What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-10-28 · 180 added, 336 removed, 416 unchanged (55% of the section changed)

3 unchanged sentences

(In thousands, except per share amounts)

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(unaudited) (unaudited)

Three-months Ended

April 4, 2021 March 29, 2020

Revenue $ 239,027 $ 167,235

3 unchanged sentences

Selling, general, and administrative expenses 72,424 69,138

Restructuring charges (Note 16) 251 — 15,049 —

Intangible asset impairment charges (Note 8) — — 19,571 —

Operating income 78,453 20,951

16 unchanged sentences

(In thousands)

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(unaudited) (unaudited)

Three-months Ended

April 4, 2021 March 29, 2020

Net income $ 69,848 $ 20,477

1 unchanged sentence

Available-for-sale investments:

Net unrealized gain (loss), net of tax of $2,855 and ($5) in the three-month periods and net of tax of $1,067 and $502 in the nine-month periods, respectively ( 2,308 ) 265 6,282 4,827

Reclassification of credit (recovery) loss on investments into current operations — — 75 —

Reclassification of net realized (gain) loss into current operations ( 786 ) ( 294 ) ( 3,591 ) ( 716 )

Net unrealized gain (loss), net of tax of ($585) and ($952) in the three-month periods, respectively ( 1,958 ) ( 3,861 )

Reclassification of credit loss (recovery) on investments into current operations — 160

Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations — ( 1,850 )

Net change related to available-for-sale investments ( 1,958 ) ( 5,551 )

8 unchanged sentences

(In thousands)

September 27, 2020 December 31, 2019

April 4, 2021 December 31, 2020

Current assets:

Cash and cash equivalents $ 242,688 $ 269,073

Current investments, amortized cost of $94,761 and $235,610 in 2020 and 2019, respectively, allowance for expected credit losses of $0 in 2020 and 2019 95,365 240,470

Accounts receivable, less reserves of $913 and $1,821 in 2020 and 2019, respectively 127,755 103,447

Current investments, amortized cost of $142,469 and $102,258 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020 143,233 103,240

Accounts receivable, allowance for credit losses of $ 798 and $ 831 in 2021 and 2020, respectively

128,822 125,696

Unbilled revenue 1,663 5,632

2 unchanged sentences

Total current assets 625,571 601,691

Non-current investments, amortized cost of $613,838 and $431,633 in 2020 and 2019, respectively, allowance for expected credit losses of $75 and $0 in 2020 and 2019, respectively 619,343 433,452

Non-current investments, amortized cost of $487,978 and $390,417 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020 490,363 395,125

Property, plant, and equipment, net 77,081 79,173

34 unchanged sentences

(In thousands)

Nine-months Ended

September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Cash flows from operating activities:

3 unchanged sentences

Depreciation of property, plant, and equipment 4,259 5,631

Loss (gain) on disposal of property, plant, and equipment 3 2

Amortization of intangible assets 927 1,388

Intangible asset impairment charges 19,571 —

Excess and obsolete inventory charges 705 1,065

Operating lease asset impairment charges 2,534 —

Amortization of discounts or premiums on investments 586 106

1 unchanged sentence

Credit loss on investments — 160

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

Change in deferred income taxes 1,250 ( 1,826 )

16 unchanged sentences

Cash flows from financing activities:

Issuance of common stock under stock plans 91,390 31,780

Net proceeds from issuance of common stock under stock plans 34,744 9,971

Repurchase of common stock ( 6,479 ) ( 51,036 )

Payment of dividends ( 10,595 ) ( 9,503 )

Payment of contingent consideration ( 1,039 ) —

Net cash provided by (used in) financing activities 17,670 ( 50,568 )

12 unchanged sentences

Shares Par Value

Balance as of June 28, 2020 173,047 $ 346 $ 710,412 $ 702,597 $ ( 36,877 ) $ 1,376,478

Issuance of common stock under stock plans 1,586 3 43,152 — — 43,155

Repurchase of common stock — — — — — —

Stock-based compensation expense — — 9,268 — — 9,268

Payment of dividends — — — ( 9,582 ) — ( 9,582 )

Net income — — — 87,506 — 87,506

Net unrealized gain (loss) on available-for-sale investments, net of tax of $2,855 — — — — ( 2,308 ) ( 2,308 )

Reclassification of credit (recovery) loss on investments — — — — — —

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 786 ) ( 786 )

Foreign currency translation adjustment — — — — 2,098 2,098

Balance as of September 27, 2020 (unaudited) 174,633 $ 349 $ 762,832 $ 780,521 $ ( 37,873 ) $ 1,505,829

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

Balance as of June 30, 2019 170,661 $ 341 $ 578,871 $ 649,234 $ ( 36,806 ) $ 1,191,640

Issuance of common stock under stock plans 236 1 5,362 — — 5,363

Repurchase of common stock — — — — — —

Stock-based compensation expense — — 10,194 — — 10,194

Payment of dividends — — — ( 8,536 ) — ( 8,536 )

Net income — — — 41,685 — 41,685

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($5) — — — — 265 265

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 294 ) ( 294 )

Foreign currency translation adjustment — — — — ( 1,099 ) ( 1,099 )

Balance as of September 29, 2019 (unaudited) 170,897 $ 342 $ 594,427 $ 682,383 $ ( 37,934 ) $ 1,239,218

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

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Common Stock Additional

Paid-in Capital Retained Earnings Accumulated

Comprehensive

Shareholders’

Shares Par Value

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

Issuance of common stock under stock plans 3,408 6 91,384 — — 91,390

Net issuance of common stock under stock plans 898 1 34,743 — — 34,744

Repurchase of common stock ( 80 ) — — ( 6,479 ) — ( 6,479 )

Stock-based compensation expense — — 12,009 — — 12,009

Payment of dividends — — — ( 28,554 ) — ( 28,554 )

Payment of dividends ($0.060 per common share) — — — ( 10,595 ) — ( 10,595 )

Net income — — — 69,848 — 69,848

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($585) — — — — ( 1,958 ) ( 1,958 )

