What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-11 · 167 added, 237 removed, 196 unchanged (67% of the section changed)

4 unchanged sentences

These statements are based on our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given.

These forward-looking statements, which include statements regarding business and market trends, future financial performance, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer order rates and timing of related revenue, future product mix, restructuring and other cost-savings initiatives, research and development activities, capital projects, investments, acquisitions, liquidity, dividends and stock repurchases, strategic plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected.

These forward-looking statements, which include statements regarding business and market trends, future financial performance, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer demand and order rates and timing of related revenue, managing supply shortages, delivery lead times, future product mix, research and development activities, sales and marketing activities, new product offerings, capital expenditures, investments, liquidity, dividends and stock repurchases, strategic and growth plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected.

Such risks and uncertainties include:

(1) the impact, duration, and severity of the COVID-19 pandemic;

(2) potential disruptions to our business due to restructuring activities;

(3) the loss of, or curtailment of purchases by, large customers in the consumer electronics and logistics industries;

(4) the reliance on revenue from the automotive industry;

(5) the reliance on key suppliers to manufacture and deliver critical components for our products;

(1) the reliance on key suppliers to manufacture and deliver quality products;

(2) the inability to obtain components for our products;

(3) the failure to effectively manage product transitions or accurately forecast customer demand;

(4) the ability to manage disruptions to our distribution centers;

(5) the inability to design and manufacture high-quality products;

(6) the impact, duration, and severity of the COVID-19 pandemic, including the availability and effectiveness of vaccines;

(7) the loss of, or curtailment of purchases by, large customers in the logistics industry;

(8) information security breaches;

(9) the inability to protect our proprietary technology and intellectual property;

(10) the inability to attract and retain skilled employees and maintain our unique corporate culture;

(9) the failure to effectively manage our growth;

(10) the inability to achieve growth in revenue and profits from the logistics industry;

(11) the technological obsolescence of current products and the inability to develop new products;

3 unchanged sentences

(15) potential disruptions in our business systems;

(16) information security breaches;

(17) the inability to protect our proprietary technology and intellectual property;

(16) potential impairment charges with respect to our investments or acquired intangible assets;

1 unchanged sentence

(18) fluctuations in foreign currency exchange rates and the use of derivative instruments;

(21) our involvement in time-consuming and costly litigation;

(19) unfavorable global economic conditions;

and (23) economic, political, and other risks associated with international sales and operations.

(20) business disruptions from natural or man-made disasters or public health issues;

(21) economic, political, and other risks associated with international sales and operations;

and (22) our involvement in time-consuming and costly litigation.

The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of this Annual Report on Form 10-K.

6 unchanged sentences

Cognex machine vision is used to automate manufacturing and distribution processes in a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance.

Virtually every manufacturer can achieve better quality and manufacturing efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including consumer electronics, automotive, consumer products, food and beverage, and medical-related.

Cognex products are also used to automate distribution processes in the logistics industry, including for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers.

Virtually every manufacturer or distributor can achieve better quality and efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including logistics, automotive, consumer electronics, medical-related, semiconductor, consumer products, and food and beverage.

Revenue for the year ended December 31, 2021 totaled $1,037,098,000, representing an increase of 28% from 2020.

This increase was driven largely by higher revenue from certain customers in the consumer electronics industry and ecommerce customers in the logistics industry.

We believe that both of these industries benefited in 2020 from higher consumer demand during the COVID-19 pandemic.

These increases were partially offset by lower revenue from customers in the automotive industry, which was our largest market in 2019 and continues to be negatively impacted by global economic conditions resulting from the COVID-19 pandemic.

The increase was due in part to significantly higher revenue from the logistics industry, which was our largest market in 2021, as well as the impact of a broader recovery in industries that were adversely affected by the COVID-19 pandemic in 2020, most notably the automotive industry.

Table of Content

Gross margin improved to 75% of revenue in 2020 from 74% of revenue in 2019.

