 442,494 ) ( 28 )

( 3,553 ) ( 89,503 ) ( 745 )

$ 10,725 $ ( 40,871 ) $ 15,307

A reconciliation of the U.S.

federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows:

federal statutory corporate tax rate to the Company’s income tax expense (benefit), or effective tax rate, was as follows:

Year Ended December 31,

2020 2019 2018

Income tax expense at U.S.

2 unchanged sentences

Foreign tax rate differential ( 6 ) ( 9 ) ( 9 )

Tax credit ( 1 ) ( 1 ) —

Discrete tax benefit related to employee stock options ( 7 ) ( 4 ) ( 4 )

Discrete tax expense (benefit) related to Tax Act

Discrete tax expense related to write-down of deferred tax assets

Discrete tax expense (benefit) related to tax return filings ( 5 ) — —

Discrete tax expense related to German withholding

Discrete tax expense related to migration of acquired IP — 18 —

1 unchanged sentence

Discrete tax expense related to GILTI impact of change in tax structure — 214 —

Discrete tax expense (benefit) related to Tax Act — — ( 3 )

Other discrete tax events — ( 1 ) —

Income tax expense

Income tax expense (benefit) 6 % ( 25 ) % 7 %

Change in Accounting Policy

In 2019, the Company elected to change its method of accounting for the United States Global Intangible Low-Taxed Income (GILTI) tax from recording the tax impact in the period it is incurred to recognizing deferred taxes for temporary tax basis differences expected to reverse as GILTI tax in future years.

The change is considered preferable, as it appropriately matches the Company's current and deferred income tax implications related to the change in tax structure noted under the heading "Discrete Tax Events 2019" below.

The change is considered preferable, as it appropriately matches the Company's current and deferred income tax implications related to the change in international tax structure noted above.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 unchanged sentences

Year Ended December 31, 2019

As reported under the new accounting policy

As computed under the previous accounting policy

Effect of change

As reported under the new accounting policy As computed under the previous accounting policy Effect of change

Income before income tax expense $ 162,994 $ 162,994 $ —

Income tax expense (benefit) ( 40,871 ) ( 393,317 ) 352,446

Net income $ 203,865 $ 556,311 $ ( 352,446 )

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

Basic $ 1.19 $ 3.25 $ ( 2.06 )

Diluted $ 1.16 $ 3.17 $ ( 2.01 )

Balance Sheet

December 31, 2019

As reported under the new accounting policy

As computed under the previous accounting policy

As reported under the new accounting policy As computed under the previous accounting policy

Effect of change

3 unchanged sentences

Year Ended December 31, 2019

As reported under the new accounting policy

As computed under the previous accounting policy

As reported under the new accounting policy As computed under the previous accounting policy

Effect of change

1 unchanged sentence

There were no material differences to the Company's reported results in prior years.

Discrete Tax Events 2019

The European Union has enacted a series of tax reform legislation over the past few years regarding low tax structures.

The Company made changes to its international tax structure in the fourth quarter of 2019 as a result of this legislation that resulted in an intercompany sale of intellectual property.

The Company recorded an associated deferred tax asset and income tax benefit of $ 437,500,000 in Ireland based upon the fair value of the intellectual property, that will be realized over 15 years as future tax deductions.

From a United States perspective, the sale is disregarded, and any future deductions claimed in Ireland will be added back to taxable income as part of GILTI minimum tax.

Discrete Tax Items

The effective tax rate included a decrease in tax expense of $ 12,788,000 in 2020, $ 6,472,000 in 2019, and $ 8,488,000 in 2018 related to stock options, primarily from 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.

The Company cannot predict the level of stock option exercises by employees in future periods.

In 2020, the Company recorded discrete tax items related to the final true-up of the prior year's tax accrual upon filing the related tax return.

This included a tax benefit of $ 13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the United States based on clarifications to rules relating to the use of foreign tax credits.

This benefit was partially offset by tax expense for a transfer price adjustment in China of $ 3,267,000 and smaller tax expense adjustments related to foreign tax filings of $ 843,000 .

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

The Company conducted a careful review of the interpretation and believes it has adequate reserves for this German tax exposure.

Management will continue to monitor this law and court rulings in Germany.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2019, the Company made changes to its international tax structure as a result of legislation by the European Union regarding low tax structures that resulted in an intercompany sale of intellectual property.

The Company recorded an associated deferred tax asset and income tax benefit of $ 437,500,000 in Ireland based on the fair value of the intellectual property, that will be realized over 15 years as future tax deductions.

