Item 1A. Risk Factors
ITEM 1A: RISK FACTORS
The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect our company in the future. If any of these risks were to occur, our business, financial condition, or results of operations could be materially and adversely affected. This section includes or refers to certain forward-looking statements. We refer you to the explanation of the qualifications and limitations on such forward-looking statements, appearing under the heading "Forward-Looking Statements" in Part II - Item 7 of this Annual Report on Form 10-K.
Risks Related to the COVID-19 Pandemic
Our business has been, and is expected to continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 (also referred to as “coronavirus”) outbreak developed into a global pandemic in March 2020. The COVID-19 outbreak had a modest adverse impact on our business in the first quarter of 2020, primarily near the end of the quarter. This impact expanded and accelerated into the second quarter of 2020, as we noted lower demand for our products in certain industries, additional disruptions to our supply chain, longer customer delivery times, higher delivery costs, and further shutdowns of customer facilities. These conditions triggered a review of long-lived assets that resulted in intangible asset impairment charges of $19,571,000 and excess inventory exposures that resulted in charges of $7,718,000 in the second quarter of 2020. Although the impact of these conditions on our business to date appears to have been most severe in the second quarter of 2020, certain industries we serve continue to be adversely impacted by the global pandemic, most notably the automotive industry, which was our largest market in 2019. Furthermore, the impact of the pandemic could worsen in any of our major industries or geographies in the future, resulting in deteriorating economic and business conditions and adverse effects on our business, results of operations, and financial condition. We face several risks and uncertainties related to the impact of COVID-19 on our business. It is difficult for us to quantify the duration and severity of this impact due to many factors beyond our control and knowledge, including changing governmental regulations and the scope and duration of social distancing and commercial restrictions. These risks and uncertainties include, among others:
• our customers may further delay or cancel orders for our products,
• customer facilities may be shut down for extended periods of time, resulting in our inability to deliver products, perform on-site services, or make on-site sales visits,
• our customers may not have sufficient cash flow or access to financing to purchase our products,
• our customers may not pay us within agreed upon terms or may default on their payments altogether,
• our vendors may be unable to fulfill their delivery obligations to us within acceptable lead times for extended periods of time, which may force us to seek alternative sources of supply at higher costs,
• our contract manufacturers may experience interruptions that result in delivery delays and higher costs for our products,
• we may experience manufacturing delays and higher costs in the event of a supply disruption from a single-source vendor,
• we may experience extended customer delivery times and higher delivery costs,
• our distribution centers in Natick, Massachusetts and Cork, Ireland may have difficulty staffing employees and contractors, be forced to operate with a significantly reduced workforce, or be forced to shut down altogether due to government regulations or health concerns,
• our online sales and marketing efforts may be less effective than face-to-face activities, resulting in fewer new customers and lower sales from new products,
• challenges involved in working from home may delay certain of our new product introductions,
• lower demand for our products may result in charges for excess and obsolete inventory if we are unable to sell inventory that is either already on hand or committed to purchase,
• lower cash flows may result in impairment charges for acquired intangible assets,
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• our investment portfolio of debt securities may be exposed to material credit losses, and
• a decline in our stock price may make stock-based awards a less attractive form of compensation and a less attractive form of retention for our employees.
These risks and uncertainties could have a material adverse effect on the continuity of our business, results of operations, and financial condition. This situation is continuously changing and additional impacts on our business may arise of which we are not currently aware.
Our restructuring activities may result in disruption to our business.
In May 2020, our Board of Directors approved a restructuring plan intended to reduce our operating costs, optimize our business model, and address the impact of the COVID-19 pandemic. The restructuring plan included a workforce reduction of approximately 8% and office closures. These restructuring actions, together with other actions to reduce the Company's overall costs, were designed to generate an aggregate annualized cost savings of approximately $25 million versus our original planned cost structure. As of December 31, 2020, the majority of these actions have been completed to achieve the annualized cost savings from this restructuring plan. Furthermore, as of the date of this report, business levels have improved from our financial projections in May 2020, when we believe the impact of the pandemic on our business was most severe. While we do not anticipate further restructuring actions, we continue to tightly manage our operating costs and optimize our business model. Although we expect to continue to make investments in strategic areas, the restructuring actions we completed in 2020 may nevertheless negatively impact programs we believe are important to the long-term success of our company, such as the ability to accelerate time to market for new products. In addition, our ability to provide a high level of service to our customers may be negatively impacted by these actions, particularly in regions where we have downsized our operations.