Reclassification of credit loss on investments — — — — 75 75

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 3,591 ) ( 3,591 )

Foreign currency translation adjustment — — — — ( 2,770 ) ( 2,770 )

Balance as of September 27, 2020 (unaudited) 174,633 $ 349 $ 762,832 $ 780,521 $ ( 37,873 ) $ 1,505,829

Balance as of April 4, 2021 (unaudited) 176,608 $ 353 $ 854,491 $ 540,686 $ ( 38,529 ) $ 1,357,001

Common Stock Additional

4 unchanged sentences

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 1,475 3 31,777 — — 31,780

Net issuance of common stock under stock plans 463 1 9,970 — — 9,971

Repurchase of common stock ( 1,215 ) ( 2 ) — ( 51,034 ) — ( 51,036 )

Stock-based compensation expense — — 14,790 — — 14,790

Payment of dividends — — — ( 25,682 ) — ( 25,682 )

Payment of dividends ($0.055 per common share) — — — ( 9,503 ) — ( 9,503 )

Net income — — — 20,477 — 20,477

Net unrealized gain (loss) on available-for-sale investments, net of tax of ($952) — — — — ( 3,861 ) ( 3,861 )

Reclassification of credit loss (recovery) on investments — — — — 160 160

Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 1,850 ) ( 1,850 )

Foreign currency translation adjustment — — — — ( 7,365 ) ( 7,365 )

Balance as of September 29, 2019 (unaudited) 170,897 $ 342 $ 594,427 $ 682,383 $ ( 37,934 ) $ 1,239,218

Balance as of March 29, 2020 (unaudited) 171,688 $ 344 $ 664,132 $ 713,208 $ ( 50,191 ) $ 1,327,493

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

3 unchanged sentences

As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles (GAAP).

As a result of the adoption of ASU 2016-13 "Measurement of Credit Losses on Financial Instruments," Cognex Corporation (the "Company") has provided new disclosures related to credit losses in this Quarterly Report on Form 10-Q.

Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for a full description of other significant accounting policies.

In the opinion of the management of the Company, the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, excess and obsolete inventory charges (Note 5), intangible asset impairment charges (Note 8), restructuring charges (Note 16), and financial statement reclassifications necessary to present fairly the Company’s financial position as of September 27, 2020, and the results of its operations for the three-month and nine-month periods ended September 27, 2020 and September 29, 2019, and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month and nine-month periods ended September 27, 2020 are not necessarily indicative of the results to be expected for the full year.

Cash, Cash Equivalents, and Investments

Money market instruments, as well as certificates of deposit and debt securities with original maturities of three months or less, are classified as cash equivalents and are stated at amortized cost.

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

Debt securities with remaining maturities greater than one year are classified as non-current investments.

It is the Company’s policy to invest in debt securities with effective maturities that do not exceed ten years.

Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax and credit losses, recorded in shareholders’ equity as other comprehensive income (loss).

Realized gains and losses are included in current operations, along with the amortization of the discount or premium on debt securities arising at acquisition, and are calculated using the specific identification method.

The Company’s limited partnership interest is accounted for using the cost method because the Company’s investment is less than 5% of the partnership and the Company has no influence over the partnership’s operating and financial policies.

The carrying value of this investment has been reduced to zero, and therefore, distributions are recorded as investment income as they occur.

Management monitors the carrying value of its investments in debt securities compared to their fair value to determine whether a credit loss or other type of impairment has occurred.

If the fair value of a debt security is less than its amortized cost, the Company assesses whether the decline has resulted from a credit loss or other factors.

In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security.

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

The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis of the security.

Credit losses on impaired securities continue to be measured in subsequent periods, using the present value of expected future cash flows, and changes in the expected credit losses are recorded in current operations.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statement of Operations.

When developing an estimate of the expected credit losses, the Company considers all available information relevant to assessing the collectability of cash flows.

This information includes internal and external factors, historical and current events, reasonable and supportable forecasts including management's expectations of future economic conditions, the type of security, the credit rating of the security, and the size of the loss position, as well as other relevant information.

An impairment is recognized as a write-down if (i) the Company has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis.

If impairment is considered upon condition (i) or (ii) described above, the debt security's amortized cost basis is written-down to its fair value and the impairment is recognized in current operations.

Subsequent increases in the fair value of the debt securities after the write-down are included in shareholders' equity as other comprehensive income.

The differences between the new amortized cost basis and the cash flows expected to be collected are accreted as interest income.

Unrealized losses, that have not been recorded through an allowance for credit losses or write-down of the debt security, are recorded in shareholders' equity as other comprehensive loss, net of the applicable taxes.

Accounts Receivable

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

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

The Company establishes an allowance against accounts receivable for potential credit losses and records bad debt expense in current operations when it determines receivables are at risk for collection based upon the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, general economic and industry conditions, and reasonable forecasts about the future, as well as various other factors.

Receivables are written off against this allowance in the period they are determined to be uncollectible and payments subsequently received on previously written-off receivables are recorded as a reversal of the bad debt expense.

Credit losses are included in "Selling, general, and administrative expenses" on the Consolidated Statement of Operations.

In the opinion of the management of Cognex Corporation (the "Company"), the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, and financial statement reclassifications necessary to present fairly the Company’s financial position as of April 4, 2021, and the results of its operations for the three-month periods ended April 4, 2021 and March 29, 2020, and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month period ended April 4, 2021 are not necessarily indicative of the results to be expected for the full year.

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.

The amendments in this ASU eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

They also clarify and simplify other aspects of the accounting for income taxes.

The Company adopted ASU 2019-12 on January 1, 2021.

Upon adoption, ASU 2019-12 did not 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 Company adopted ASU 2020-08 on January 1, 2021.

Upon adoption, ASU 2020-08 did not 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.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting" and (ASU) 2021-01, "Reference Rate Reform (Topic 848):

The amendments in these ASUs 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.

Together, the ASUs 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.

The amendments in these ASUs are effective for all entities as of March 12, 2020 through December 31, 2022.