From a United States perspective, the sale is disregarded, and any future deductions claimed in Ireland were added back to taxable income as part of GILTI minimum tax.

The Company recorded an associated deferred tax liability and income tax expense of $ 350,000,000 , representing the GILTI minimum tax related to the fair value of the intellectual property.

1 unchanged sentence

Management expects its current effective tax rate excluding discrete items to increase slightly in future years as a result of this change.

In connection with the acquisition of Sualab, Co.

Ltd., the Company migrated acquired intellectual property to certain subsidiaries in the fourth quarter of 2019 in order to align with its corporate tax structure.

In 2019, in connection with the acquisition of Sualab, Co.

Ltd., the Company migrated acquired intellectual property to certain subsidiaries to align with its corporate tax structure.

As a result of this transaction, the Company recorded a discrete tax expense of $ 28,528,000 , which included a reserve of $ 3,700,000 for certain related tax uncertainties.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) was signed into law.

The Tax Act resulted in a decrease in the U.S.

federal statutory corporate tax rate from 35% to 21%.

As a result of the reduction in anticipated tax rate, the Company remeasured its deferred tax positions as of December 31, 2017 at the new enacted tax rate, and accordingly, recorded tax expense of $ 12,523,000 in 2017 from the associated write-down of its deferred tax assets.

In 2018, the Company recorded an increase in tax expense of $ 3,240,000 from the write-down of its deferred tax assets primarily relating to guidance under the Tax Act regarding stock-based compensation.

The Tax Act subjects unrepatriated foreign earnings to a one-time transition tax, regardless of the Company's financial statement assertion related to indefinite reinvestment or whether the Company ultimately repatriates any of the foreign earnings, for which the Company recorded estimated tax expense of $ 101,379,000 in 2017.

In 2018, the Company revised its estimate of the one-time transition tax and recorded a decrease in tax expense of $ 11,028,000 , which resulted in a revised estimate for the one-time transition tax of $ 90,351,000 .

The Tax Act replaces the current system of taxing U.S.

corporations on repatriated foreign earnings with a partial territorial system that provides a 100% dividends-received deduction to domestic corporations for foreign-source dividends received from 10% or more owned foreign corporations.

The Company recorded a decrease in tax expense of $3,843,000 in 2017 from the reversal of the tax effect of a 2016 dividend paid in 2017 from a wholly-owned foreign subsidiary to its domestic entity.

Other Discrete Tax Events

The effective tax rate also included a decrease in tax expense of $ 6,472,000 in 2019, $ 8,488,000 in 2018, and $ 38,569,000 in 2017 related to stock options, primarily from 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.

The Company cannot predict the level of stock option exercises by employees in future periods.

Other discrete tax events included a net decrease in tax expense of $ 1,932,000 in 2019, $ 1,847,000 in 2018, and $ 2,502,000 in 2017, consisting primarily of the expiration of the statutes of limitations for certain reserves for income tax uncertainties and the final true-up of the prior year's tax accrual upon filing the related tax returns.

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.

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

As of December 31, 2019 and 2018, $ 370,953,000 and $ 446,346,000 , respectively, of the Company’s cash, cash equivalents, and investments were held by foreign subsidiaries and were primarily denominated in U.S.

Interest and penalties included in income tax expense were $ 116,000 , $ 91,000 , and $ 71,000 in 2019, 2018, and 2017, respectively.

On January 1, 2018, the Company adopted Accounting Standard Update (ASU) 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory." This ASU requires the recognition of deferred income taxes for an intra-entity transfer of an asset other than inventory.

As a result of this ASU, the Company recorded $ 5,961,000 through a cumulative-effect adjustment directly to retained earnings at the beginning of fiscal year 2018.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2018, the Company recorded a decrease in tax expense of $ 11,028,000 to revise its estimate of a one-time transition tax on unrepatriated foreign earnings resulting from the Tax Act, which resulted in a revised estimate for the one-time transition tax of $ 90,351,000 .

Other discrete tax items, none of which were individually material, resulted in a net decrease in tax expense of $ 307,000 in 2020, $ 1,932,000 in 2019, and $ 1,847,000 in 2018.

The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands):

14 unchanged sentences

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 taxing authorities.

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

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 6 percentage points for 2020 and 9 percentage points for both 2019 and 2018.

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.

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Within the United States, the tax years 2017 through 2019 remain open to examination by the Internal Revenue Service ("IRS") and various state taxing 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.

Any reserves associated with this audit period will not be released until the issue is settled or the audit is concluded.

Interest and penalties included in income tax expense were $ 340,000 , $ 116,000 , and $ 91,000 in 2020, 2019, and 2018, respectively.