Risks Related to Revenue Concentrations
The loss of, or significant curtailment of purchases by, two large customers could have an adverse effect on our business.
In 2020, the Company had two large customers in the consumer electronics and logistics industries that each represented a significant portion of revenue in their respective industries and each represented over 10% of our total revenue in 2020. Our total revenue and quarterly timing of revenue is impacted by the purchasing cycles of these two large customers.
Large customers may divert management’s attention from other operational matters and pull resources from other areas of the business, resulting in potential loss of revenue from other customers. In addition, large customers may receive preferred pricing and a higher level of support, which may lower our gross margin percentage. Furthermore, in certain instances due to long supplier lead times, we may purchase inventory in advance of receipt of a customer purchase order, which exposes us to an increased risk of excess or obsolete inventory and resulting charges. The loss of, or further curtailment of purchases by, any one or more of our larger customers could have a material adverse effect on our operating results.
A continued downturn in the automotive industry may further adversely affect our business.
Revenue from customers in the automotive industry, which was our largest market in 2019, declined by approximately 20% in 2020. It has been reported that the automotive industry has been significantly and adversely impacted by the COVID-19 pandemic, as consumer demand for new automobiles has been curtailed and investment in new electric vehicle technology has been delayed. Furthermore, the surge in demand for electronics during the pandemic has resulted in chip shortages that may constrain vehicle production and delay a recovery of our business in this industry. Despite the decline in revenue from customers in the automotive industry in 2020, automotive revenue continues to represent a significant portion of our total revenue, and we are dependent upon revenue from customers in this industry to achieve our longer-term, high-margin growth plans. As a result, our operating results could continue to be materially and adversely affected by further declining sales in this industry.
Risks Related to our Supply Chain
The failure of a key supplier to deliver quality product in a timely manner or our inability to obtain components for our products could adversely affect our operating results.
A significant portion of our products is manufactured by a third-party contractor located in Indonesia. This contract manufacturer has agreed to provide Cognex with termination notification periods and last-time-buy rights, if and when that may be applicable. We rely upon our contract manufacturers to provide quality product. We engage in extensive product quality programs and processes, including actively monitoring the performance of our third-party manufacturers; however, we may not detect all product quality issues through these programs and processes. We also rely upon our contract manufacturers to meet delivery schedules.
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We have in the past experienced, and may continue in the future to experience, delays in the delivery of our finished products from our contract manufacturers due to the impact of the COVID-19 pandemic or other factors. Although our primary contract manufacturer has the ability to shift production to plants in other regions when operations in its Indonesia plant are disrupted, production and test equipment located at the Indonesia plant that is unique to the manufacture of Cognex products creates practical challenges to doing so in a timely manner. Furthermore, this contract manufacturer sources components for our finished products from China and other regions that experienced interruptions in production and delivery during the pandemic as factories were closed. These challenges in obtaining components and maintaining production have resulted in delays, and may continue to result in delays, in meeting our delivery schedules that, in turn, result in delayed deliveries to our customers past their requested delivery date and negatively impact customer satisfaction.
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 and higher costs. 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 vendors, we may have to redesign our products, which may lead to a delay in manufacturing and a possible loss of sales. Furthermore, the surge in demand for electronics during the COVID-19 pandemic has resulted in chip shortages that may impact the supply for our products. Although we are taking certain actions to mitigate supply risk, an interruption in, termination of, or material change in the purchase terms of any key components could have a material adverse effect on our operating results.
Our failure to effectively manage product transitions or accurately forecast customer demand could result in excess or obsolete inventory and resulting charges.
Because the market for our products is characterized by rapid technological changes, we frequently introduce new products with improved ease-of-use, improved hardware performance, additional software features and functionality, or lower cost that may replace existing products. Among the risks associated with the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product.
We may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing, address concerns about the availability of future supplies, or build safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times. These measures to purchase inventory may expose us to an increased risk of excess or obsolete inventory and resulting charges if actual demand is lower than anticipated.
Deteriorating global economic conditions from the COVID-19 pandemic resulted in lower projected sales of excess inventories, for which the company recorded provisions totaling $7,718,000 in the second quarter of 2020. Our failure to effectively manage product transitions or accurately forecast customer demand, in terms of both volume and configuration, has led to, and may again in the future lead to, an increased risk of excess or obsolete inventory and resulting charges.
Our products may contain design or manufacturing defects, which could result in reduced demand, significant delays, or substantial costs.
If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and material repair or replacement costs. Our release-to-market process may not be robust enough to detect significant design flaws or software bugs. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and contract manufacturers, these actions may not be sufficient to avoid a product failure rate that results in:
• substantial delays in shipment,
• significant repair or replacement costs,
• product liability claims or lawsuits, particularly in connection with life sciences customers or other high-risk end-user industries, or
• potential damage to our reputation.
Any of these results could have a material adverse effect on our operating results.
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Risks Related to Execution of our Business Strategy
If we fail to attract and retain key talent and maintain our unique corporate culture, our business and operating results could suffer.
To support our growth and execute on our operating plans and strategic initiatives, we must effectively attract, train, develop, motivate, and retain skilled employees, while maintaining our unique corporate culture. During the COVID-19 pandemic, many of our employees have worked remotely from their homes to comply with governmental regulations, with the primary exception of our distribution center employees who have remained on-site in shifts throughout the pandemic to deliver products to essential businesses. While we have been able to effectively conduct most business activities in this manner, these conditions have made it more challenging to maintain our collaborative corporate culture. When regulatory and health conditions allow, we anticipate returning to a more collaborative, largely on-site work environment. If work-from-home conditions continue longer than anticipated or we are unable to successfully bring people back into the office once safe to do so, the company's business and ability to execute its plans could be adversely affected in a material way.
We are highly dependent upon the management and leadership of our senior management team. Although we have many experienced and qualified senior managers, the loss of key personnel could have a material adverse effect on our company.
We use stock options and restricted stock units (RSUs) as a key component of our employee compensation program in order to align employee interests with the interests of our shareholders, provide competitive compensation packages, and encourage employee retention. Our stock price volatility may cause periods of time during which option exercise prices might be less than the sale price of our common stock or the value of RSUs might be less competitive, which may lessen the retentive attributes of these awards. We are limited as to the number of stock options and RSUs that we may grant under our stock plans, and we are unsure how effective different stock-based awards with different vesting schedules will be to retain key talent. Accordingly, we may find it difficult to attract, retain, and motivate employees, and any such difficulties could materially adversely affect our business.
If we fail to effectively manage our growth, our business and operating results could suffer.
We have in the past experienced, and may again in the future experience, periods of rapid revenue growth due to such factors as the level of investment from key customers or the impact of general economic recoveries on automation spending. The growth and expansion of our business and product offerings place significant demand on our employees and, in particular, our management team. This growth may require significant additional resources, which may not scale in a cost-effective manner or may negatively impact our customers’ experience. We may not be able to hire and train new employees and contractors quickly enough to meet our business needs. If we fail to quickly adapt our hiring and training plans to our business levels or effectively execute on our hiring plans, our efficiency and ability to meet our operating goals could suffer. Furthermore, employee productivity, morale, and retention could suffer, which may have a material adverse effect on our business and operating results.
Our inability to achieve growth in revenue and profits from our logistics business may negatively impact our operating results.
We are pursuing applications to automate distribution processes in the logistics industry including applications for retail distribution and ecommerce to scan, track, and sort goods through distribution centers. Our future growth plans are dependent upon growth in this industry. Our gross margin percentage in this industry is currently lower than our average gross margin percentage, as certain sales in this industry are for application-specific customer solutions that include deployment services. Our strategy is to shift our focus as the logistics market matures from Cognex providing deployment services to utilizing partner integrators to provide these services for end users, which we believe will result in improved gross margins that will be more in line with our overall average over time. In addition, we are making significant investments in engineering and sales to further develop our logistics business. Failure to generate revenue in this industry in the amounts and at the gross margins anticipated may have a material adverse impact on our revenue growth and operating results.
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Our failure to introduce new products in a successful and timely manner could result in the loss of our market share and a decrease in our revenues and profits.
The market for our products is characterized by rapidly changing technology. Accordingly, we believe that our future success will depend upon our ability to accelerate time-to-market for new products with improved functionality, ease-of-use, performance, and price. There can be no assurance that we will be able to introduce new products in accordance with scheduled release dates or that new products will achieve market acceptance. Our inability to keep pace with the rapid rate of technological change in the high-technology marketplace could have a material adverse effect on our operating results.
Product development is often a complex, time-consuming, and costly process involving significant investment in research and development with no assurance of return on investment. Our strong balance sheet allows us to continue to make significant investments in research, development, and marketing for new products and technologies. Research is by its nature speculative and the ultimate commercial success of a product depends upon various factors, many of which are not under our control. We may not achieve significant revenue from new product investments for a number of years, if at all. Moreover, new products, if introduced, may not generate the gross margins that we have experienced historically.
Our failure to properly manage the distribution of our products and services could result in the loss of revenues and profits.
We utilize a direct sales force, as well as a network of distribution and integration partners, to sell our products and services. Successfully managing the interaction of our direct and indirect sales channels to reach various potential customers for our products and services is a complex process. In addition, our reliance upon indirect selling methods may reduce visibility to demand and pricing issues.
Finished products for customers in the Americas, with the exception of certain products stocked locally in Mexico, are shipped from our Natick, Massachusetts distribution center, while finished products for customers outside of the Americas are shipped from our Cork, Ireland distribution center. In 2020, we began stocking certain fully-configured finished products in our Mexico facility in order to provide faster delivery to local customers. To support the expansion of our business internationally, we may decide to make changes to our operating structure in other countries in the future when we believe these changes will make us more competitive by offering faster delivery, importation services, and/or local currency sales. These new operating models may require changes in legal structures, business systems, and business processes that may result in significant business disruption and negatively impact our customers’ experience, resulting in loss of sales. Furthermore, as we assume more responsibility for the importation of our products into other countries, we face higher compliance risk to adhering to local regulatory and trade requirements. Finally, the local stocking of finished products in countries outside of our primary distribution centers may result in higher costs and increased risk of excess or obsolete inventory associated with maintaining the appropriate level and mix of stock in multiple inventory locations, resulting in lower gross margins.
Our go-to-market strategy has distinct risks and costs, and therefore, our failure to implement the most advantageous balance in the sales and operating model for our products and services could adversely affect our revenue and profitability.
Increased competition may result in decreased demand or prices for our products and services.
The machine vision market is highly fragmented and competitive. Our competitors include other vendors of machine vision systems, controllers, and components; manufacturers of image processing systems, sensors, and components; and system integrators. We may also compete with internal engineering departments of current or prospective customers, as well as open source tools available for free by various companies. In recent years, we have encountered increased competition from low-cost vision providers in China. Any of these competitors may have greater financial and other resources than we do. We may not be able to compete successfully in the future and our investments in research and development, sales and marketing, and support activities may be insufficient to enable us to maintain our competitive advantage. In addition, competitive pressures could lead to price erosion that could have a material adverse effect on our gross margins and operating results.
Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenue or profitability and result in the impairment of acquired intangible assets.
In 2019, we completed our largest acquisition to date when we acquired Sualab Co., Ltd., a provider of deep learning-based vision software based in Korea. Our business may be negatively impacted by risks related to this acquisition, as well as other smaller acquisitions we have completed in the past few years, and future acquisitions that we may make. These risks include, among others:
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• the diversion of management's attention from other operational matters,
• difficulties or delays integrating personnel, operations, technologies, products, and systems of the acquired business, particularly in locations far from the company's headquarters,
• the inability to realize expected synergies or other benefits resulting from the acquisition,
• the failure to retain key talent,
• the impairment of acquired intangible assets resulting from lower-than-expected cash flows from the acquired assets,
• the inability to protect and secure acquired intellectual property or confidential information,
• difficulties or delays completing the development of acquired in-process technology,
• the failure to retain key customers, and
• the failure to achieve projected sales of acquired products.
Acquisitions are inherently risky and the inability to effectively manage these risks could have a material adverse effect on our operating results.
Business system disruptions may adversely affect our business.
In 2021, the Company is making significant investments in business systems related to our sales processes, including systems to help our sales team more efficiently manage customer relationships and sales opportunities. We expect these new sales systems to be placed into service in the first quarter of 2022. Implementing new business systems requires a significant investment of time and money, and may divert management’s attention from other operational matters. The implementation of a new system and changes to associated business processes, particularly those that are customer-facing, may result in significant business disruption and negatively impact our customers’ experience, resulting in loss of sales. The Company intends to continue to make IT-related investments to improve its management information systems and support the expansion of our business internationally. Any disruption occurring with our business systems may have a material adverse effect on our operating results.
Risks Related to Information Technology and Intellectual Property
Information security breaches may adversely affect our business.
We rely on our information technology infrastructure and management information systems to effectively run our business. We may be subject to information security breaches caused by hacking, malicious software, or acts of vandalism or terrorism. Our security measures or those of our third-party service providers may not detect or prevent such breaches. Any such compromise to our information security could result in theft of our intellectual property, including software source code, a misappropriation of our cash or other assets, an interruption in our operations, the unauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation of privacy or other laws, and the exposure to litigation or regulatory penalties, any of which could harm our business and operating results. We have experienced cybersecurity incidents in the past that have included malware, viruses, phishing attacks, and intrusion attempts to Cognex’s internet-facing systems. To date, these incidents have not had a material impact on our operations or financial results; however, future cybersecurity incidents could have a material adverse effect on our business, financial condition, or operating results.
If we fail to successfully protect our intellectual property, our competitive position and operating results could suffer.
We rely on our proprietary software technology and hardware designs, as well as the technical expertise, creativity, and knowledge of our personnel to maintain our position as a leading provider of machine vision products. Software piracy and reverse engineering, specifically from companies in Russia and China, may result in counterfeit products that are misrepresented in the market as Cognex products or pirated products that contain stolen technology such as software source code. Although we use a variety of methods to protect our intellectual property, we rely most heavily on patent, trademark, copyright, and trade secret protection, as well as non-disclosure agreements with customers, suppliers, employees, and consultants. We also attempt to protect our intellectual property by restricting access to our proprietary information by a combination of technical and internal security measures. These measures, however, may not be adequate to:
• protect our proprietary technology,
• protect our patents from challenge, invalidation, or circumvention, or
• ensure that our intellectual property will provide us with competitive advantages.
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Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any meaningful protection or any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from developing and marketing similar products or limit the length of patent protection we may have for our products. Furthermore, other companies may design around technologies we have patented, licensed, or developed. Moreover, changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar to ours. Any of these adverse circumstances could have a material adverse effect on our operating results.
Risks Related to Financial Matters
We are at risk for impairment charges with respect to our investments or acquired intangible assets, which could have a material adverse effect on our results of operations.
As of December 31, 2020, we had approximately $498 million of debt securities in our investment portfolio. These debt securities are reported at fair value, with unrealized gains and losses, net of tax, included in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities. As of December 31, 2020, our portfolio of debt securities had an unrealized gain of $5,690,000, and no unrealized losses. However, at any point in time, we may hold securities in an unrealized loss position. Management monitors its debt securities that are in an unrealized loss position to determine whether a loss exists related to the credit quality of the issuer that would be reported in current operations. It is our policy to invest in investment-grade debt securities that minimize our exposure to credit losses.