Management does not expect ASU 2020-04 or ASU 2021-01 to have a material impact on the Company's consolidated financial statements and disclosures.

COGNEX CORPORATION

2 unchanged sentences

Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of September 27, 2020 (in thousands):

The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of April 4, 2021 (in thousands):

Quoted Prices in

4 unchanged sentences

Money market instruments $ 25,375 $ — $ —

Treasury bills — 270,091 —

Corporate bonds — 384,761 —

Treasury bills — 131,409 —

Asset-backed securities — 79,400 —

1 unchanged sentence

Sovereign bonds — 12,050 —

Commercial paper — 10,000 —

Municipal bonds — 7,015 —

1 unchanged sentence

Economic hedge forward contracts — 124 —

Contingent consideration liabilities — — —

The Company’s money market instruments are reported at fair value based upon the daily market price for identical assets in active markets, and are therefore classified as Level 1.

The Company’s debt securities and forward contracts are reported at fair value based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2.

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.

3 unchanged sentences

The market participants are generally large commercial banks.

The Company recorded no gross credit losses or gross credit recoveries on debt securities for the three-month period ended September 27, 2020, and $ 160,000 and $ 85,000 , respectively, for the nine-month period ended September 27, 2020.

No credit losses or recoveries on debt securities were recorded for the three-month or nine-month periods ended September 29, 2019.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.

The Company's contingent consideration liabilities are reported at fair value based upon probability-adjusted present values of the consideration expected to be paid using significant inputs that are not observable in the market, and are therefore classified as Level 3.

1 unchanged sentence

The fair values of these contingent consideration liabilities were calculated using discount rates consistent with the level of risk of achievement, and are remeasured each reporting period.

The fair value of the contingent consideration liability related to the Company's acquisition of Chiaro Technologies, LLC was $ 1,153,000 as of December 31, 2019.

During the second quarter of 2020, the Company paid out $ 1,039,000 based upon the revenue levels achieved, with the remaining $ 114,000 recorded as a fair value adjustment in "Other income (expense)" on the Consolidated Statements of Operations.

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

was written down to zero as of December 31, 2019 resulting from a lower level of revenue in the Americas' automotive industry, and the balance remains at zero as of September 27, 2020.

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

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

in 2017 was written down to zero in 2019 resulting from a lower level of revenue in the Americas' automotive industry, and the balance remains at zero as of April 4, 2021.

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

Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis

1 unchanged sentence

The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances, referred to as "triggering events," indicate the carrying value may not be recoverable.

Our business has been adversely and materially impacted by deteriorating global economic conditions resulting from the COVID-19 pandemic.

These conditions triggered a review of long-lived assets for potential impairment as of May 26, 2020, which resulted in operating lease asset impairment charges of $ 2,534,000 in the second quarter of 2020 (refer to Notes 6 and 16) that are included in "Restructuring charges" on the Consolidated Statements of Operations, and intangible asset impairment charges of $ 19,571,000 in the second quarter of 2020 (refer to Note 8).

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

No triggering event occurred in the three-month periods ended April 4, 2021 and March 29, 2020 that would indicate a potential impairment of long-lived assets.

However, the Company continues to monitor global economic conditions, as events or changes in circumstances could result in an impairment of long-lived assets in a future period.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cash, Cash Equivalents, and Investments

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

September 27, 2020 December 31, 2019

April 4, 2021 December 31, 2020

Cash $ 207,313 $ 266,609

Commercial paper 10,000 —

Money market instruments 25,375 2,464

Cash and cash equivalents 242,688 269,073

Treasury bills 66,261 35,403

Corporate bonds 50,410 32,714

2 unchanged sentences

Municipal bonds 1,296 1,303

Treasury bills — 92,914

Certificate of deposit — 4,328

Current investments 143,233 103,240

Treasury bills 270,091 216,334

Corporate bonds 334,351 203,428

Treasury bills 65,148 96,458

Asset-backed securities 62,755 67,058

Agency bonds 18,961 19,006

Sovereign bonds 8,410 16,005

Municipal bonds 5,719 5,735

Sovereign bonds 3,429 3,440

Non-current investments 490,363 395,125

$ 876,284 $ 767,438

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

corporate bonds consist of debt securities issued by both domestic and foreign companies;

Cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of ninety days or less at the time of acquisition.

Cash equivalents consist primarily of government and institutional money market funds as well as corporate obligations such as commercial paper;

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

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 recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 1,912,000 and $ 2,874,000 as of September 27, 2020 and December 31, 2019, respectively.

All of the Company's securities as of April 4, 2021 and December 31, 2020 were denominated in U.S.

Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 2,467,000 and $ 1,560,000 as of April 4, 2021 and December 31, 2020, respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective.

The Company did not record an adjustment to retained earnings, as there were no debt securities with credit losses as of the adoption date.

The following table summarizes the Company’s available-for-sale investments as of September 27, 2020 (in thousands):

The following table summarizes the Company’s available-for-sale investments as of April 4, 2021 (in thousands):

Losses Fair Value

Treasury bills $ 65,830 $ 431 $ — $ 66,261

Corporate bonds 50,164 261 ( 15 ) 50,410

2 unchanged sentences

Municipal bonds 1,296 — — 1,296

Treasury bills 268,071 2,030 ( 10 ) 270,091

Corporate bonds 333,094 1,962 ( 705 ) 334,351

Treasury bills 64,506 642 — 65,148

Asset-backed securities 62,368 393 ( 6 ) 62,755

Agency bonds 18,917 44 — 18,961

Sovereign bonds 8,349 61 — 8,410

Municipal bonds 5,714 18 ( 13 ) 5,719

Sovereign bonds 3,379 50 — 3,429

$ 630,447 $ 3,894 $ ( 745 ) $ 633,596

The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of September 27, 2020 (in thousands):

The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of April 4, 2021 (in thousands):

Unrealized Loss Position For:

4 unchanged sentences

Corporate bonds $ 176,773 $ ( 720 ) $ — $ — $ 176,773 $ ( 720 )

Treasury bills 11,543 ( 10 ) — — 11,543 ( 10 )

Municipal bonds 5,257 ( 13 ) — — 5,257 ( 13 )

Asset-backed securities 4,533 ( 12 ) — — 4,533 ( 12 )

$ 186,563 $ ( 745 ) $ — $ — $ 186,563 $ ( 745 )

No credit losses or recoveries on debt securities were recorded for the three-month or nine-month periods ended September 29, 2019.

Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.

The following table summarizes the allowance for credit losses activity for the nine-month period ended September 27, 2020 (in thousands):

Balance as of December 31, 2019 $ —

Increases to the allowance for credit losses 160

Decreases to the allowance for credit losses ( 85 )

Balance as of September 27, 2020 $ 75

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 787,000 and $ 1,000 , respectively, for the three-month period ended September 27, 2020, and $ 361,000 and $ 67,000 , respectively, for the three-month period ended September 29, 2019.

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 3,613,000 and $ 22,000 , respectively, for the nine-month period ended September 27, 2020, and $ 818,000 and $ 103,000 , respectively, for the nine-month period ended September 29, 2019.

The Company's allowance for credit losses on debt securities was zero as of April 4, 2021 and December 31, 2020.

There was no activity recorded in the allowance for credit losses during the three-month period ended April 4, 2021.

The Company recorded credit losses on debt securities totaling $ 160,000 during the three-month period ended March 29, 2020.

The Company recorded no gross realized gains or gross realized losses on the sale of debt securities for the three-month period ended April 4, 2021.

The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 1,865,000 and $ 15,000 , respectively, for the three-month period ended March 29, 2020.

These gains and losses are included in "Investment income" on the Consolidated Statements of Operations.

Prior to the sale of these securities, unrealized gains and losses for these debt securities, net of tax, are recorded in shareholders’ equity as accumulated other comprehensive loss.

The following table presents the effective maturity dates of the Company’s available-for-sale investments as of September 27, 2020 (in thousands):

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the effective maturity dates of the Company’s available-for-sale investments as of April 4, 2021 (in thousands):

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

Treasury bills $ — $ 167,677 $ 98,353 $ 4,061 $ — $ 270,091

Corporate bonds $ 50,410 $ 130,867 $ 143,430 $ 58,992 $ 1,062 $ 384,761

Treasury bills 66,261 64,035 1,113 — — 131,409

Asset-backed securities 16,645 42,114 20,159 482 — 79,400

4 unchanged sentences

Inventories consisted of the following (in thousands):

September 27, 2020 December 31, 2019

April 4, 2021 December 31, 2020

Raw materials $ 22,124 $ 26,800

2 unchanged sentences

$ 61,392 $ 60,830

The Company recorded provisions for excess and obsolete inventories of $ 9,386,000 for the nine-month period ended September 27, 2020, which reduced the carrying value of the inventories to their net realizable value.

Charges of $ 7,718,000 were recorded in the second quarter of 2020 due to lower projected sales of excess inventories as a result of deteriorating global economic conditions from the COVID-19 pandemic.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations.

1 unchanged sentence

Certain leases may contain options to extend or terminate the lease at the Company's sole discretion.

There were no options to extend or terminate that were included in the determination of the lease term for the leases outstanding as of September 27, 2020.

As of April 4, 2021 and 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 outstanding leases, and no options to extend that were included in the determination of the lease term for outstanding leases.

Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index.

There were no restrictions or covenants for the leases outstanding as of September 27, 2020.

The total operating lease expense for the three-month periods ended September 27, 2020 and September 29, 2019 was $ 2,047,000 and $ 1,749,000 , respectively.

The total operating lease cash payments for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 2,041,000 and $ 1,708,000 , respectively.

The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 22,000 for both of the three-month periods ended September 27, 2020 and September 29, 2019.

The total operating lease expense for the nine-month periods ended September 27, 2020 and September 29, 2019 was $ 6,100,000 and $ 4,976,000 , respectively.

The total operating lease cash payments for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 5,995,000 and $ 4,778,000 , respectively.

The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 84,000 and $ 255,000 for the nine-month periods ended September 27, 2020 and September 29, 2019, respectively.

There were no restrictions or covenants for outstanding leases as of April 4, 2021 and December 31, 2020.

The total operating lease expense for the three-month periods ended April 4, 2021 and March 29, 2020 was $ 2,002,000 and $ 1,906,000 , respectively.

The total operating lease cash payments for the three-month periods ended April 4, 2021 and March 29, 2020 were $ 2,061,000 and $ 1,863,000 , 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 $ 40,000 and $ 39,000 for the three-month periods ended April 4, 2021 and March 29, 2020, respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2 unchanged sentences

Thereafter 3,815

The discounted present value of the future lease cash payments resulted in a lease liability of $ 27,916,000 and $ 17,973,000 as of September 27, 2020 and December 31, 2019, respectively.

The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of September 27, 2020 or September 29, 2019.

The weighted-average discount rate was 4.1 % and 4.6 % for the leases outstanding as of September 27, 2020 and December 31, 2019, respectively.

The weighted-average remaining lease term was 5.2 and 3.7 years for the leases outstanding as of September 27, 2020 and December 31, 2019, respectively.

As part of the Company's restructuring plan (refer to Note 16), management closed ten leased offices as of the end of the second quarter of 2020, prior to the end of their lease terms.

The carrying value of the lease assets associated with these ten offices was reduced to zero , resulting in operating lease asset impairment charges of $ 2,534,000 in the second quarter of 2020 that are included in "Restructuring charges" on the Consolidated Statements of Operations.

Management is currently negotiating early contract terminations for the remaining lease liability obligations associated with these abandoned offices.

The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant for a portion of the current year.

This lease was terminated prior to the end of its lease term during the second quarter of 2020.

Rental income was $ 0 and $ 76,000 for the three-month periods ended September 27, 2020 and September 29, 2019, respectively, and $ 77,000 and $ 234,000 for the nine-month periods ended September 27, 2020 and September 29, 2019, respectively.