Cash paid for income taxes totaled $ 33,695,000 in 2020, $ 13,443,000 in 2019, and $ 41,430,000 in 2018.

Deferred Tax Assets and Liabilities

4 unchanged sentences

Federal and state tax credit carryforwards 10,171 8,491

Foreign net operating losses

Inventory and revenue related 5,976 2,934

Bonuses, commissions, and other compensation 4,932 1,609

Depreciation 4,211 3,522

Foreign net operating losses 602 4,286

Other 4,342 3,550

Gross non-current deferred tax assets 467,684 476,934

Valuation allowance ( 8,568 ) ( 7,312 )

$ 459,116 $ 469,622

Non-current gross deferred tax liabilities:

1 unchanged sentence

Other GILTI tax basis differences ( 39 ) ( 2,446 )

Nondeductible intangible assets

In 2019, the Company recorded a valuation allowance of $ 1,200,000 for state research and development tax credits that were not considered to be realizable.

$ ( 339,364 ) $ ( 352,446 )

As of December 31, 2020, the Company had a valuation allowance for state research and development tax credits of $ 8,568,000 that was not considered to be realizable.

Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future state income tax liabilities.

In addition, the Company had $ 9,519,000 of state research and development tax credit carryforwards, net of federal tax, as of December 31, 2019 , which will begin to expire in 2020.

As of December 31, 2020, the Company had state research and development tax credit carryforwards of $ 11,361,000 , net of federal tax, which will begin to expire for the 2020 tax return.

While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized.

1 unchanged sentence

Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to current operations in the period of determination.

Cash paid for income taxes totaled $ 13,443,000 in 2019 , $ 41,430,000 in 2018 , and $ 11,802,000 in 2017 .

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Weighted Average Shares

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

Basic weighted-average common shares outstanding 173,489 171,194 172,333

2 unchanged sentences

Stock options to purchase 4,371,194 , 5,735,608 , and 2,650,164 shares of common stock, on a weighted-average basis, were outstanding in 2020, 2019, and 2018, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

Restricted stock units totaling 13,092 shares of common stock, on

COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

a weighted-average basis, were outstanding in 2019, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

There were no restricted stock units outstanding that were anti-dilutive in 2018 or 2017.

Restricted stock units totaling 3,826 and 13,092 shares of common stock, on a weighted-average basis, were outstanding in 2020 and 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 restricted stock units outstanding, on a weighted-average basis, in 2018.

Segment and Geographic Information

3 unchanged sentences

The following table summarizes information about geographic areas (in thousands):

United States

Greater China

United States Europe Greater China Other Total

Year Ended December 31, 2020

Revenue $ 280,205 $ 208,787 $ 168,287 $ 153,741 $ 811,020

Long-lived assets 60,911 20,014 1,278 4,764 $ 86,967

Year Ended December 31, 2019

Revenue $ 247,689 $ 227,738 $ 115,061 $ 135,137 $ 725,625

Long-lived assets 68,496 21,691 1,487 3,602 $ 95,276

Year Ended December 31, 2018

Revenue $ 231,760 $ 311,914 $ 123,708 $ 138,956 $ 806,338

Long-lived assets 67,156 23,948 1,482 2,735 $ 95,321

Revenue is presented geographically based upon the customer’s country of domicile.

Revenue is presented geographically based on the customer’s country of domicile.

Revenue from a single customer accounted for 13 % and 15 % of total revenue in 2020 and 2018, respectively.

Accounts receivable from the same customer accounted for 24 % , 30 % , and 40 % of total accounts receivable as of December 31, 2019, 2018, and 2017, respectively.

In 2019, no customer accounted for greater than 10% of total revenue.

Revenue from this customer was not greater than 10% of total revenue in 2019.

Accounts receivable from this same customer accounted for 20 %, 24 %, and 30 % of total accounts receivable as of December 31, 2020, 2019, and 2018, respectively.

In 2020, a second customer accounted for 14 % of total revenue.

Accounts receivable from this second customer accounted for 19 % of total accounts receivable as of December 31, 2020.

Business Acquisitions

The Company completed one business acquisition in 2019 and two business acquisitions in 2017.

All of these transactions were accounted for as business combinations.

Pro-forma information for these acquisitions is not presented because they are not significant, either individually or in the aggregate.

Revenue and earnings since the dates of the acquisitions included in the Company's Consolidated Statements of Operations are also not presented because they are not material.

Transaction costs were immaterial and were expensed as incurred.

Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date.

Contingent consideration is remeasured each reporting period with changes in fair value recorded in "Other income (expense)" on the Consolidated Statements of Operations.