Gross margin expansion was due to the favorable impact of the higher revenue on fixed manufacturing costs, as well as favorable product mix.

Operating expenses increased by 10% from the prior year due primarily to one-time restructuring charges and intangible asset impairment charges.

Excluding these charges, operating expenses were relatively flat with the prior year, as higher incentive compensation costs were offset by lower travel expenses resulting from COVID-19 restrictions and savings from restructuring actions.

Gross margin as a percentage of revenue was 73% in 2021 compared to 75% in 2020, primarily due to higher prices paid to purchase inventories, as well as a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

Operating expenses increased by $10,656,000, or 2%, from the prior year as higher incentive compensation costs, the impact of foreign currency exchange rate changes, and costs of additional headcount to support our future growth plans, were partially offset by savings from 2020 cost-cutting measures and one-time restructuring and intangible asset impairment charges of $35,495,000.

Excluding these one-time restructuring and intangible asset impairment charges, operating expenses increased by $46,151,000, or 12%.

Operating income expanded to 30% of revenue in 2021 compared to 21% of revenue in 2020.

A higher level of discrete tax benefits in 2019 related to tax structure changes resulted in net income of 22% of revenue in 2020 compared to 28% of revenue in 2019, and net income per diluted share of $1.00 in 2020 compared to $1.16 in 2019.

This higher level of operating income resulted in net income of 27% of revenue in 2021 compared to 22% of revenue in 2020, and net income per diluted share of $1.56 in 2021 compared to $1.00 in 2020.

The following table sets forth certain consolidated financial data as a percentage of revenue:

22 unchanged sentences

Revenue for the year ended December 31, 2020 was $1,037,098,000 compared to $811,020,000 for the prior year, representing an increase of 28%.

Revenue from customers in the logistics industry increased by approximately 65% from the prior year, with the most significant portion of this growth coming from e-commerce and omni-channel retailers.

Higher sales from traditional brick-and-mortar retailers also contributed to growth in the logistics industry.

Growth in the automotive, semiconductor, medical-related, and consumer products industries also contributed to the increase in total revenue.

After declining for two consecutive years, revenue from customers in the automotive industry grew faster than the company average in 2021, due in part to electric vehicle investments.

These increases were partially offset by a decrease in revenue from customers in the consumer electronics industry due to lower investment in smartphone manufacturing and other devices that we believe benefited from remote work conditions in 2020.

From a geographic perspective, revenue from customers based in the Americas increased by 40% from the prior year driven primarily by higher revenue in the logistics industry.

Revenue from customers in medical-related industries was also notably higher than the prior year.

Table of Content

Revenue from customers based in Europe increased by 19% from the prior year.

Changes in foreign currency exchange rates resulted in a higher level of reported revenue in 2021, as sales denominated in Euros were translated into U.S.

Dollars at a higher rate.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Europe increased by 15% from the prior year.

The increase came from customers in a variety of industries, most notably logistics, automotive, and consumer products, partially offset by lower revenue in the consumer electronics industry.

The decline in revenue from consumer electronics was partially a result of procurement changes made by certain customers, shifting their purchases to China from Europe.

Revenue from customers based in Greater China increased by 19% from the prior year.

Changes in foreign currency exchange rates resulted in a higher level of reported revenue in 2021, as sales denominated in Chinese Renminbi were translated into U.S.

Dollars at a higher rate.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Greater China increased by 12% from the prior year.

The increase was driven primarily by higher revenue in the automotive and semiconductor industries, partially offset by lower revenue in the consumer electronics industry.

Revenue from other countries in Asia increased by 24% from the prior year due primarily to higher revenue in the automotive, semiconductor, and consumer electronics industries.

As of the date of this report, we expect revenue for the first quarter of 2022 to be higher than the revenue reported for the fourth quarter of 2021 of $244,065,000.

We anticipate a significant portion of this increase to come from more favorable product supply conditions, as well as higher revenue in the logistics industry, due particularly to the timing of large customer deployments in this industry.