The Company is now fully occupying this building for its operations.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The discounted present value of the future lease cash payments resulted in a lease liability of $ 24,028,000 and $ 26,230,000 as of April 4, 2021 and December 31, 2020, respectively.

The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of April 4, 2021 or December 31, 2020.

The weighted-average discount rate was 3.9 % and 4.0 % for the leases outstanding as of April 4, 2021 and December 31, 2020, respectively.

The weighted-average remaining lease term was 4.9 and 5.1 years for the leases outstanding as of April 4, 2021 and December 31, 2020, respectively.

Management closed eleven leased offices in 2020, prior to the end of their lease terms, as a part of the Company's restructuring plan (refer to Note 16).

Management is currently negotiating early contract terminations for the remaining lease liability obligations associated with these abandoned offices, which obligations totaled $ 2,530,000 and $ 2,877,000 as of April 4, 2021 and December 31, 2020, respectively, and are included in "Operating lease liabilities" on the Consolidated Balance Sheets.

The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant for a portion of 2020.

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

There was no rental income for the three-month period ended April 4, 2021.

Rental income was $ 77,000 for the three-month period ended March 29, 2020 .

The changes in the carrying value of goodwill were as follows (in thousands):

1 unchanged sentence

Foreign exchange rate changes ( 1,042 )

Balance as of September 27, 2020 $ 243,129

The adverse impact of the COVID-19 pandemic on our business triggered a review of long-lived assets, including goodwill, for potential impairment during the second quarter of 2020.

Based upon this assessment, management concluded that the reporting unit fair value was not less than its carrying value, and therefore no goodwill impairment charge was recognized for the three-month and nine-month periods ended September 27, 2020.

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

Balance as of April 4, 2021 $ 243,036

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

5 unchanged sentences

Customer relationships 10,578 7,340 3,238

In-process technologies 2,300 — 2,300

Non-compete agreements 710 450 260

Trademarks 110 81 29

Balance as of September 27, 2020 $ 73,675 $ 57,193 $ 16,482

Balance as of April 4, 2021 $ 73,675 $ 59,047 $ 14,628

Value Accumulated

3 unchanged sentences

Customer relationships 10,578 7,160 3,418

In-process technologies 8,200 — 8,200

Non-compete agreements 710 436 274

1 unchanged sentence

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

The adverse impact of the COVID-19 pandemic on our business triggered a review of long-lived assets, including intangible assets, for potential impairment during the second quarter of 2020.

For finite-lived intangible assets that are subject to amortization, the Company follows a two-step process for impairment testing.

In step one, known as the recoverability test, the carrying value of the asset is compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

If the sum of the undiscounted future cash flows is less than the carrying value, the asset is not recoverable and step two is performed.

In step two, the impairment charge is measured as the amount by which the carrying value of the asset exceeds its fair value.

For indefinite-lived intangible assets that are not subject to amortization, the fair value of the asset is measured and an impairment charge is recorded as the amount by which the carrying value of the asset exceeds its fair value.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Based upon this assessment, management concluded that certain of the Company's finite-lived intangible assets failed the recoverability test, and recorded impairment charges for these assets equal to the amount by which their carrying value exceeded their fair value.

The Company also measured the fair value and recorded an impairment charge for its indefinite-lived intangible asset related to in-process technologies.

The fair values were established, with the assistance of an outside valuation advisor, using the income approach based upon a discounted cash flow model that estimated future revenue streams and expenses attributable to those revenue streams provided by management.

This review resulted in intangible asset impairment charges totaling $ 19,571,000 in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab Co.

("Sualab") as a result of the deteriorating global economic conditions from the COVID-19 pandemic.

Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $ 10,070,000 , $ 5,900,000 , and $ 3,382,000 , respectively.

In addition, customer relationships acquired from EnShape GmbH that had a gross carrying value of $ 447,000 and accumulated amortization of $ 228,000 on the measurement date were reduced to zero , resulting in an impairment charge of $ 219,000 .

As of September 27, 2020, estimated future amortization expense related to intangible assets was as follows (in thousands):

As of April 4, 2021, estimated future amortization expense related to intangible assets was as follows (in thousands):

Year Ended December 31, Amount

1 unchanged sentence

Thereafter 730

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

COGNEX CORPORATION

10 unchanged sentences

Fulfillment of warranty obligations ( 691 )

Balance as of September 27, 2020 $ 5,586

Balance as of April 4, 2021 $ 5,486

Derivative Instruments

The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates.

Currently, the Company enters into economic hedges to manage this risk.

The economic hedges utilize foreign currency forward contracts with maturities of up to 45 days to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables.

The Company enters into economic hedges utilizing foreign currency forward contracts with maturities of up to 95 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.

1 unchanged sentence

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

September 27, 2020 December 31, 2019

April 4, 2021 December 31, 2020

Currency Notional

2 unchanged sentences

Euro 25,000 $ 29,431 50,000 $ 61,342

Korean Won 14,840,000 12,695 161,951,500 139,688

Chinese Renminbi 170,000 25,587 — —

Mexican Peso 150,000 7,350 155,000 7,776

5 unchanged sentences

Singapore Dollar 1,300 966 1,465 1,110

Korean Won — — 6,925,000 6,377

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1 unchanged sentence

Balance Fair Value Balance Fair Value

Location September 27, 2020 December 31, 2019 Sheet

Location September 27, 2020 December 31, 2019

Location April 4, 2021 December 31, 2020 Sheet

Location April 4, 2021 December 31, 2020

Derivatives Not Designated as Hedging Instruments:

Economic hedge forward contracts Prepaid expenses and other current assets $ 8 $ 265 Accrued expenses $ 124 $ 38

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands):

Asset Derivatives Liability Derivatives

September 27, 2020 December 31, 2019 September 27, 2020 December 31, 2019

April 4, 2021 December 31, 2020 April 4, 2021 December 31, 2020

Gross amounts of recognized assets $ 8 $ 265 Gross amounts of recognized liabilities $ 124 $ 38

2 unchanged sentences

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

Location in Financial Statements Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Location in Financial Statements Three-months Ended

April 4, 2021 March 29, 2020

Derivatives Not Designated as Hedging Instruments:

4 unchanged sentences

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

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Americas $ 107,836 $ 60,247

4 unchanged sentences

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

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Standard products and services $ 222,326 $ 152,854

2 unchanged sentences

Costs to Fulfill a Contract

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 12,708,000 and $ 3,963,000 as of September 27, 2020 and December 31, 2019, respectively.

