COGNEX CORP 10-Q

ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three-months Ended April 4, 2021 March 29, 2020 (unaudited) Revenue $ 239,027 $ 167,235 Cost of revenue 54,045 41,200 Gross margin 184,982 126,035 Research, development, and engineering expenses 34,105 35,946 Selling, general, and administrative expenses 72,424 69,138 Operating income 78,453 20,951 Foreign currency gain (loss) ( 1,008 ) ( 3,003 ) Investment income 1,554 5,229 Other income (expense) ( 168 ) ( 183 ) Income before income tax expense 78,831 22,994 Income tax expense 8,983 2,517 Net income $ 69,848 $ 20,477 Net income per weighted-average common and common-equivalent share: Basic $ 0.40 $ 0.12 Diluted $ 0.39 $ 0.12 Weighted-average common and common-equivalent shares outstanding: Basic 176,288 172,408 Diluted 179,971 175,602 Cash dividends per common share $ 0.060 $ 0.055 The accompanying notes are an integral part of these consolidated financial statements. 3 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Three-months Ended April 4, 2021 March 29, 2020 (unaudited) Net income $ 69,848 $ 20,477 Other comprehensive income (loss), net of tax: Available-for-sale investments: 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 ) Foreign currency translation adjustments: Foreign currency translation adjustments ( 2,770 ) ( 7,365 ) Net change related to foreign currency translation adjustments ( 2,770 ) ( 7,365 ) Other comprehensive income (loss), net of tax ( 4,728 ) ( 12,916 ) Total comprehensive income $ 65,120 $ 7,561 The accompanying notes are an integral part of these consolidated financial statements. 4 COGNEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) April 4, 2021 December 31, 2020 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 242,688 $ 269,073 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 Inventories 61,392 60,830 Prepaid expenses and other current assets 47,773 37,220 Total current assets 625,571 601,691 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 Operating lease assets 20,784 22,582 Goodwill 243,036 244,078 Intangible assets, net 14,628 15,555 Deferred income taxes 429,801 434,704 Other assets 7,692 7,794 Total assets $ 1,908,956 $ 1,800,702 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 20,970 $ 16,270 Accrued expenses 60,422 77,264 Accrued income taxes 18,823 9,379 Deferred revenue and customer deposits 51,660 21,274 Operating lease liabilities 7,805 8,110 Total current liabilities 159,680 132,297 Non-current operating lease liabilities 16,223 18,120 Deferred income taxes 310,884 314,952 Reserve for income taxes 14,752 14,257 Non-current accrued income taxes 40,963 48,915 Other liabilities 9,453 9,959 Total liabilities 551,955 538,500 Shareholders’ equity: Preferred stock, $ .01 par value – Authorized: 400 shares in 2021 and 2020, respectively, no shares issued and outstanding — — Common stock, $ .002 par value – Authorized: 300,000 shares in 2021 and 2020, respectively, issued and outstanding: 176,608 and 175,790 shares in 2021 and 2020, respectively 353 352 Additional paid-in capital 854,491 807,739 Retained earnings 540,686 487,912 Accumulated other comprehensive loss, net of tax ( 38,529 ) ( 33,801 ) Total shareholders’ equity 1,357,001 1,262,202 Total liabilities and shareholders' equity $ 1,908,956 $ 1,800,702 The accompanying notes are an integral part of these consolidated financial statements. 5 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three-months Ended April 4, 2021 March 29, 2020 (unaudited) Cash flows from operating activities: Net income $ 69,848 $ 20,477 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 12,009 14,790 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 Excess and obsolete inventory charges 705 1,065 Amortization of discounts or premiums on investments 586 106 Realized gain on sale of investments — ( 1,850 ) Credit loss on investments — 160 Change in deferred income taxes 1,250 ( 1,826 ) Change in operating assets and liabilities: Accounts receivable ( 3,495 ) 2,182 Unbilled revenue 3,958 ( 703 ) Inventories ( 1,323 ) 3,889 Prepaid expenses and other current assets ( 10,882 ) ( 9,788 ) Accounts payable 4,760 ( 1,613 ) Accrued expenses ( 15,973 ) 12,720 Accrued income taxes 1,651 7,650 Deferred revenue and customer deposits 30,641 11,961 Other ( 285 ) ( 4,206 ) Net cash provided by operating activities 98,639 62,035 Cash flows from investing activities: Purchases of investments ( 298,911 ) ( 199,530 ) Maturities and sales of investments 160,552 262,126 Purchases of property, plant, and equipment ( 2,436 ) ( 3,074 ) Net cash provided by (used in) investing activities ( 140,795 ) 59,522 Cash flows from financing activities: 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 ) Net cash provided by (used in) financing activities 17,670 ( 50,568 ) Effect of foreign exchange rate changes on cash and cash equivalents ( 1,899 ) ( 3,223 ) Net change in cash and cash equivalents ( 26,385 ) 67,766 Cash and cash equivalents at beginning of period 269,073 171,431 Cash and cash equivalents at end of period $ 242,688 $ 239,197 The accompanying notes are an integral part of these consolidated financial statements. 6 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of December 31, 2020 175,790 $ 352 $ 807,739 $ 487,912 $ ( 33,801 ) $ 1,262,202 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 ($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 ) Foreign currency translation adjustment — — — — ( 2,770 ) ( 2,770 ) Balance as of April 4, 2021 (unaudited) 176,608 $ 353 $ 854,491 $ 540,686 $ ( 38,529 ) $ 1,357,001 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ ( 37,275 ) $ 1,355,710 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 ($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 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. 7 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: Summary of Significant Accounting Policies 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). 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 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. NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2019-12, "Simplifying the Accounting for Income Taxes" 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): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" and (ASU) 2021-01, "Reference Rate Reform (Topic 848): Scope" 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 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. 8 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 required to be measured at fair value on a recurring basis as of April 4, 2021 (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 $ 25,375 $ — $ — Corporate bonds — 384,761 — Treasury bills — 131,409 — Asset-backed securities — 79,400 — Agency bonds — 18,961 — Sovereign bonds — 12,050 — Commercial paper — 10,000 — Municipal bonds — 7,015 — Economic hedge forward contracts — 8 — Liabilities: Economic hedge forward contracts — 124 — 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 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 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. 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. 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 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 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. 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. 9 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of the following (in thousands): 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 Asset-backed securities 16,645 25,160 Sovereign bonds 8,621 8,660 Municipal bonds 1,296 1,303 Current investments 143,233 103,240 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 Municipal bonds 5,719 5,735 Sovereign bonds 3,429 3,440 Non-current investments 490,363 395,125 $ 876,284 $ 767,438 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. 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; and agency bonds consist of domestic or foreign obligations of government agencies and government-sponsored enterprises that have government backing. All of the Company's securities as of April 4, 2021 and December 31, 2020 were denominated in U.S. Dollars. 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. 10 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the Company’s available-for-sale investments as of April 4, 2021 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Treasury bills $ 65,830 $ 431 $ — $ 66,261 Corporate bonds 50,164 261 ( 15 ) 50,410 Asset-backed securities 16,587 64 ( 6 ) 16,645 Sovereign bonds 8,592 29 — 8,621 Municipal bonds 1,296 — — 1,296 Non-current: 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 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 April 4, 2021 (in thousands): Unrealized Loss Position For: Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Corporate bonds $ 176,773 $ ( 720 ) $ — $ — $ 176,773 $ ( 720 ) Municipal bonds 5,257 ( 13 ) — — 5,257 ( 13 ) Asset-backed securities 4,533 ( 12 ) — — 4,533 ( 12 ) $ 186,563 $ ( 745 ) $ — $ — $ 186,563 $ ( 745 ) 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. 11 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 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 Agency bonds — 2,800 16,161 — — 18,961 Sovereign bonds 8,621 — 3,429 — — 12,050 Municipal bonds 1,296 5,068 651 — — 7,015 $ 143,233 $ 244,884 $ 184,943 $ 59,474 $ 1,062 $ 633,596 NOTE 5: Inventories Inventories consisted of the following (in thousands): April 4, 2021 December 31, 2020 Raw materials $ 22,124 $ 26,800 Work-in-process 4,389 4,780 Finished goods 34,879 29,250 $ 61,392 $ 60,830 NOTE 6: 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 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 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. 12 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Future operating lease cash payments are as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2021 $ 6,546 2022 6,711 2023 4,948 2024 2,046 2025 1,280 2026 968 Thereafter 3,815 $ 26,314 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 . NOTE 7: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Balance as of December 31, 2020 $ 244,078 Foreign exchange rate changes ( 1,042 ) Balance as of April 4, 2021 $ 243,036 13 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8: Intangible Assets Amortized 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 13,116 11,101 Customer relationships 10,578 7,340 3,238 Non-compete agreements 710 450 260 Trademarks 110 81 29 Balance as of April 4, 2021 $ 73,675 $ 59,047 $ 14,628 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 As of April 4, 2021, estimated future amortization expense related to intangible assets was as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2021 $ 2,729 2022 3,286 2023 2,594 2024 2,080 2025 1,757 2026 1,452 Thereafter 730 $ 14,628 14 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9: Warranty Obligations The Company records the estimated cost of fulfilling product warranties at the time of sale based upon historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or changes in circumstances impacting product quality become known that would not have been taken into account using historical data. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. An adverse change in any of these factors may result in the need for additional warranty provisions. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets. The changes in the warranty obligation were as follows (in thousands): Balance as of December 31, 2020 $ 5,406 Provisions for warranties issued during the period 771 Fulfillment of warranty obligations ( 691 ) Balance as of April 4, 2021 $ 5,486 NOTE 10: 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 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. These economic hedges are not designated as hedging instruments for hedge accounting treatment. The Company had the following outstanding forward contracts (in thousands): April 4, 2021 December 31, 2020 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Euro 25,000 $ 29,431 50,000 $ 61,342 Chinese Renminbi 170,000 25,587 — — Mexican Peso 150,000 7,350 155,000 7,776 Japanese Yen 600,000 5,419 600,000 5,808 Hungarian Forint 1,415,000 4,608 1,330,000 4,494 British Pound 2,000 2,765 1,675 2,287 Taiwanese Dollar 37,600 1,324 38,035 1,362 Canadian Dollar 1,260 1,004 1,285 1,010 Singapore Dollar 1,300 966 1,465 1,110 Korean Won — — 6,925,000 6,377 15 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Information regarding the fair value of the outstanding forward contracts was as follows (in thousands): Asset Derivatives Liability Derivatives Balance Fair Value Balance Fair Value Sheet 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 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 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 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 8 $ 265 Net amount of liabilities presented $ 124 $ 38 Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands): Location in Financial Statements Three-months Ended April 4, 2021 March 29, 2020 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ 2,893 $ ( 8,240 ) 16 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11: Revenue Recognition The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands): Three-months Ended April 4, 2021 March 29, 2020 Americas $ 107,836 $ 60,247 Europe 57,048 48,582 Greater China 38,238 26,403 Other Asia 35,905 32,003 $ 239,027 $ 167,235 The following table summarizes disaggregated revenue information by revenue type (in thousands): Three-months Ended April 4, 2021 March 29, 2020 Standard products and services $ 222,326 $ 152,854 Application-specific customer solutions 16,701 14,381 $ 239,027 $ 167,235 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 $ 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 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 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 Increases to the allowance for credit losses — Write-offs ( 33 ) Foreign exchange rate changes — Balance as of April 4, 2021 $ 798 17 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 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 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. NOTE 12: Stock-Based Compensation Expense Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units ("RSUs"). 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. 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 for the three-month period ended April 4, 2021: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2020 8,970 $ 44.73 Granted 421 90.50 Exercised ( 897 ) 38.82 Forfeited or expired ( 42 ) 48.68 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. 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: Three-months Ended April 4, 2021 March 29, 2020 Risk-free rate 1.3 % 1.6 % Expected dividend yield 0.27 % 0.43 % Expected volatility 39 % 37 % Expected term (in years) 5.7 6.0 18 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Risk-free rate The risk-free rate was based upon 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 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. Expected term The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. 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 three-month period ended April 4, 2021: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2020 554 $ 51.27 Granted 245 89.86 Vested ( 2 ) 50.94 Forfeited or expired ( 15 ) 52.22 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 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 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. 19 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 April 4, 2021 March 29, 2020 Cost of revenue $ 248 $ 354 Research, development, and engineering 4,003 5,366 Selling, general, and administrative 7,758 9,070 $ 12,009 $ 14,790 NOTE 13: Stock Repurchase Program In October 2018, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock. 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 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. NOTE 14: Income Taxes 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 April 4, 2021 March 29, 2020 Income tax expense at U.S. federal statutory corporate tax rate 21 % 21 % State income taxes, net of federal benefit 2 % 1 % Foreign tax rate differential ( 5 ) % ( 6 ) % Tax credit ( 1 ) % ( 1 ) % Discrete tax benefit related to stock options ( 7 ) % ( 7 ) % Other discrete adjustments — % 1 % Other 1 % 2 % Income tax expense 11 % 11 % 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. 20 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. 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 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. NOTE 15: Weighted-Average Shares Weighted-average shares were calculated as follows (in thousands): Three-months Ended April 4, 2021 March 29, 2020 Basic weighted-average common shares outstanding 176,288 172,408 Effect of dilutive equity awards 3,683 3,194 Weighted-average common and common-equivalent shares outstanding 179,971 175,602 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 . NOTE 16: 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. 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): One-time Termination Benefits Contract Termination Costs Other Associated Costs Total Balance as of December 31, 2020 $ 1,624 $ 750 $ 15 $ 2,389 Cash payments ( 951 ) ( 68 ) ( 15 ) ( 1,034 ) Foreign exchange rate changes ( 1 ) ( 4 ) — ( 5 ) Balance as of April 4, 2021 $ 672 $ 678 $ — $ 1,350 21 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 17: Subsequent Events 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. 22