Gross margin as a percentage of revenue decreased to 73% in 2021 compared to 75% in 2020.

The decrease in gross margin percentage was primarily due to higher prices paid to purchase inventories in 2021, including higher costs for components and freight, due largely to global supply chain constraints.

The decrease was also due to a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins and included some comparatively lower margins from strategic logistics projects in 2021.

The unfavorable impact of higher inventory purchase prices and a higher percentage of logistics revenue was partially offset by manufacturing efficiencies related to the higher revenue level and lower provisions for excess and obsolete inventories as compared to the prior year.

The higher provisions for excess and obsolete inventories in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

As of the date of this report, we expect gross margin as a percentage of revenue for the first quarter of 2022 to be in the low-70% range.

The expected gross margin percentage reflects our expectations that higher inventory purchase prices will continue throughout and beyond the first quarter of 2022.

Our estimates also reflect a significant percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses in 2021 increased by $4,390,000, or 3%, from the prior year as detailed in the table below (in thousands).

RD&E expenses in 2020 $ 130,982

Foreign currency exchange rate changes 2,919

Outsourced engineering services 1,464

Personnel-related costs (517)

RD&E expenses in 2021 $ 135,372

RD&E expenses increased due to foreign currency exchange rate changes, as costs denominated in foreign currencies were translated into U.S.

Dollars at a higher rate.

Higher spending on outsourced engineering services due to the timing of product development activities, including engineering prototypes for large sales opportunities, also contributed to the increase.

These increases were partially offset by lower personnel-related costs due to a workforce reduction in the second quarter of 2020.

Higher costs from annual salary increases and fringe benefits provided to employees, as well as headcount additions to support new product initiatives, partially offset the lower costs from the workforce reduction.

Table of Content

RD&E expenses as a percentage of revenue was 13% in 2021 compared to 16% in 2020.

We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers.

In addition, we consider our ability to accelerate the time to market for new products to be critical to our revenue growth.

This quarterly percentage is impacted by revenue levels and investing cycles.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased in 2021 by $41,761, or 16%, from the prior year as detailed in the table below (in thousands).

SG&A expenses in 2020 $ 267,593

Incentive compensation 15,709

Personnel-related costs 6,734

Foreign currency exchange rate changes 6,420

Business system investments 2,798

Marketing programs 2,599

Travel expenses 2,057

SG&A expenses in 2021 $ 309,354

SG&A expenses increased due to higher expenses related to annual incentive compensation plans, which include sales commissions and incentive bonuses.

Relevant performance goals for these plans, as well as any changes to employee eligibility, are set at the beginning of each year, with the ability to earn upside if the goals are exceeded.

Sales commissions were higher than the prior year primarily due to the higher business levels, which resulted in a greater portion of our sales team exceeding the performance goals set in their commission plans in 2021 versus 2020.

Likewise, the performance goal set for 2021 incentive bonuses was exceeded based on the Company's operating income margin, with the same being true in 2020.

However, incentive bonus accruals in 2021 were higher than the prior year primarily due to the impact of changes to employee eligibility, of which the most significant related to members of the Company's senior leadership team who were not eligible for 2020 incentive bonuses as part of the Company's restructuring plan.

These annual incentive compensation plans will be reset with relevant performance goals for 2022, and incentive compensation expenses will reflect our estimates of achievement throughout the year, which we expect will result in lower expense for the first quarter of 2022 as compared to the fourth quarter of 2021.

Personnel-related costs increased due to higher costs from annual salary increases and fringe benefits provided to employees, as well as sales headcount additions in strategic growth areas of the business, partially offset by the impact of the workforce reduction that took place in the second quarter of 2020.

Changes in foreign currency exchange rates also resulted in a higher level of expenses, as costs denominated in foreign currencies were translated into U.S.

Dollars at a higher rate.

Expenses were also higher due to investments the Company is making in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities.

A portion of these costs was expensed as incurred, while the majority of these investments were accounted for as a capital asset that was placed into service in the first quarter of 2022.