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 14,789,000 and $ 6,846,000 as of April 4, 2021 and December 31, 2020, respectively.

Accounts Receivable, Contract Assets, and Contract Liabilities

Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value.

The Company maintains an allowance against its accounts receivable for potential credit losses.

The Company maintains an allowance against its accounts receivable for credit losses.

Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts.

Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.

The Company did not record an adjustment to retained earnings as this ASU did not have a material impact on the Company's consolidated allowance for credit losses.

The Company recorded credit losses on accounts receivable of $ 0 and $ 600,000 for the three-month and nine-month periods ended September 27, 2020, respectively.

The Company recorded credit losses on accounts receivable of $ 125,000 and $ 215,000 for the three-month and nine-month periods ended September 29, 2019.

The Company's estimate of expected credit losses takes into account the deteriorating global economic conditions from the COVID-19 pandemic.

The following table summarizes the allowance for credit losses activity for the nine-month period ended September 27, 2020 (in thousands):

The following table summarizes the allowance for credit losses activity for the three-month period ended April 4, 2021 (in thousands):

Balance as of December 31, 2020 $ 831

1 unchanged sentence

Write-offs ( 33 )

Balance as of September 27, 2020 $ 913

Foreign exchange rate changes —

Balance as of April 4, 2021 $ 798

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the deferred revenue and customer deposits activity for the nine-month period ended September 27, 2020 (in thousands):

The following table summarizes the deferred revenue and customer deposits activity for the three-month period ended April 4, 2021 (in thousands):

Balance as of December 31, 2020 $ 21,274

Increases to deferred revenue and customer deposits 93,830

Recognition of revenue ( 75,023 )

Deferral of revenue billed in the current period, net of recognition 38,380

Recognition of revenue deferred in prior periods ( 7,757 )

Foreign exchange rate changes ( 237 )

Balance as of September 27, 2020 $ 33,717

Balance as of April 4, 2021 $ 51,660

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.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock-Based Compensation Expense

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

As of September 27, 2020, the Company had 16,450,000 shares available for grant under its stock plans.

As of April 4, 2021, the Company had 15,650,000 shares available for grant under its stock plans.

Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four or five years based upon continuous service and expire ten years from the grant date.

2 unchanged sentences

Stock Options

The following table summarizes the Company’s stock option activity for the nine-month period ended September 27, 2020:

The following table summarizes the Company’s stock option activity for the three-month period ended April 4, 2021:

(in thousands) Weighted-

6 unchanged sentences

Forfeited or expired ( 42 ) 48.68

Outstanding as of September 27, 2020 9,937 $ 42.45 7.03 $ 191,245

Exercisable as of September 27, 2020 3,807 $ 33.58 5.83 $ 107,040

Options vested or expected to vest as of September 27, 2020 (1) 9,125 $ 41.73 6.92 $ 182,232

Outstanding as of April 4, 2021 8,452 $ 47.62 7.11 $ 312,675

Exercisable as of April 4, 2021 3,824 $ 38.18 5.92 $ 176,405

Options vested or expected to vest as of April 4, 2021 (1) 7,733 $ 46.78 7.00 $ 292,344

(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future.

1 unchanged sentence

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Risk-free rate 1.3 % 1.6 %

2 unchanged sentences

Expected term (in years) 5.7 6.0

No stock options were granted during the three-month period ended September 27, 2020.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Risk-free rate

4 unchanged sentences

The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Expected term

The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.

There were no stock options granted during the three-month period ended September 27, 2020.

The weighted-average grant-date fair values of stock options granted during the three-month period ended September 29, 2019 was $ 18.42 .

The weighted-average grant-date fair values of stock options granted during the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 18.52 and $ 18.58 , respectively.

The total intrinsic values of stock options exercised for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 62,787,000 and $ 5,746,000 , respectively.

The total intrinsic values of stock options exercised for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 116,600,000 and $ 42,545,000 , respectively.

The total fair values of stock options vested for the three-month periods ended September 27, 2020 and September 29, 2019 were $ 1,331,000 and $ 1,213,000 , respectively.

The total fair values of stock options vested for the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 39,282,000 and $ 32,072,000 , respectively.

The weighted-average grant-date fair values of stock options granted during the three-month periods ended April 4, 2021 and March 29, 2020 were $ 33.63 and $ 18.46 , respectively.

The total intrinsic values of stock options exercised for the three-month periods ended April 4, 2021 and March 29, 2020 were $ 42,327,000 and $ 14,454,000 , respectively.

The total fair values of stock options vested for the three-month periods ended April 4, 2021 and March 29, 2020 were $ 35,600,000 and $ 36,664,000 , respectively.

Restricted Stock Units (RSUs)

The following table summarizes the Company's RSUs activity for the nine-month period ended September 27, 2020:

The following table summarizes the Company's RSUs activity for the three-month period ended April 4, 2021:

(in thousands) Weighted-Average

2 unchanged sentences

Granted 245 89.86

Vested ( 2 ) 50.94

Forfeited or expired ( 15 ) 52.22

Nonvested as of September 27, 2020 554 $ 50.96

The weighted-average grant-date fair values of RSUs granted during the three-month periods ended September 27, 2020 and September 29, 2019 were $ 67.14 and $ 45.20 , respectively.

The weighted-average grant-date fair values of RSUs granted during the nine-month periods ended September 27, 2020 and September 29, 2019 were $ 51.73 and $ 45.20 , respectively.

There were no RSUs that vested during the three-month and nine-month periods ended September 27, 2020 and September 29, 2019.