As of December 31, 2020, we had approximately $16 million in acquired intangible assets, consisting primarily of acquired technologies and customer relationships. These assets are susceptible to changes in fair value due to a decrease in the historical or projected cash flows from the use of these assets, which may be negatively impacted by economic trends. Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of long-lived assets for potential impairment, which 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. A further decline in the cash flows generated by these or other intangible assets may result in future impairment charges.
If we determine that any of these investments or intangible assets are impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.
We may have additional tax liabilities, which could adversely affect our operating results and financial condition.
We are subject to taxes in the United States, as well as in numerous foreign jurisdictions, including income taxes, indirect taxes such as value-added taxes (VAT), and payroll-related taxes and withholding obligations. Significant judgment is required in determining our worldwide provision for income and other taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities and may be assessed additional taxes, penalties, fees or interest, which could have an adverse effect on our financial position, liquidity, or results of operations.
Although we believe our tax positions are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our financial statements and could have a material adverse effect on our income tax provision, net income, or cash flows in the period in which the determination is made.
Fluctuations in foreign currency exchange rates and the use of derivative instruments to hedge these exposures could adversely affect our reported results, liquidity, and competitive position.
We face exposure to foreign currency exchange rate fluctuations, as a significant portion of our revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of our subsidiaries or the reporting currency of our company, which is the U.S. Dollar. In certain instances, we utilize forward contracts to hedge against foreign currency fluctuations. These contracts are used to minimize foreign currency gains or losses, as the gains or losses on the derivative are intended to offset the losses or gains on the underlying exposure. We do not engage in foreign currency speculation. If the counterparty to any of our hedging arrangements experiences financial difficulties, or is otherwise unable to honor the terms of the contract, we may experience material losses.
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The success of our foreign currency risk management program depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations. In addition, our failure to identify new exposures and hedge them in an effective manner may result in material foreign currency gains or losses. Furthermore, our ability to hedge the Chinese Yuan is limited, which has resulted in unhedged exposures. To date, foreign currency gains and losses related to the Chinese Yuan have been immaterial to our total results; however, further fluctuations in this currency may result in material foreign currency gains or losses in the future.
In addition to the U.S. Dollar, a significant portion of our revenues and expenses are denominated in the Euro and Chinese Yuan, and to a lesser extent the Japanese Yen, Korean Won, and Mexican Peso. We estimate that approximately 45% of our sales in 2020 were invoiced in currencies other than the U.S. Dollar, and we expect sales denominated in foreign currencies to continue to represent a significant portion of our total revenue. While we also have expenses denominated in these same foreign currencies, the impact on revenues has historically been, and is expected to continue to be, greater than the offsetting impact on expenses. Therefore, in times when the U.S. Dollar strengthens in relation to these foreign currencies, we would expect to report a net decrease in operating income. Conversely, in times when the U.S. Dollar weakens in relation to these foreign currencies, we would expect to report a net increase in operating income. Thus, changes in the relative strength of the U.S. Dollar may have a material impact on our operating results.
General Risk Factors
Unfavorable global economic conditions may negatively impact our operating results.
Our revenue levels are impacted by global economic conditions, as we have a significant business presence in many countries throughout the world. Economic downturns may cause industrial companies to delay or reduce spending for automation projects, including those with machine vision, amid weaker general manufacturing confidence and heightened uncertainty around global trade. When global economic conditions are unfavorable, our revenue and our ability to generate operating profits could be materially adversely affected.
As a result of global economic conditions, our business is subject to the following risks, among others:
• our customers may not have sufficient cash flow or access to financing to purchase our products,
• our customers may not pay us within agreed upon terms or may default on their payments altogether,
• our vendors may be unable to fulfill their delivery obligations to us in a timely manner,
• lower demand for our products may result in charges for excess and obsolete inventory if we are unable to sell inventory that is either already on hand or committed to purchase,
• lower cash flows may result in impairment charges for acquired intangible assets or goodwill,
• a decline in our stock price may make stock-based awards a less attractive form of compensation and a less effective form of retention for our employees, and
• the trading price of our common stock may be volatile.
As of December 31, 2020, the Company had approximately $767 million in cash and investments. In addition, Cognex has no long-term debt and we do not anticipate needing debt financing in the near future. We believe that our strong cash position puts us in a relatively good position to weather economic downturns. Nevertheless, our operating results have been materially adversely affected in the past, and could be materially adversely affected in the future, as a result of unfavorable economic conditions and reduced capital spending by manufacturers worldwide.
Economic, political, and other risks associated with international sales and operations could adversely affect our business and operating results.
In 2020, approximately 65% of our revenue was derived from customers located outside of the United States. We anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we source components from suppliers located outside of the United States, including China, and utilize third-party contract manufacturers, primarily located in Indonesia, to assemble certain of our products. We intend to continue to expand our sales and operations outside of the United States and expand our presence in international emerging markets. As a result, our business is subject to the risks inherent in international sales and operations, including, among other things:
• various regulatory and statutory requirements,
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• difficulties in injecting and repatriating cash,
• export and import restrictions,
• trade tariffs,
• transportation delays,
• product certification requirements,
• employment regulations and local labor conditions,
• difficulties in staffing and managing foreign sales operations,
• instability in economic or political conditions,
• public health epidemics or pandemics, such as the COVID-19 pandemic,
• difficulties protecting intellectual property,
• business systems connectivity issues, and
• potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our operating results. In recent years, trade tariffs imposed by the United States on certain components imported from Chinese suppliers resulted in higher costs for our products. To date, these cost increases have been immaterial to our total cost of goods sold and primarily relate to components sourced in China for new products that we build in the United States in their infancy before they are moved to our contract manufacturer in Indonesia; however, cost increases as a result of trade tariffs could become material in the future.
Trade tariffs have also had an indirect impact on the economic climate in China, which in turn, has had a negative impact on the Company's revenue from customers based in China. Further escalations of trade conflicts between the United States and China, or other countries where Cognex has operations, may have a further adverse effect on our revenue. In addition to trade tariffs, United States export controls that place restrictions on the exportation of our products or a subset of our products, including, without limitation, any applicable regulations promulgated by the U.S. Commerce Department’s Bureau of Industry and Security, have had a negative impact on our revenue from customers based in China. To date, the impact of these restrictions has been immaterial to our total revenue; however, further or continued restrictions could have a material adverse effect on our operating results in the future.
Additionally, we are subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, and similar anti-corruption and anti-kickback laws in the jurisdictions in which we operate. These laws generally prohibit offering, promising, giving, or authorizing others to provide anything of value, either directly or indirectly, to a government official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. Particularly as a result of our global operations, including in developing countries, and our growing international sales force, our relationships with our customers and resellers could expose us to liability under these laws. Violations of anti-corruption laws may result in severe civil and criminal penalties for noncompliance. Even an unsuccessful challenge or investigation into our practices is costly to defend, and could cause adverse publicity, and thus could have a material adverse effect on our business, financial condition, or operating results.
Finally, Brexit, or the withdrawal of the United Kingdom (U.K.) from the European Union, resulted in a new trade agreement between these two parties that became effective on January 1, 2021. Revenue from customers in the U.K. represented approximately 1% of our total revenue in 2020. Under the new trade process, our U.K. customers have experienced, and may continue to experience, delivery delays as additional customs documents are required to complete delivery.
Our Company may be subject to time-consuming and costly litigation.
From time to time, we may be subject to various claims and lawsuits by competitors, shareholders, customers, distributors, patent trolls, former employees, or other parties arising in the ordinary course of business, including lawsuits charging patent infringement, or claims and lawsuits instituted by us to protect our intellectual property and confidential information or for other reasons. These matters can be time consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our operating results.
ITEM 1B: UNRESOLVED STAFF COMMENTS
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