The Company also increased spending on marketing programs in an effort to generate future sales opportunities, particularly related to new product introductions, and incurred higher travel expenses as restrictions related to COVID-19 eased in certain regions.

Restructuring and Intangible Asset Impairment 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 Company recorded restructuring charges of $15,924,000 in 2020, as a result of actions related to the restructuring plan, which included a global workforce reduction of approximately 8% and office closures.

In addition, the adverse impact of the COVID-19 pandemic triggered a review of long-lived assets for potential impairment in the second quarter of 2020.

This review resulted in intangible asset impairment charges totaling $19,571,000 recorded in the second quarter of 2020.

Table of Content

Non-operating Income (Expense)

The Company recorded foreign currency losses of $2,270,000 in 2021 and foreign currency gains of $3,697,000 in 2020.

Foreign currency gains and losses result primarily from the revaluation and settlement of assets and liabilities that are denominated in currencies other than the functional currencies of our subsidiaries or the reporting currency of our company, which is the U.S.

Investment income decreased by $6,334,000, or 49%, from the prior year.

The decrease was due primarily to lower yields on the Company's portfolio of debt securities, partially offset by higher invested balances.

The Company recorded other expense of $591,000 in 2021 and $309,000 in 2020.

Other income (expense) includes fair value adjustments of contingent consideration liabilities arising from business acquisitions.

Income Tax Expense (Benefit)

The Company’s effective tax rate was 12% of pre-tax income in 2021, compared to 6% in 2020.

The effective tax rate in both years reflected several discrete tax items described below.

The effective tax rate included a decrease in tax expense of $11,036,000 in 2021 and $12,788,000 in 2020 related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises.

The Company cannot accurately predict the level of stock option exercises by employees in future periods.

Income tax expense in 2021 and 2020 also included discrete tax items related to the final true-up of the prior year's tax accrual upon filing the related tax return.

In 2020, this included a tax benefit of $13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the United States based on clarifications to rules relating to the use of foreign tax credits.

This benefit was partially offset by tax expense for a transfer price adjustment in China of $3,267,000 and smaller tax expense adjustments related to foreign tax filings of $843,000.

In 2020, interpretations of a German law relating to withholding taxes on intellectual property rights emerged.

The Company conducted a careful review of the interpretation, submitted required tax filings, and believes it has adequate reserves for this German tax exposure.

Excluding the impact of all discrete tax items, the Company’s effective tax rate was an expense of 16% of pre-tax income in 2021 and 17% of pre-tax income in 2020.

The decrease in the effective tax rate excluding discrete tax items was due to the impact of higher estimated tax credits in 2021, partially offset by more of the Company's profits being earned and taxed in higher tax jurisdictions.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenue for the year ended December 31, 2020 was $811,020,000 compared to $725,625,000 for the prior year, representing an increase of 12%.

The increase was due largely to higher revenue from customers in the consumer electronics and logistics industries, which were our two largest markets in 2020.

It appears that manufacturers of electronics products and ecommerce providers in the logistics industry both benefited from the "stay-at-home" conditions that arose from the COVID-19 pandemic in 2020.

During the year, it appeared that manufacturers of electronics products and e-commerce providers in the logistics industry both benefited from the "stay-at-home" conditions that arose from the COVID-19 pandemic in 2020.

Revenue from customers in the consumer electronics and logistics industries increased by approximately 30% and 40%, respectively, from the prior year, and a significant portion of this growth came from large customers in these industries.

Our total revenue and quarterly timing of revenue is impacted by the purchasing cycles of these large customers.

In contrast, our results indicate that other industries we serve have experienced significantly lower demand during the COVID-19 pandemic, most notably the automotive industry, which was our largest market in 2019.

Although revenue from customers in the automotive industry for the full year 2020 decreased by approximately 20% from the prior year, automotive revenue for the fourth quarter of 2020 was slightly higher than the fourth quarter of 2019 and increased sequentially each of the last two quarters.