Nonvested as of April 4, 2021 782 $ 63.33

The weighted-average grant-date fair values of RSUs granted during the three-month periods ended April 4, 2021 and March 29, 2020 were $ 89.86 and $ 50.94 , respectively.

There were 2,000 RSUs that vested during the three-month period ended April 4, 2021 and no RSUs that vested during the three-month period ended March 29, 2020.

Stock-Based Compensation Expense

The Company stratifies its employee population into two groups:

The Company segments its employee population into two groups:

one consisting of senior management and another consisting of all other employees.

The Company currently applies an estimated annual forfeiture rate of 8 % to all stock-based awards for senior management and a rate of 12 % for all other employees.

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

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

As of September 27, 2020, total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was $ 56,150,000 , which is expected to be recognized over a weighted-average period of 1.8 years.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended September 27, 2020 were $ 9,268,000 and $ 1,524,000 , respectively, and for the three-month period ended September 29, 2019 were $ 10,194,000 and $ 1,804,000 , respectively.

The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended September 27, 2020 were $ 32,076,000 , which includes credits of $ 1,401,000 relating to grants cancelled as a result of the Company's workforce reduction, and $ 5,365,000 , respectively, and for the nine-month period ended September 29, 2019 were $ 33,442,000 and $ 5,839,000 , respectively.

No compensation expense was capitalized as of September 27, 2020 or December 31, 2019.

Each year during the first quarter, the Company revises its forfeiture rate based on updated estimates of employee turnover.

This resulted in a decrease to compensation expense of $ 255,000 in 2021 and an increase to compensation expense of $ 1,787,000 in 2020.

As of April 4, 2021, total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was $ 69,821,000 , which is expected to be recognized over a weighted-average period of 2.0 years.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended April 4, 2021 were $ 12,009,000 and $ 1,813,000 , respectively, and for the three-month period ended March 29, 2020, were $ 14,790,000 and $ 2,564,000 , respectively.

No compensation expense was capitalized as of April 4, 2021 or December 31, 2020.

COGNEX CORPORATION

1 unchanged sentence

The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Cost of revenue $ 248 $ 354

4 unchanged sentences

In October 2018, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock.

As of September 27, 2020, the Company repurchased 2,816,000 shares at a cost of $ 121,348,000 under this program, including 1,215,000 shares at a cost of $ 51,036,000 during the nine-month period ended September 27, 2020, leaving a remaining balance of $ 78,652,000 .

No shares were repurchased during the three-month period ended September 27, 2020.

As of April 4, 2021, the Company repurchased 2,897,000 shares at a cost of $ 127,827,000 under this program, including 80,000 shares at a cost of $ 6,479,000 during the three-month period ended April 4, 2021, leaving a remaining balance of $ 72,173,000 .

During the three-month period ended March 29, 2020, 1,215,000 shares were repurchased at a cost of $ 51,036,000 under this October 2018 program.

On March 12, 2020, the Company's Board of Directors authorized the repurchase of an additional $ 200,000,000 of the Company's common stock.

Purchases under this March 2020 program will commence upon completion of the October 2018 program.

The Company may repurchase shares under these programs in future periods depending upon a variety of factors, including, among other things, the impact of dilution from employee equity awards, stock price, share availability, and cash requirements.

The Company 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.

A reconciliation of the United States federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows:

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Income tax expense at U.S.

4 unchanged sentences

Discrete tax benefit related to stock options ( 7 ) % ( 7 ) %

Discrete tax expense (benefit) related to tax return filings — % ( 3 ) % 3 % ( 1 ) %

Other discrete adjustments — % 1 %

Other 1 % 2 %

Income tax expense 11 % 11 %

The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United States, Ireland, and China.

The statutory tax rate is 12.5 % in Ireland and 25 % in China, compared to the U.S.

federal statutory corporate tax rate of 21 %.

These differences resulted in a favorable impact to the effective tax rate of 5 percentage points for both the three-month and nine-month periods ended September 27, 2020, and 7 percentage points for the same periods in 2019.

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

The Company recorded discrete tax benefits arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock exercises that resulted in a favorable impact to the effective tax rate of 4 and 9 percentage points for the three-month and nine-month periods ended September 27, 2020, respectively, and 1 and 3 percentage points for the same periods in 2019.

In addition, the Company recorded other discrete tax items primarily related to the final true-up of the prior year tax accrual upon

The Company recorded discrete tax benefits arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock exercises that resulted in a favorable impact to the effective tax rate of 7 % for both of the three-month periods ended April 4, 2021 and March 29, 2020.

In addition to stock exercises, other discrete adjustments recorded during the three-month period ended March 29, 2020 included the final true-up of the prior year's tax accrual upon filing the related tax return that resulted in an unfavorable impact to the effective tax rate of 1 %.

Excluding the impact of these discrete items, the Company’s effective tax rate was 18 % of pre-tax income for the three-month period ended April 4, 2021 compared to 17 % for the same period in 2020.

The increase in the effective tax rate, excluding the impact of discrete items, was due to a higher percentage of the Company's pre-tax income being earned and taxed in higher tax jurisdictions.

During the three-month period ended April 4, 2021, the Company recorded a $ 478,000 increase in reserves for income taxes, net of deferred tax benefit.

Estimated interest and penalties included in these amounts totaled $ 183,000 for the three-month period ended April 4, 2021.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

filing the related tax return that resulted in an unfavorable impact to the effective tax rate of 3 percentage points for the nine-month period ended September 27, 2020, and a favorable impact to the effective tax rate of 3 and 1 percentage points for the three-month and nine-month periods ended September 29, 2019, respectively.

Excluding the impact of these discrete items, the Company’s effective tax rate was 18 % of pre-tax income for the three-month and nine-month periods ended September 27, 2020, respectively, compared to 16 % for the same periods in 2019.

The increase in the effective tax rate, excluding the impact of discrete items, was due to more of the Company's profits being earned and taxed in higher tax jurisdictions.

