COGNEX CORP 10-K

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain risks relating to its ongoing business operations, including foreign currency exchange rate risk and interest rate risk. The Company currently mitigates certain foreign currency exchange rate risks with derivative instruments. The Company does not currently manage its interest rate risk with derivative instruments. Foreign Currency Risk The Company faces exposure to foreign currency exchange rate fluctuations, as a significant portion of its revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of the Company’s subsidiaries or the reporting currency of the 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. 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. 31 Table of Content The Company had the following outstanding forward contracts (in thousands): December 31, 2020 December 31, 2019 Currency Notional Value USD Equivalent High Rate Low Rate Notional Value USD Equivalent High Rate Low Rate Derivatives Not Designated as Hedging Instruments: Euro 50,000 $ 61,342 0.8151 0.8151 18,000 $ 20,249 0.8917 0.8917 Mexican Peso 155,000 7,776 19.93 19.93 80,000 4,223 18.94 18.94 Korean Won 6,925,000 6,377 1,086 1,086 161,951,500 139,688 1,155 1,155 Japanese Yen 600,000 5,808 103.30 103.30 575,000 5,291 108.70 108.70 Hungarian Forint 1,330,000 4,494 295.9 295.9 870,000 2,962 295.3 295.3 British Pound 1,675 2,287 0.7324 0.7324 2,700 3,569 0.7541 0.7541 Taiwanese Dollar 38,035 1,362 27.93 27.93 37,450 1,256 29.91 29.91 Singapore Dollar 1,465 1,110 1.3198 1.3198 845 628 1.3461 1.3461 Canadian Dollar 1,285 1,010 1.2719 1.2719 1,300 1,000 1.2989 1.2989 A change in foreign currency exchange rates could materially impact the fair value of these contracts; however, if this occurred, the fair value of the underlying exposures hedged by the contracts would change by a similar amount. Accordingly, management does not believe that a material change in foreign currency exchange rates used in the fair value of our derivative instruments would materially impact operations or cash flows. 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. Furthermore, our failure to identify new exposures and hedge them in an effective manner may result in material foreign currency gains or losses. The Company’s functional currency/reporting currency exchange rate exposures result from revenues and expenses that are denominated in currencies other than the U.S. Dollar. 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. Interest Rate Risk The Company’s investment portfolio of debt securities includes corporate bonds, treasury bills, asset-backed securities, agency bonds, sovereign bonds, and municipal bonds. Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value. As of December 31, 2020, the fair value of the Company’s portfolio of debt securities amounted to $498,365,000 with amortized cost amounts totaling $ 492,675,000 , maturities that do not exceed five years, and a yield to maturity of 1.18%. Differences between the fair value and principal amounts of the Company’s portfolio of debt securities are primarily attributable to discounts and premiums arising at the acquisition date, as well as unrealized gains and losses as of the balance sheet date. The Company’s investment policy allows investment in debt securities with effective maturities up to ten years, however as of December 31, 2020, 97% of the investment portfolio has effective maturity dates of less than three years. Given the relatively short maturities and investment-grade quality of the Company’s portfolio of debt securities as of December 31, 2020, a sharp rise in interest rates should not have a material adverse effect on the fair value of these instruments. As a result, the Company does not currently hedge these interest rate exposures. 32 Table of Content The following table presents the hypothetical change in the fair value of the Company’s portfolio of debt securities arising from selected potential changes in interest rates (in thousands). This modeling technique measures the change in fair value that would result from a parallel shift in the yield curve plus or minus 50 and 100 basis points (BP) over a twelve-month time horizon. Type of security Valuation of securities given an interest rate decrease No change in interest rates Valuation of securities given an interest rate increase (100 BP) (50 BP) 50 BP 100 BP Corporate bonds $ 239,731 $ 237,937 $ 236,142 $ 234,347 $ 232,553 Treasury bills 133,866 132,863 131,861 130,859 129,857 Asset-backed securities 93,619 92,918 92,218 91,517 90,816 Agency bonds 19,295 19,150 19,006 18,862 18,717 Sovereign bonds 12,285 12,193 12,100 12,009 11,917 Municipal bonds 7,144 7,090 7,038 6,983 6,930 $ 505,940 $ 502,151 $ 498,365 $ 494,577 $ 490,790 33 Table of Content