In addition, revenue from customers in certain industries in which we have a smaller presence, including medical-related industries, increased for the full year 2020 from the

Table of Content

prior year, due in part to COVID-19 applications for Cognex products.

Although we continue to experience certain disruptions to our business from COVID-19 and the situation is continuously changing, the impact of these conditions on our business to date appears to have been most severe in the second quarter of 2020.

In contrast, our results indicated that other industries we serve had experienced significantly lower demand during the COVID-19 pandemic, most notably the automotive industry, which was our largest market in 2019.

In addition, revenue from customers in certain industries in which we have a smaller presence, including medical-related industries, increased for the full year 2020 from the prior year, due in part to COVID-19 applications for Cognex products.

Although we continue to experience certain disruptions to our business from COVID-19 and the situation is continuously changing, the impact of these conditions on our business appears to have been most severe in the second quarter of 2020.

From a geographic perspective, revenue from customers based in the Americas increased by 12% from the prior year driven by higher revenue in the logistics industry, partially offset by lower revenue in the automotive industry.

A significant portion of our logistics business currently comes from customers based in the Americas.

Although this region had the largest dollar growth of logistics revenue in 2020, we are making investments to grow our logistics business outside of the Americas and our logistics revenue increased in all of our major regions in 2020.

Although this region had the largest dollar growth of logistics revenue in 2020, we are making investments to grow our logistics

Table of Content

business outside of the Americas and our logistics revenue increased in all of our major regions in 2020.

Revenue from customers based in Europe decreased by 8% from the prior year due to lower revenue in the automotive and consumer electronics industries, partially offset by higher revenue in the logistics industry.

1 unchanged sentence

In recent years, there has been a shift in procurement for certain electronics orders for Cognex products used on assembly lines in China.

This procurement shift has resulted in an increase in consumer electronics revenue reported in Greater China that was previously reported in Europe.

This procurement shift resulted in an increase in consumer electronics revenue reported in Greater China that was previously reported in Europe.

Revenue from other countries in Asia increased by 17% from the prior year due primarily to higher revenue in the consumer electronics and logistics industries.

As of the date of this report, we expect revenue for the first quarter of 2021 to be higher than revenue reported for fourth quarter of 2020 of $223,615,000.

We anticipate the majority of this increase to come from higher revenue in the logistics industry.

Gross margin as a percentage of revenue improved to 75% in 2020 compared to 74% in 2019.

4 unchanged sentences

The higher level of provisions in 2020 was due to lower projected sales of excess inventories as a result of the deteriorating global economic conditions from the COVID-19 pandemic.

As of the date of this report, we expect gross margin as a percentage of revenue for the first quarter of 2021 to be in the mid 70 percent range, but likely lower than the 75% reported for the fourth quarter of 2020.

The decrease is anticipated to be due to a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

Operating Expenses

9 unchanged sentences

in the fourth quarter of 2019.

These incremental compensation costs included a new team of deep learning engineers, as well as deferred payments from the acquisition that are being recorded as compensation expense over four years from the closing date that accounted for $4,189,000 of this increase.

Excluding the addition of the Sualab deep learning team, RD&E personnel-related costs decreased slightly from 2019 to 2020, as the impact of

Table of Content

incremental resources added largely in 2019 were offset by savings from a workforce reduction in the second quarter of 2020.

Excluding the addition of the Sualab deep learning team, RD&E personnel-related costs decreased slightly from 2019 to 2020, as the impact of incremental resources added largely in 2019 were offset by savings from a workforce reduction in the second quarter of 2020.

RD&E expenses also increased due to higher expenses for annual incentive compensation plans.

1 unchanged sentence

The Company did not achieve its performance goal to earn a company bonus in 2019, while the goal set for 2020 was exceeded based on the Company's operating income margin.

Expenses for the fourth quarter of 2020 included a true-up of the annual liability to reflect the upside achievement based on our strong operating results for this quarter that exceeded our prior estimates.