During the nine-month period ended September 27, 2020, the Company recorded a $ 198,000 decrease in reserves for income taxes, net of deferred tax benefit.

Estimated interest and penalties included in these amounts totaled $ 212,000 for the nine-month period ended September 27, 2020.

The Company’s reserve for income taxes, including gross interest and penalties, was $ 12,353,000 as of September 27, 2020, which included $ 11,325,000 classified as a non-current liability and $ 1,028,000 recorded as an increase to a non-current deferred tax liability.

The Company’s reserve for income taxes, including gross interest and penalties, was $ 15,780,000 as of April 4, 2021, which included $ 14,752,000 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 $ 1,528,000 .

If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period.

The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts.

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 $ 450,000 to $ 500,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Korea, and within the United States, Massachusetts.

The statutory tax rate is 12.5 % in Ireland, 25 % in China, and 25 % in Korea compared to the U.S.

federal statutory corporate tax rate of 21 %.

These differences resulted in a favorable impact to the effective tax rate of 5 % for the three-month period ended April 4, 2021, and 6 % for the same period in 2020.

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

The tax years 2016 through 2019 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.

The Company has recently been notified that it is under audit by the IRS for the tax year 2017.

Management believes the Company is adequately reserved for this audit.

The Company has filed its U.S.

federal tax return in the fourth quarter of 2020 for tax year 2019, and as a result, is expected to record a discrete tax benefit in excess of $12,000,000 in the fourth quarter.

This benefit was the result of new regulations issued by the IRS relating to the use of foreign tax credits as allowable to reduce the tax associated with foreign operations under Global Intangible Low-Taxed Income (“GILTI”).

These credits were generated from taxes paid relating to the acquisition of Sualab in October 2019.

The Company has been previously notified that it is under audit by the IRS for the tax year 2017.

Additionally, the Company has been recently notified that it is under audit by the IRS for tax year 2018, as well as the Commonwealth of Massachusetts Department of Revenue for tax years 2017 and 2018.

Management believes the Company is adequately reserved for these audits.

The final determination of tax audits could result in favorable or unfavorable changes in our estimates.

Weighted-Average Shares

Weighted-average shares were calculated as follows (in thousands):

Three-months Ended Nine-months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Three-months Ended

April 4, 2021 March 29, 2020

Basic weighted-average common shares outstanding 176,288 172,408

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Weighted-average common and common-equivalent shares outstanding 179,971 175,602

Stock options to purchase 1,416,000 and 5,540,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 27, 2020, respectively, and 6,078,000 and 5,695,000 for the same periods in 2019, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

Restricted stock units totaling 3,000 and 2,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 27, 2020, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

There were no anti-dilutive restricted stock units outstanding, on a weighted-average basis, during the three-month and nine-month periods ended September 29, 2019.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock options to purchase 485,000 and 6,273,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month periods ended April 4, 2021 and March 29, 2020, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

Restricted stock units totaling 124,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month period ended April 4, 2021, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.

There were no anti-dilutive restricted stock units outstanding, on a weighted-average basis, during the three-month period ended March 29, 2020 .

Restructuring Charges

1 unchanged sentence

The restructuring plan included a global workforce reduction of approximately 8 % and office closures.

The Company estimates the total restructuring charges from these actions to be approximately $ 15,388,000 , of which $ 14,798,000 was recorded in the second quarter and $ 251,000 was recorded in the third quarter of 2020 and are included in “Restructuring charges” on the Consolidated Statements of Operations.

The remaining charges are expected to be recognized during the fourth quarter of 2020.

The following table summarizes the restructuring charges (in thousands):

Total Amount Expected to be Incurred Incurred in the Three-months Ended September 27, 2020 Incurred in the Nine-months Ended September 27, 2020

One-time termination benefits $ 10,503 $ ( 36 ) $ 10,350

Contract termination costs 4,099 104 4,099

Other associated costs 786 183 600

$ 15,388 $ 251 $ 15,049

One-time termination benefits include severance, health insurance, and outplacement services for 181 employees who were either terminated during the second quarter of 2020, or were notified during the second quarter of 2020 that they would be terminated at a future date.

For employees not required to render service beyond a minimum retention period, the one-time termination benefits were recognized in the second quarter of 2020.

Otherwise, these benefits, including retention bonuses for selected employees, are being recognized over the service period, which is not expected to exceed the fourth quarter of 2020.

Contract termination costs include remaining lease liability obligations and operating lease asset impairments for offices closed prior to the end of the contractual lease term.

These costs also include the write-off of leasehold improvements and other equipment related to these abandoned offices that had no alternative use.

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

Other associated costs primarily include legal fees related to the employee termination actions, which are being recognized when the services are performed.

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.

There were no restructuring charges recognized during the three-month period ended April 4, 2021.

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):

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

Restructuring charges 11,117 3,995 600 15,712

Cash payments ( 951 ) ( 68 ) ( 15 ) ( 1,034 )

Non-cash restructuring charges — ( 3,145 ) — ( 3,145 )

Restructuring adjustments ( 767 ) 104 — ( 663 )

Foreign exchange rate changes ( 1 ) ( 4 ) — ( 5 )

Balance as of September 27, 2020 $ 2,375 $ 737 $ 205 $ 3,317

Restructuring adjustments related to one-time termination benefits consisted primarily of the favorable true-up of severance estimates based on final agreements and health insurance estimates based on employee elections.

Adjustments related to contract termination costs consisted primarily of lease early termination fees.

Balance as of April 4, 2021 $ 672 $ 678 $ — $ 1,350

COGNEX CORPORATION

1 unchanged sentence

Subsequent Events

On October 28, 2020, the Company’s Board of Directors declared a cash dividend of $ 0.06 per share.

The dividend is payable on November 27, 2020 to all shareholders of record as of the close of business on November 13, 2020.

On May 6, 2021, the Company’s Board of Directors declared a cash dividend of $ 0.060 per share.

The dividend is payable on June 4, 2021 to all shareholders of record as of the close of business on May 21, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements