COGNEX CORP 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm 35 Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018 37 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 , 2019, and 2018 38 Consolidated Balance Sheets as of December 31, 2020 and 2019 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 40 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020 , 2019, and 2018 41 Notes to the Consolidated Financial Statements 42 Selected Quarterly Financial Data (unaudited) 74 Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts for the Years Ended December 31, 2020, 2019, and 2018 75 34 Table of Content REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Cognex Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Cognex Corporation (a Massachusetts corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 11, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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 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. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Application-Specific Customer Solutions 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 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. The principal considerations for our determination that application-specific customer solutions revenue is a critical audit matter are that determining the timing of validation and that the agreed-upon specifications in the contract have been met relies on the use of management estimates and requires a higher degree of auditor subjectivity and judgment in designing and executing audit procedures. Accounting for application-specific customer solutions requires the Company to monitor and evaluate customer contracts on an ongoing basis to determine the point in time at which the agreed-upon specifications in the contract have been met. Our audit procedures related to the revenue recognition of application-specific customer solutions included the following, among others. 35 Table of Content • 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 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. 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. 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 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. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2007. Boston, Massachusetts February 11, 2021 36 Table of Content 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 Foreign currency gain (loss) 3,697 ( 509 ) ( 1,064 ) Investment income 12,994 19,689 14,715 Other income (expense) ( 309 ) 1,212 ( 219 ) 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 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Content 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: Available-for-sale investments: Net unrealized gain (loss), net of tax of $981, $515, and ($188) in 2020 2019, and 2018, respectively 6,478 5,219 ( 1,185 ) Reclassification of net realized (gain) loss into current operations ( 4,119 ) ( 1,452 ) ( 501 ) Net change related to available-for-sale investments 2,359 3,767 ( 1,686 ) Foreign currency translation adjustments: Foreign currency translation adjustments 1,115 ( 541 ) ( 4,216 ) Net change related to foreign currency translation adjustments 1,115 ( 541 ) ( 4,216 ) Other comprehensive income (loss), net of tax 3,474 3,226 ( 5,902 ) Total comprehensive income $ 179,660 $ 207,091 $ 213,365 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Content COGNEX CORPORATION – CONSOLIDATED BALANCE SHEETS December 31, 2020 2019 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 269,073 $ 171,431 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, 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 Current liabilities: Accounts payable $ 16,270 $ 17,866 Accrued expenses 77,264 52,199 Accrued income taxes 9,379 30,333 Deferred revenue and customer deposits 21,274 14,432 Operating lease liabilities 8,110 5,647 Total current liabilities 132,297 120,477 Non-current operating lease liabilities 18,120 12,326 Deferred income taxes 314,952 332,344 Reserve for income taxes 14,257 11,563 Non-current accrued income taxes 48,915 51,113 Other liabilities 9,959 2,402 Total liabilities 538,500 530,225 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred stock, $.01 par value - Authorized: 400 shares in 2020 and 2019, respectively, no shares issued and outstanding — — Common stock, $.002 par value – Authorized: 300,000 shares in 2020 and 2019, respectively, issued and outstanding: 175,790 and 172,440 shares in 2020 and 2019, respectively 352 345 Additional paid-in capital 807,739 639,372 Retained earnings 487,912 753,268 Accumulated other comprehensive loss, net of tax ( 33,801 ) ( 37,275 ) 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. 39 Table of Content 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: Stock-based compensation expense 42,661 45,589 41,090 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 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 on sale of investments ( 4,119 ) ( 1,452 ) ( 501 ) Revaluation of contingent consideration ( 114 ) ( 1,401 ) ( 3 ) Change in deferred income taxes ( 3,353 ) ( 94,866 ) ( 413 ) Changes in operating assets and liabilities: Accounts receivable ( 21,285 ) 16,807 ( 1,867 ) 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 ) Accounts payable ( 1,688 ) 1,633 ( 7,247 ) Accrued expenses 24,542 ( 8,938 ) 380 Accrued income taxes ( 22,973 ) 25,266 ( 21,903 ) 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 Cash flows from investing activities: Purchases of investments ( 922,867 ) ( 1,031,642 ) ( 782,032 ) Maturities and sales of investments 1,104,605 1,062,962 812,565 Purchases of property, plant, and equipment ( 13,303 ) ( 21,745 ) ( 37,095 ) 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: Issuance of common stock under stock plans 125,715 64,581 26,783 Repurchase of common stock ( 51,036 ) ( 61,690 ) ( 203,822 ) Payment of dividends ( 390,508 ) ( 35,124 ) ( 31,865 ) Payment of contingent consideration ( 1,039 ) — ( 1,000 ) Net cash used in financing activities ( 316,868 ) ( 32,233 ) ( 209,904 ) Effect of foreign exchange rate changes on cash and cash equivalents 2,671 ( 523 ) ( 1,093 ) Net change in cash and cash equivalents 97,642 63,219 1,630 Cash and cash equivalents at beginning of year 171,431 108,212 106,582 Cash and cash equivalents at end of year $ 269,073 $ 171,431 $ 108,212 The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Content COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (In thousands) Shares Par Value Balance as of December 31, 2017 173,507 $ 347 $ 461,338 $ 668,587 $ ( 34,599 ) $ 1,095,673 Issuance of common stock under stock plans 1,493 3 26,780 — — 26,783 Repurchase of common stock ( 4,180 ) ( 8 ) — ( 203,814 ) — ( 203,822 ) Stock-based compensation expense — — 41,090 — — 41,090 Payment of dividends — — — ( 31,865 ) — ( 31,865 ) 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 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 501 ) ( 501 ) Foreign currency translation adjustment, net of tax of $0 — — — — ( 4,216 ) ( 4,216 ) Balance as of December 31, 2018 170,820 $ 342 $ 529,208 $ 646,214 $ ( 40,501 ) $ 1,135,263 Issuance of common stock under stock plans 3,018 6 64,575 — — 64,581 Repurchase of common stock ( 1,398 ) ( 3 ) — ( 61,687 ) — ( 61,690 ) Stock-based compensation expense — — 45,589 — — 45,589 Payment of dividends — — — ( 35,124 ) — ( 35,124 ) Net income — — — 203,865 — 203,865 Net unrealized gain (loss) on available-for-sale investments, net of tax of $515 — — — — 5,219 5,219 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 1,452 ) ( 1,452 ) Foreign currency translation adjustment, net of tax of $0 — — — — ( 541 ) ( 541 ) Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ ( 37,275 ) $ 1,355,710 Issuance of common stock under stock plans 4,565 9 125,706 — — 125,715 Repurchase of common stock ( 1,215 ) ( 2 ) — ( 51,034 ) — ( 51,036 ) Stock-based compensation expense — — 42,661 — — 42,661 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 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 4,119 ) ( 4,119 ) Foreign currency translation adjustment, net of tax of $0 — — — — 1,115 1,115 Balance as of December 31, 2020 175,790 $ 352 $ 807,739 $ 487,912 $ ( 33,801 ) $ 1,262,202 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of the significant accounting policies described below. Nature of Operations Cognex Corporation is a leading provider of machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks where vision is required. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the balance sheet date, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. 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 The consolidated financial statements include the accounts of Cognex Corporation and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated. Foreign Currency Translation 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 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 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 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 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 42 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 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 Inventories are stated at the lower of cost and net realizable value. Cost is determined using standard costs, which approximates actual costs under the first-in, first-out (FIFO) method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. 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 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. The Company generally disposes of obsolete inventory upon determination of obsolescence. The Company does not dispose of excess inventory immediately, due to the possibility that some of this inventory could be sold to customers as a result of differences between actual and forecasted demand. When inventory has been written down below cost, such reduced amount is considered the new cost basis for subsequent accounting purposes. As a result, the Company would recognize a higher than normal gross margin if the reserved inventory were subsequently sold. Property, Plant, and Equipment Property, plant, and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Buildings’ useful lives are 39 years, building improvements’ useful lives are ten years , and the useful lives of computer hardware and software, manufacturing test equipment, and furniture and fixtures range from two to ten years . Leasehold improvements are depreciated over the shorter of the estimated useful lives or the remaining terms of the leases. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. 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. 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, 43 Table of Contents 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. Leases At inception of a contract, the Company determines whether that contract is or contains a lease. The Company determines whether a contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. The Company has control of the asset if it has the right to direct the use of the asset and obtains substantially all of the economic benefits from the use of the asset throughout the period of use. As a practical expedient, the Company does not recognize a lease asset or lease liability for leases with a lease term of 12 months or less. In the determination of the lease term, the Company considers the existence of extension or termination options and the probability of those options being exercised. Lease contracts may include lease components and non-lease components, such as common area maintenance and utilities for property leases. As a practical expedient, the Company accounts for the non-lease components together with the lease components as a single lease component for all of its leases. The Company classifies a lease as a finance lease when it meets any of the following criteria at the lease commencement date: (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. On the lease commencement date, the Company records a lease asset and lease liability on the balance sheet. The lease asset consists of: (1) the amount of the initial lease liability; (2) any lease payments made to the lessor at or before the lease commencement