These annual incentive compensation plans will be reset with relevant performance goals for 2021 and incentive compensation expenses will reflect our estimates of achievement throughout the year, which we expect will result in lower expense for the first quarter of 2021 as compared to the fourth quarter of 2020.

Expenses for the fourth quarter of 2020 included a true-up of the annual liability to reflect the upside achievement based on our strong operating results for the quarter that exceeded our prior estimates.

These increases were partially offset by lower stock-based compensation expense as a result of a lower total value of awards granted in 2020 as compared to 2019, as well as the impact on the timing of expense recognition due to changes in restricted stock unit vesting schedules.

1 unchanged sentence

The Company also incurred lower travel expenses resulting from COVID-19 restrictions.

We expect these restrictions to continue into 2021.

RD&E expenses as a percentage of revenue were 16% for both 2020 and 2019.

In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth.

We currently expect to continue to make significant RD&E investments to support our product development plans during the COVID-19 pandemic and other business disruptions generally.

Table of Content

Selling, General, and Administrative Expenses

10 unchanged sentences

The majority of these savings came from sales activities, which were redirected to online efforts due to shutdowns of customer facilities for portions of 2020.

We expect these restrictions to continue into 2021.

In addition, the Company reduced spending on contract labor, marketing programs, and recruiting activities as part of actions taken to reduce operating costs during the global pandemic.

2 unchanged sentences

The Company did not achieve its performance goal to earn a company bonus in 2019, while the goal set for 2020 was exceeded based on the Company's operating income margin.

Likewise, sales commissions were higher than the prior year due to a greater portion of our sales team exceeding the performance goals set in their commission plans in 2020 versus 2019.

SG&A personnel-related costs were relatively flat from the prior year, as the impact of incremental resources added largely in 2019 were offset by savings from a workforce reduction in the second quarter of 2020.

Table of Content

Restructuring Charges

In May 2020, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs, optimize its business model, and address the impact of the COVID-19 pandemic.

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

The Company recorded restructuring charges from these actions totaling $15,924,000 in 2020.

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.

These restructuring actions, together with other actions to reduce the Company's overall costs, were designed to generate an aggregate annualized cost savings of approximately $25 million versus the Company's original planned cost structure.

As of the date of this report, we are on track to achieve this target for 2021, with actual savings from these restructuring and other cost-saving actions in 2020 estimated to be approximately $16 million.

Intangible Asset Impairment Charges

Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of long-lived assets for potential impairment in the second quarter of 2020.

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

Non-operating Income (Expense)

2 unchanged sentences

In 2020, the Company recognized foreign currency gains related to the revaluation of intercompany payables reported on the Company's China entity that are denominated in U.S.

The Company currently does not hedge its Chinese Yuan exposures due to limitations in hedging instruments available for this currency.

Investment income decreased by $6,695,000, or 34%, from the prior year.

7 unchanged sentences

The effective tax rate included a decrease in tax expense of $12,788,000 in 2020 and $6,472,000 in 2019 related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises.

The Company cannot predict the level of stock option exercises by employees in future periods.

In 2020, the Company recorded discrete tax items related to the final true-up of the prior year tax accrual upon filing the related tax return.

3 unchanged sentences

The Company conducted a careful review of the interpretation and believes it has adequate reserves for this German tax exposure.

Management will continue to monitor this law and court rulings in Germany.

Table of Content

In 2019, the Company made changes to its international tax structure as a result of European Union tax reform legislation, and as a result, recorded a net discrete tax benefit of $87,500,000.

Also, in 2019, the Company migrated acquired intellectual property to certain subsidiaries, and as a result, recorded a discrete tax expense of $28,528,000.

Table of Content

Other discrete tax items, none of which were individually material, resulted in a net decrease in tax expense of $307,000 in 2020 and $1,932,000 in 2019.

1 unchanged sentence

The increase in the effective tax rate excluding discrete tax items was due to more of the Company's profits being earned and taxed in higher tax jurisdictions, as well as the impact of changes in 2019 to the Company's international tax structure.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue for the year ended December 31, 2019 was $725,625,000 compared to $806,338,000 for the prior year, representing a decrease of $80,713,000, or 10%.

Changes in foreign currency exchange rates accounted for approximately 2% of the revenue decrease from 2018 to 2019, primarily related to the translation of Euro-denominated and Chinese Yuan-denominated revenue to U.S.

In 2019, industrial companies delayed and reduced spending for automation projects, including those with machine vision, amid weaker general manufacturing confidence and heightened uncertainty around global trade.

This decrease in capital spending, along with the decision by certain of our larger customers to retrofit existing equipment rather than invest in new production lines or facilities, contributed to the decrease in revenue from the prior year.

The impact to our business was most significant in our two largest markets, consumer electronics and automotive, which together represent approximately half of our total revenue.

Consumer electronics revenue was approximately 30% lower than the prior year, with the majority of this decrease related to smartphone manufacturing, while automotive revenue was approximately 10% lower than the prior year.

These decreases were only partially offset by higher revenue in the logistics industry, which increased by approximately 15% from the prior year.

This growth rate was slower than 2018 due to a major customer delaying deliveries for new facilities until mid-2020 after building adequate capacity for 2019 by upgrading existing facilities.

Excluding revenue from this major customer, logistics revenue increased by approximately 50% from the prior year.

From a geographic perspective, revenue from customers based in the Americas increased by 5% driven by higher sales in the logistics industry, partially offset by lower sales in the automotive industry.

Revenue from customers based in Europe decreased by 27% driven by lower sales in the consumer electronics industry, and to a lesser extent, the automotive industry.

Revenue from customers based in Greater China decreased by 7% across a variety of industries.

The decline would have been larger in Greater China, and less extreme in Europe, if not for procurement changes made by certain consumer electronics customers, shifting their purchases to China from Europe.

Revenue from customers based in other regions in Asia were relatively flat.

Gross margin as a percentage of revenue was 74% for both 2019 and 2018.

The unfavorable absorption of manufacturing overhead costs over the lower level of revenue was offset by favorable product mix.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses in 2019 increased by $2,982,000, or 3%, from the prior year as detailed in the table below (in thousands).

RD&E expenses in 2018 $ 116,445

Personnel-related costs 5,782

Incentive compensation (3,852)

RD&E expenses in 2019 $ 119,427

RD&E expenses increased due to higher personnel-related costs resulting primarily from headcount additions to support new product initiatives, of which $1,013,000 related to a new team of deep learning engineers from the Company's acquisition of Sualab Co., Ltd.

on October 16, 2019.

The consideration from this acquisition included deferred payments that are being recorded as compensation expense over four years from the closing date, which accounted for an additional $1,092,000 of the increase in personnel-related costs.

These increases were partially offset by lower expenses related to incentive compensation plans resulting from lower levels of achievement on performance plans that were set at the beginning of the year.

Table of Content

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses in 2019 increased by $11,143,000, or 4%, from the prior year as detailed in the table below (in thousands).

SG&A expenses in 2018 $ 262,699

Personnel-related costs 23,811

Incentive compensation (8,742)

Foreign currency exchange rate changes (5,085)

ERP project costs (4,967)

SG&A expenses in 2019 $ 273,842

SG&A expenses increased due to higher personnel-related costs resulting primarily from headcount additions, principally sales personnel.

In addition to salaries and fringe benefits, these personnel-related costs included sales commissions and travel expenses related to the additional headcount.

Changes in foreign currency exchange rates also resulted in a lower level of expenses, as costs denominated in foreign currencies were translated to U.S.

Dollars at a lower rate.

Expenses were also lower due to project costs incurred in 2018 related to the Company's new Enterprise Resource Planning (ERP) system.

This system was placed into service during the third quarter of 2018, and therefore, similar costs were not incurred in 2019.

Non-operating Income (Expense)

The Company recorded foreign currency losses of $509,000 in 2019 and $1,064,000 in 2018.