Sualab Co., Ltd.

2 unchanged sentences

The total consideration of $ 193,638,000 included cash payments of $ 170,602,000 upon closing.

In the fourth quarter of 2020, the Company recorded a credit to goodwill in the amount of $1,004,000 representing a purchase price adjustment.

The remaining consideration consists of deferred payments of $ 24,040,000 that may become payable on the fourth anniversary date of the closing, contingent upon continued employment of key talent, and will be recorded as compensation expense over this four-year period.

6 unchanged sentences

Accounts receivable 1,200

Inventories 115

Prepaid expenses and other current assets 252

2 unchanged sentences

Deferred income tax asset 3,087

Other assets 513

Accounts payable ( 28 )

9 unchanged sentences

Non-compete agreements 340

Trademarks 110

Goodwill 129,138

Purchase price $ 169,598

1 unchanged sentence

The completed technologies are being amortized to cost of revenue over eight years , the customer relationships are being amortized to SG&A expenses over seven years , the trademarks are being amortized to SG&A expenses over two years , and the non-compete agreements are being amortized to RD&E expenses over six to seven years .

The in-process technology will be amortized to cost of revenue over its estimated useful life once the technology is finalized.

The portion of the acquired goodwill deductible for tax purposes is $ 104,609,000 .

GVi Ventures, Inc.

On April 12, 2017, the Company acquired selected assets and assumed selected liabilities of GVi Ventures, Inc., a privately-held maker of pre-configured vision solutions for common automotive applications based in the United States.

The total purchase price of $ 5,368,000 included cash payment of $ 4,069,000 and contingent consideration valued at $ 1,299,000 as of the acquisition date.

In addition, the Company entered into special incentive payments tied to employment, none of which are material, that are being recorded as compensation expense.

The Company recorded fair value adjustments in non-operating expense totaling $ 282,000 in 2017 and $ 1,065,000 in 2018, and paid out $ 1,000,000 in 2018 of the contingent consideration.

In 2019, the remaining contingent consideration liability was reduced to zero as a result of a lower level of revenue in the America's automotive industry.

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

Under this transaction, in addition to customer relationships and completed technologies, the Company acquired a team of software engineers that are expected to develop new products and increase the Company's ability to serve large customers in the automotive industry.

The purchase price was allocated as follows (in thousands):

Accounts receivable

Prepaid expenses and other current assets

Accounts payable

Accrued expenses

Completed technologies

Customer relationships

Purchase price

The customer relationships and completed technologies are included in "Intangible assets" on the Consolidated Balance Sheet.

The customer relationships are being amort ized to selling, general, and administrative e xpenses over eight years , and the completed technologies are being amortized to cost of revenue over five years , both on a straigh t-line basis.

The portion of the acquired goodwill deductible for tax purposes is $ 443,000 .

ViDi Systems S.A.

On April 4, 2017, the Company acquired all of the outstanding shares of ViDi Systems, S.A.

(ViDi), a privately-held vision software company based in Switzerland.

The total purchase price of $ 23,015,000 included cash payment of $ 20,019,000 , with the remaining $ 2,996,000 recorded as a holdback to secure potential claims under the agreement that was paid in 2018.

In addition, the Company entered into a special incentive payment tied to employment, which is not material, that is being recorded as compensation expense.

Under this transaction, in addition to completed technologies, the Company acquired a team of software engineers that are expected to help the Company broaden the scope of applications that can be addressed with Cognex vision.

ViDi's deep learning software solves complex applications that are too complicated and time-consuming to program and maintain with traditional machine vision rules-based algorithms.

Using feedback, ViDi's software trains the system to distinguish between acceptable variations and defects.

The purchase price was allocated as follows (in thousands):

Accounts receivable

Prepaid expenses and other current assets

Property, plant, and equipment

Deferred income tax asset

Accounts payable

Accrued expenses

Deferred income tax liability

Non-compete agreement

Completed technologies

Purchase price

The non-compete agreement and completed technology are included in "Intangible assets" on the Consolidated Balance Sheet.

The non-compete agreement are being amortized to research, development and engineering expenses over three years , and the completed technology are being amortized to cost of revenue over six years , both on a straight-line basis.

The portion of the acquired goodwill deductible for tax purposes is $ 5,112,000 .

The in-process technologies were completed in the fourth quarter of 2020 and are being amortized to cost of revenue over six years .

The portion of the acquired goodw ill deductible for tax purposes is $ 104,609,000 .

Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of long-lived assets for potential impairment in the second quarter of 2020.

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.

This transaction was accounted for as a business combination.

Pro-forma information is not presented because it is not significant.

Revenue and earnings since the date of the acquisition included in the Company's Consolidated Statements of Operations are also not presented because they are not material.

Transaction costs were immaterial and were expensed as incurred.

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 recorded restructuring charges from these actions totaling $ 15,924,000 in 2020 which are included in “Restructuring charges” on the Consolidated Statements of Operation s.

As of December 31, 2020, the majority of these actions were completed and no additional charges are expected to be incurred in future periods in relation to this restructuring plan.

The following table summarizes the restructuring charges for the year ended December 31, 2020 (in thousands):

One-time termination benefits $ 10,159

Contract termination costs 5,207

Other associated costs 558

One-time termination benefits included 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 b enefits, including retention bonuses for selected employees, were recognized over the remaining service period which was completed by December 31, 2020.

Contract termination costs included operating lease asset impairment charges for eleven offices closed prior to the end of the contractual lease term.

These costs also included the write-off of leasehold improvements and other equipment related to these abandoned offices that had no alternative use, as well as other associated operating costs, such as utilities, that the Company is obligated to pay for the remainder of the lease term.

These contract termination costs were primarily recognize d in the second quarter of 2020 when th e Company ceased using the property for economic benefit.

Other associated costs primarily included legal fees related to the employee termination actions, which were recognized when the services were 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 11,329 5,220 636 17,185

Cash payments ( 8,717 ) ( 317 ) ( 563 ) ( 9,597 )

Non-cash restructuring charges — ( 4,163 ) — ( 4,163 )

Restructuring adjustments ( 1,170 ) ( 13 ) ( 78 ) ( 1,261 )

Foreign exchange rate changes 182 23 20 225

Balance as of December 31, 2020 $ 1,624 $ 750 $ 15 $ 2,389

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.

Subsequent Events

3 unchanged sentences

Quarter Ended

March 31, 2019

June 30, 2019

September 29, 2019

March 29, 2020 June 28, 2020 September 27, 2020 December 31,

(In thousands, except per share amounts)

Operating income

Basic net income per share

Diluted net income per share

Revenue $ 167,235 $ 169,097 $ 251,073 $ 223,615

Gross margin 126,035 118,777 191,332 168,455

Restructuring charges — 14,798 251 875

Intangible asset impairment charges — 19,571 — —

Operating income (loss) 20,951 ( 6,142 ) 96,635 59,085

Net income (loss) $ 20,477 $ ( 1,142 ) $ 87,506 $ 69,345

Basic net income (loss) per share $ 0.12 $ ( 0.01 ) $ 0.50 $ 0.40

Diluted net income (loss) per share $ 0.12 $ ( 0.01 ) $ 0.49 $ 0.39

Quarter Ended

April 1, 2018

September 30, 2018

March 31, 2019 June 30, 2019 September 29, 2019 December 31,

(In thousands, except per share amounts)

Revenue $ 173,484 $ 199,047 $ 183,325 $ 169,769

Gross margin 127,200 148,080 135,693 124,898

Operating income 30,147 51,756 43,092 17,607

Net income $ 33,104 $ 48,749 $ 41,685 $ 80,327

Basic net income per share $ 0.19 $ 0.28 $ 0.24 $ 0.47

1 unchanged sentence

COGNEX CORPORATION – SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

Description Balance at

of Period Charged to

Expenses Charged

Accounts Deductions Other Balance at

(In thousands)

Reserve for Uncollectible Accounts Receivable and Sales Returns:

Allowance for Credit Losses on Accounts Receivable:

2020 $ 530 $ 600 $ — $ ( 300 ) (1) $ 1 (2) $ 831

2019 $ 596 $ 215 $ — $ ( 286 ) (1) $ 5 (2) $ 530

2018 $ 387 $ 282 $ — $ ( 61 ) (1) $ ( 12 ) (2) $ 596

Reserve for Sales Returns:

2020 $ 1,291 $ — $ — $ — (1) $ — (2) $ 1,291

2019 $ 1,050 $ 225 $ — $ — (1) $ 16 (2) $ 1,291

2018 $ 1,181 $ 182 $ — $ ( 282 ) (1) $ ( 31 ) (2) $ 1,050

Deferred Tax Valuation Allowance:

2020 $ 7,312 $ 1,256 $ — $ — $ — $ 8,568

2019 $ 6,112 $ 1,200 $ — $ — $ — $ 7,312

2018 $ 5,309 $ 803 $ — $ — $ — $ 6,112

(1) Specific write-offs

3 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data