date, minus any lease incentives received; and (3) any initial direct cost incurred by the Company. Initial direct costs are incremental costs of a lease that would not have been incurred if the lease had not been obtained and are capitalized as part of the lease asset. The lease liability equals the present value of the future cash payments discounted using the Company's incremental borrowing rate. The Company’s incremental borrowing rate is the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments over a similar term, which is the three-month London Interbank Offered Rate (LIBOR) plus a 2% credit risk spread. Operating lease expense equals the total cash payments recognized on a straight-line basis over the lease term. The amortization of the lease asset is calculated as the straight-line lease expense less the accretion of the interest on the lease liability each period. The lease liability is reduced by the cash payment less the interest each period. 44 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill Goodwill is stated at cost. 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 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 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. 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 on the income approach. Intangible Assets Intangible assets are stated at cost and amortized over the assets’ estimated useful lives. Intangible assets are either amortized in relation to the relative cash flows anticipated from the intangible asset or using the straight-line method, depending upon facts and circumstances. 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 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 on 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 on historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or circumstances impacting product quality become known that would not have been taken into account using historical data. Contingencies 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 are expensed as incurred. 45 Table of Contents 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 The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The framework in support of this core principle includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied. Identifying the Contract with the Customer 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. 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 The Company identifies performance obligations as promises in contracts to transfer distinct goods or services. Standard products and services that the Company regularly sells separately are accounted for as distinct performance obligations. Application-specific customer solutions that are comprised of a combination of products and services are accounted for as one performance obligation to deliver a total solution to the customer. 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 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. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized. The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. If revenue is recognized before immaterial promises have been completed, then the costs related to such immaterial promises are accrued at the time of sale. Determining the Transaction Price The Company determines the transaction price as the amount of consideration it expects to receive in exchange for transferring promised goods or services to the customer. Amounts collected from customers for sales taxes are excluded from the transaction price. If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. 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 46 Table of Contents 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 The Company allocates the transaction price to each performance obligation at contract inception based on a relative stand-alone selling price basis, or the price at which the Company would sell the good or service separately to similar customers in similar circumstances. Recognizing Revenue When (or As) the Performance Obligations are Satisfied The Company recognizes revenue when it transfers the promised goods or services to the customer. Revenue for standard products is recognized at the point in time when the customer obtains control of the goods, which is typically upon delivery when the customer has legal title, physical possession, the risks and rewards of ownership, and an enforceable obligation to pay for the products. Revenue for services, which are not material, is typically recognized over the time the service is provided. Revenue for application-specific customer solutions is recognized at the point in time when the solution is validated, which is the point in time when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligations in the arrangement. Although the customer may have taken legal title and physical possession of the goods when they arrived at the customer’s designated site, the significant risks and rewards of ownership transfer to the customer only upon validation. Revenue for on-site support services related to these solutions is recognized over the time the service is provided. In certain instances, an arrangement may include customer-specified acceptance provisions or performance guarantees that allow the customer to accept or reject delivered products that do not meet the customer’s specifications. If the Company can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, then customer acceptance is a formality. If acceptance provisions are presumed to be substantive, then revenue is deferred until customer acceptance. For the Company’s standard products and services, revenue recognition and billing typically occur at the same time. For application-specific customer solutions, however, the agreement with the customer may provide for billing terms which differ from revenue recognition criteria, resulting in either deferred revenue or unbilled revenue. Credit assessments are performed to determine payment terms, which vary by region, industry, and customer. Prepayment terms result in contract liabilities for customer deposits. 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 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. Management exercises judgment when determining the amount of revenue to be recognized each period. Such judgments include, but are not limited to, assessing the customer’s ability and intention to pay substantially all of the contract consideration when due, determining when two or more contracts should be combined and accounted for as a single contract, determining whether a contract modification has occurred, assessing whether promises are immaterial in the context of the contract, determining whether material promises in a contract represent distinct performance obligations, estimating the transaction price for a contract that contains variable consideration, determining the stand-alone selling price of each performance obligation, determining whether control is transferred over time or at a point in time for performance obligations, and assessing whether formal customer acceptance provisions are substantive. Research and Development 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. The Company determines technological feasibility at the time the product reaches beta in its stage of development. Historically, the time incurred between beta and general release to customers has been short, and therefore, the costs have been insignificant. 47 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Advertising Costs Advertising costs are expensed as incurred and totaled $ 1,443,000 in 2020, $ 1,385,000 in 2019, and $ 1,662,000 in 2018. Stock-Based Compensation 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 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 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 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. The term “forfeitures” is distinct from “expirations” and represents only the unvested portion of the surrendered award. 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 on the employee’s service, and an increase or decrease to compensation expense is recorded to true up the final expense. Taxes 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. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statutes of limitations. Derecognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. Only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g., resolution due to the expiration of the statutes of limitations) or are not expected to be paid within one year are not classified as current. 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. 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. Sales tax in the United States and similar taxes in other jurisdictions that are collected from customers and remitted to government authorities are presented on a gross basis (i.e., a receivable from the customer with a corresponding payable to the government). Amounts collected from customers and retained by the Company during tax holidays are recognized as non-operating income when earned. 48 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Income Per Share Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period plus potential dilutive common shares. Dilutive common equivalent shares consist of stock options and restricted stock units and are calculated using the treasury stock method. Common equivalent shares do not qualify as participating securities. In periods where the Company records a net loss, potential common stock equivalents are not included in the calculation of diluted net loss per share as their effect would be anti-dilutive. Comprehensive Income Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. 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 $ 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. Amounts reclassified from accumulated other comprehensive income (loss) to investment income on the Consolidated Statements of Operations were net realized gains of $ 4,119,000 , $ 1,452,000 , and $ 501,000 for 2020, 2019, and 2018, respectively. Concentrations of Risk 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 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 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. This contractor has agreed to provide Cognex with termination notification periods and last-time-buy rights, if and when that may be applicable. We rely upon this contractor to provide quality product and meet delivery schedules. 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. 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 sources, we may have to redesign our products, which may lead to a delay in manufacturing and a possible loss of sales. 49 Table of Contents 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 contribute 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 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 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 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 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. 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. 50 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2019-12, "Simplifying the Accounting for Income Taxes" ASU 2019-12 applies to all entities within the scope of Topic 740, Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also simplify the accounting for income taxes by doing the following: (1) requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that included the enacted date. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted; however, an entity that elects to early adopt the amendments must adopt all the amendments in the same period. The amendments in this ASU related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Management does not expect ASU 2019-12 to have a material impact on the Company's consolidated financial statements and disclosures. 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. 51 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Fair Value Measurements Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Money market instruments $ 2,464 $ — $ — 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 Economic hedge forward contracts — 265 — Liabilities: Economic hedge forward contracts — 38 — 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. For debt securities, this service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the daily valuations. The Company's forward contracts are typically traded or executed in over-the-counter markets with a high degree of pricing transparency. The market participants are generally large commercial banks. The Company'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. 52 Table of Contents 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 Fair value adjustment to GVi contingent consideration ( 1,646 ) Fair value adjustment to Chiaro contingent consideration 245 Balance as of December 31, 2019 1,153 Fair value adjustment to Chiaro contingent consideration ( 114 ) Payment of Chiaro contingent consideration ( 1,039 ) Balance as of December 31, 2020 $ — 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, 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. NOTE 4: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of the following (in thousands): December 31, 2020 2019 Cash $ 266,609 $ 155,498 Money market instruments 2,464 15,933 Cash and cash equivalents 269,073 171,431 Treasury bills 35,403 92,914 Corporate bonds 32,714 65,624 Asset-backed securities 25,160 66,680 Sovereign bonds 8,660 6,294 Municipal bonds 1,303 4,630 Certificate of deposit — 4,328 Current investments 103,240 240,470 Corporate bonds 203,428 146,474 Treasury bills 96,458 216,334 Asset-backed securities 67,058 46,403 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 53 Table of Contents 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. government; 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; 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): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Treasury bills $ 34,978 $ 425 $ — $ 35,403 Corporate bonds 32,394 320 — 32,714 Asset-backed securities 24,999 161 — 25,160 Sovereign bonds 8,590 70 — 8,660 Municipal bonds 1,297 6 — 1,303 Non-current: Corporate bonds 200,549 2,879 — 203,428 Treasury bills 95,522 936 — 96,458 Asset-backed securities 66,329 729 — 67,058 Agency bonds 18,913 93 — 19,006 Municipal bonds 5,725 10 5,735 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 ) Write-offs — 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. 54 Table of Contents 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): <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 NOTE 5: Inventories Inventories consisted of the following (in thousands): December 31, 2020 2019 Raw materials $ 26,800 $ 27,285 Work-in-process 4,780 5,503 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. NOTE 6: Property, Plant, and Equipment Property, plant, and equipment consisted of the following (in thousands): December 31, 2020 2019 Land $ 3,951 $ 3,951 Buildings 24,533 24,533 Building improvements 45,978 49,289 Leasehold improvements 12,682 10,790 Computer hardware and software 58,162 67,474 Manufacturing test equipment 29,816 31,278 Furniture and fixtures 6,372 6,800 181,494 194,115 Less: accumulated depreciation ( 102,321 ) ( 104,672 ) $ 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. 55 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: Leases The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. Certain leases may contain options to extend or terminate the lease at the Company's sole discretion. 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, 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 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, Amount 2021 $ 9,101 2022 6,863 2023 5,072 2024 2,074 2025 1,317 Thereafter 4,960 $ 29,387 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. 56 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Amount Balance as of December 31, 2018 $ 113,208 Acquisition of Sualab Co., Ltd. 130,142 Foreign exchange rate changes 95 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. 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. NOTE 9: Intangible Assets Intangible assets consisted of the following (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value Distribution networks $ 38,060 $ 38,060 $ — Completed technologies 24,217 12,397 11,820 Customer relationships 10,578 7,160 3,418 Non-compete agreements 710 436 274 Trademarks 110 67 43 Balance as of December 31, 2020 $ 73,675 $ 58,120 $ 15,555 Gross Carrying Value Accumulated Amortization Net Carrying Value Distribution networks $ 38,060 $ 38,060 $ — Completed technologies 31,987 9,160 22,827 Customer relationships 14,407 6,402 8,005 In-process technologies 8,200 — 8,200 Non-compete agreements 710 350 360 Trademarks 110 12 98 Balance as of December 31, 2019 $ 93,474 $ 53,984 $ 39,490 57 Table of Contents 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. Ltd. ("Sualab") as a result of the deteriorating global economic conditions from the COVID-19 pandemic. Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $ 10,070,000 , $ 5,900,000 , and $ 3,382,000 , respectively. In addition, customer relationships acquired from EnShape GmbH that had a gross carrying value of $ 447,000 and accumulated amortization of $ 228,000 on the measurement date were reduced to zero , resulting in an impairment charge of $ 219,000 . 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 2021 $ 3,656 2022 3,286 2023 2,594 2024 2,080 2025 1,757 Thereafter 2,182 $ 15,555 NOTE 10: Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2020 2019 Company bonuses $ 19,343 $ — Salaries, commissions, and payroll taxes 14,025 11,500 Foreign retirement obligations 6,886 6,146 Warranty obligations 5,406 4,713 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): Balance as of December 31, 2018 $ 4,743 Provisions for warranties issued during the period 3,841 Fulfillment of warranty obligations ( 3,871 ) Balance as of December 31, 2019 4,713 Provisions for warranties issued during the period 3,463 Fulfillment of warranty obligations ( 2,770 ) Balance as of December 31, 2020 $ 5,406 58 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Commitments and Contingencies As of December 31, 2020, the Company had outstanding purchase orders totaling $ 32,315,000 to purchase inventory from various vendors. Certain of these purchase orders may be canceled by the Company, subject to cancellation penalties. These purchase commitments relate to expected sales in 2021. Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations. NOTE 12: Indemnification Provisions Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. The maximum potential amount of future payments the Company could be required to make under these provisions is unlimited. The Company has never incurred significant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is not material. In the ordinary course of business, the Company may accept standard limited indemnification provisions in connection with the sale of its products, whereby it indemnifies its customers for certain direct damages incurred in connection with third-party patent or other intellectual property infringement claims with respect to 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 subject to fixed monetary limits. The Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is not material. 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 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. NOTE 13: Derivative Instruments The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates. 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. 59 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company had the following outstanding forward contracts (in thousands): December 31, 2020 December 31, 2019 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: 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 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 Balance Sheet Location Fair Value Balance Sheet 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 $ 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, 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, 2020 2019 2018 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ ( 12,308 ) $ 1,305 $ ( 285 ) 60 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: Revenue Recognition 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 $ 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 represent amounts billed and currently due from customers which are reported at their net estimated realizable value. The Company maintains an allowance against its accounts receivable for credit losses. Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition. On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. The Company did not record an adjustment to retained earnings as this ASU did not have a material impact on the Company's consolidated allowance for credit losses. The following table summarizes changes in the allowance for credit losses (in thousands): Amount 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 61 Table of Contents 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): Amount Balance as of December 31, 2018 $ 9,845 Increases to deferred revenue and customer deposits 53,422 Recognition of revenue ( 48,730 ) Foreign exchange rate changes ( 105 ) Balance as of December 31, 2019 14,432 Increases to deferred revenue and customer deposits 120,008 Recognition of revenue ( 114,014 ) Foreign exchange rate changes 848 Balance as of December 31, 2020 $ 21,274 As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year. 62 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15: Shareholders’ Equity Preferred Stock The Company has 400,000 shares of authorized but unissued $ .01 par value preferred stock. Common 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 $ .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 . 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. Common shareholders are also entitled to dividends when and if declared by the Company’s Board of Directors. Shareholder Rights Agreement On December 5, 2018, the Company’s Board of Directors allowed the Company’s Shareholder Rights Agreement and associated rights to expire in accordance with their terms without renewal. In connection with the adoption of the Shareholder Rights Agreement, the Company had filed Articles of Amendment to its Restated Articles of Organization establishing Series E Junior Participating Cumulative Preferred Stock with the Secretary of State of The Commonwealth of Massachusetts, setting forth the rights, powers, and preferences of the Series E Junior Participating Cumulative Preferred Stock issuable upon exercise of the rights (the “Preferred Shares”). Effective on April 26, 2019, the Company filed Articles of Amendment to the Company’s Restated Articles of Organization with the Secretary of State of The Commonwealth of Massachusetts eliminating the Preferred Shares and returning them to authorized but undesignated shares of the Company’s preferred stock. Stock Repurchases In April 2017, the Company's Board of Directors authorized the repurchase of $ 100,000,000 of the Company's common stock. The Company repurchased 1,744,000 shares at a cost of $ 100,000,000 under this April 2017 program, including 803,000 shares at a cost of $ 45,200,000 in 2018. In February 2018, the Company's Board of Directors authorized the repurchase of $ 150,000,000 of the Company's common stock. The Company repurchased 3,174,000 shares at a cost of $ 150,000,000 in 2018 under this February 2018 program. In October 2018, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock. The Company repurchased 203,000 shares at a cost of $ 8,622,000 in 2018 under this October 2018 program. 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 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. Dividends 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. 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. 63 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: Stock-Based Compensation Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units (RSUs). 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. Participants are not entitled to dividends on RSUs. Stock Options The following table summarizes the Company’s stock option activity: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 12,899 $ 37.95 Granted 1,245 54.68 Exercised ( 4,565 ) 27.54 Forfeited or expired ( 609 ) 50.28 Outstanding as of December 31, 2020 8,970 $ 44.73 7.11 $ 318,873 Exercisable as of December 31, 2020 3,135 $ 33.79 5.60 $ 145,735 Options vested or expected to vest as of December 31, 2020 (1) 8,235 $ 44.08 7.01 $ 298,118 (1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options. The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Year Ended December 31, 2020 2019 2018 Risk-free rate 1.4 % 2.7 % 2.9 % Expected dividend yield 0.41 % 0.39 % 0.35 % Expected volatility 37 % 37 % 39 % Expected term (in years) 6.0 5.3 5.4 Risk-free rate The risk-free rate was based on a treasury instrument whose term was consistent with the contractual term of the option. Expected dividend yield Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date. Expected volatility The expected volatility was based 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 The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. 64 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average grant-date fair value of stock options granted was $ 19.62 in 2020, $ 18.62 in 2019, and $ 20.84 in 2018. The total intrinsic value of stock options exercised was $ 166,796,000 in 2020, $ 90,762,000 in 2019, and $ 52,629,000 in 2018. The total fair value of stock options vested was $ 45,998,000 in 2020, $ 38,974,000 in 2019, and $ 31,106,000 in 2018. Restricted Stock Units (RSUs) The following tables summarizes the Company's RSU activity: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2019 150 $ 48.63 Granted 446 52.09 Vested — — 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 The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently applies an estimated forfeiture rate of 7 % to all unvested options for senior management and a rate of 12 % for all other employees. Each year during the first quarter, the Company revises its forfeiture rate. This resulted in an increase to compensation expense of $ 1,787,000 in 2020, 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 $ 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. The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenue $ 1,365 $ 1,504 $ 2,447 Research, development, and engineering 13,387 15,748 14,578 Selling, general, and administrative 27,909 28,337 24,065 $ 42,661 $ 45,589 $ 41,090 NOTE 17: Employee Savings Plan Under the Company's Employee Savings Plan, a defined contribution plan, all U.S. employees who have attained age 21 may contribute up to 100 % of their pay on a pre-tax basis under the Company's Employee Savings Plan, subject to the annual dollar limitations established by the Internal Revenue Service ("IRS"). The Company matches 50 % of the first 6 % of pay an employee contributes. Company contributions vest 25 %, 50 %, 75 %, and 100 % after one, two, three, and four years of continuous employment with the Company, respectively. Company contributions totaled $ 2,636,000 in 2020, $ 2,729,000 in 2019, and $ 2,540,000 in 2018. Cognex stock is not an investment alternative and Company contributions are not made in the form of Cognex stock. 65 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18: Income Taxes 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. Income tax expense (benefit) consisted of the following (in thousands): Year Ended December 31, 2020 2019 2018 Current: Federal $ 160 $ 15,854 $ 10,624 State 921 2,108 ( 879 ) Foreign 13,197 30,670 6,307 14,278 48,632 16,052 Deferred: 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 (benefit), or effective tax rate, was as follows: Year Ended December 31, 2020 2019 2018 Income tax expense at U.S. federal statutory corporate tax rate 21 % 21 % 21 % State income taxes, net of federal benefit 1 2 1 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 return filings ( 5 ) — — Discrete tax expense related to German withholding 1 — — Discrete tax expense related to migration of acquired IP — 18 — Discrete tax (benefit) related to change in tax structure — ( 268 ) — 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 ) — Other 2 3 1 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 international tax structure noted above. 66 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The change in this accounting policy impacted the Company's 2019 reported results as follows (in thousands): Statement of Operations Year Ended December 31, 2019 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 Effect of change Deferred tax assets $ 449,519 $ 469,621 $ ( 20,102 ) Deferred tax liabilities $ 332,344 $ — $ 332,344 Statement of Shareholders' Equity Year Ended December 31, 2019 As reported under the new accounting policy As computed under the previous accounting policy Effect of change Retained earnings $ 753,268 $ 1,105,714 $ ( 352,446 ) There were no material differences to the Company's reported results in prior years. 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. 67 Table of Contents 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. The result of these transactions was a net discrete tax benefit of $ 87,500,000 . Management expects its current effective tax rate excluding discrete items to increase slightly in future years as a result of this change. 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. In December 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) was signed into law. 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. 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. Tax Reserves The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands): Balance of reserve for income taxes as of December 31, 2018 $ 7,294 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods 199 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period 5,259 Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations ( 1,161 ) Balance of reserve for income taxes as of December 31, 2019 11,591 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods 162 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period 3,383 Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations ( 1,184 ) Balance of reserve for income taxes as of December 31, 2020 $ 13,952 The Company’s reserve for income taxes, including gross interest and penalties, was $ 15,285,000 as of December 31, 2020, which included $ 14,257,000 classified as a non-current liability and $ 1,028,000 recorded as a reduction to non-current deferred tax assets. The Company's reserve for income taxes, including gross interest and penalties, was $ 12,591,000 as of December 31, 2019, which included $ 11,563,000 classified as a non-current liability and $ 1,028,000 recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was $ 1,332,000 and $ 1,000,000 as of December 31, 2020 and December 31, 2019, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $ 1,900,000 to $ 2,000,000 over the next twelve months. The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts. 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. 68 Table of Contents 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 Deferred tax assets and liabilities, presented on a gross basis by jurisdiction, consisted of the following (in thousands): December 31, 2020 2019 Non-current gross deferred tax assets: Intangible asset in connection with change in tax structure $ 424,156 $ 437,500 Stock-based compensation expense 13,294 15,042 Federal and state tax credit carryforwards 10,171 8,491 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: GILTI tax basis differences in connection with change in tax structure $ ( 339,325 ) $ ( 350,000 ) Other GILTI tax basis differences ( 39 ) ( 2,446 ) $ ( 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. 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. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. 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. 69 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19: Weighted Average Shares Weighted-average shares were calculated as follows (in thousands): Year Ended December 31, 2020 2019 2018 Basic weighted-average common shares outstanding 173,489 171,194 172,333 Effect of dilutive stock awards 3,103 4,075 5,073 Diluted weighted-average common and common-equivalent shares outstanding 176,592 175,269 177,406 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 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. NOTE 20: Segment and Geographic Information The Company operates in one segment, machine vision technology. The Company’s chief operating decision maker is the chief executive officer, who makes decisions to allocate resources and assesses performance at the corporate level. The Company offers a variety of machine vision products that have similar economic characteristics, have the same production processes, and are distributed by the same sales channels to the same types of customers. The following table summarizes information about geographic areas (in thousands): 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 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. 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. 70 Table of Contents NOTE 21: Business Acquisitions Sualab Co., Ltd. On October 16, 2019, the Company acquired all the outstanding shares of Sualab Co., Ltd. (Sualab), a provider of deep learning-based vision software for industrial image analysis based in Korea. 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. Sualab's intellectual property, engineering expertise, and market coverage are expected to increase the Company's existing deep learning capabilities. Combined with intellectual property acquired from ViDi Systems S.A. in 2017, the Company is now a leading provider of deep learning-based industrial vision software. The purchase price that was not related to employment was allocated as follows (in thousands): Cash and cash equivalents $ 3,691 Current investments 9,487 Accounts receivable 1,200 Inventories 115 Prepaid expenses and other current assets 252 Property, plant, and equipment 726 Operating lease assets 2,792 Deferred income tax asset 3,087 Other assets 513 Accounts payable ( 28 ) Accrued expenses ( 2,633 ) Deferred revenue and customer deposits ( 764 ) Operating lease liabilities ( 448 ) Non-current operating lease liabilities ( 2,344 ) Deferred income tax liabilities ( 7,926 ) Other liabilities ( 10 ) Completed technologies 18,300 In-process technologies 8,200 Customer relationships 5,800 Non-compete agreements 340 Trademarks 110 Goodwill 129,138 Purchase price $ 169,598 The completed technologies, in-process technologies, customer relationships, trademarks, and non-compete agreements are included in "Intangible assets" on the Consolidated Balance Sheet. 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 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. 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. Completed technologies, in-process technologies, 71 Table of Contents 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. NOTE 22: 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): Amount One-time termination benefits $ 10,159 Contract termination costs 5,207 Other associated costs 558 $ 15,924 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 72 Table of Contents 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. NOTE 23: Subsequent Events On February 11, 2021, the Company's Board of Directors declared a cash dividend of $ 0.060 per share. The dividend is payable March 12, 2021 to all shareholders of record as of the close of business on February 26, 2021 . 73 COGNEX CORPORATION - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter Ended March 29, 2020 June 28, 2020 September 27, 2020 December 31, 2020 (In thousands, except per share amounts) 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 March 31, 2019 June 30, 2019 September 29, 2019 December 31, 2019 (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 Diluted net income per share $ 0.19 $ 0.28 $ 0.24 $ 0.46 74 Table of Contents COGNEX CORPORATION – SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS Additions Description Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions Other Balance at End of Period (In thousands) 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 (2) Foreign currency exchange rate changes 75 Table of Contents ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on accounting or financial disclosure during 2020 or 2019.