Foreign currency gains and losses result primarily from the revaluation of cash, accounts receivable, accounts payable, and intercompany balances that are reported in one currency and denominated in another.

Investment income increased by $4,974,000 or 34%, from the prior year.

The increase was due to higher yields on the Company's portfolio of debt securities, and to a lesser extent, higher average investment balances.

The Company recorded other income of $1,212,000 in 2019 and other expense of $219,000 in 2018.

Other income (expense) includes fair value adjustments of contingent consideration liabilities arising from business acquisitions.

A higher level of fair value adjustments to income was recorded in 2019 related to the Company's acquisition of GVi Ventures, Inc., resulting from a lower level of revenue in the Americas' automotive industry.

Income Tax Expense (Benefit)

The Company’s effective tax rate was a benefit of 25% of pre-tax income in 2019 compared to an expense of 7% in 2018.

The European Union has enacted a series of tax reform legislation over the past few years regarding low tax structures.

The Company made changes to its international tax structure in the fourth quarter of 2019 as a result of this legislation, and as a result, recorded a net discrete tax benefit of $87,500,000.

On October 16, 2019, the Company acquired Sualab Co., Ltd., a provider of deep learning-based vision software based in Korea.

The Company migrated acquired intellectual property to certain subsidiaries in the fourth quarter of 2019, and as a result, recorded a discrete tax expense of $28,528,000.

In addition, the effective tax rate included a decrease in tax expense of $6,472,000 in 2019 and $8,488,000 in 2018 related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises.

Other discrete tax events included a net decrease in tax expense of $1,932,000 in 2019 and $1,847,000 in 2018, consisting primarily of the expiration of the statutes of limitations for certain reserves for income tax uncertainties and the final true-up of the prior year's tax accrual upon filing the related tax returns.

Excluding the impact of these discrete events, the Company’s effective tax rate was an expense of 16% of pre-tax income in 2019.

This represents an increase in the effective tax rate excluding discrete events from 14% in 2018 due to more of the Company's profits being earned and taxed in higher tax jurisdictions.

Table of Content

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $767,438,000 as of December 31, 2020.

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and resulted in an accumulated cash and investment balance of $907,364,000 as of December 31, 2021.

The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.

The Company’s cash requirements in 2020 were primarily met with positive cash flows from operations, maturities and sales of investments, and the proceeds from stock option exercises.

Cash requirements consisted of operating activities, the payment of dividends, the repurchase of common stock, and capital expenditures.

Working capital requirements included an increase in accounts receivable resulting from the higher business level and the timing of invoicing for a material customer, as well as an increase in gross inventories to support the higher business level and build safety stock to mitigate the Company's exposure to demand changes or supply disruptions.

The Company’s cash requirements in 2021 were primarily met with positive cash flows from operations and the proceeds from stock option exercises.

Cash requirements consisted of operating activities, the repurchase of common stock, the payment of dividends, and capital expenditures.

Operating activities included cash outflows to secure inventories to support higher business levels and build safety stock to mitigate the Company's exposure to demand changes or supply disruptions.

Cash outlays in the first quarter of 2022 are planned to include incentive compensation payments that were earned and accrued in 2021.

Capital expenditures in 2020 totaled $13,303,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and improvements made to the Company's headquarters building in Natick, Massachusetts and various leased facilities.

In 2021, the Company is making significant investments in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities.

As of the date of this report, the Company estimates cash outlays for this initiative to be up to $10 million, a large portion of which we expect will be capitalized and placed into service in the first quarter of 2022.

The Company implemented a variety of cost-cutting measures in the second quarter of 2020 to address the impact of the COVID-19 pandemic, including a workforce reduction and office closures.

The Company estimates the total restructuring charges from these actions to be approximately $15,924,000, of which $3,938,000 represents non-cash charges and adjustments, $9,597,000 was paid in 2020, and the remainder of $2,389,000 expected to be paid in 2021.

The following table summarizes the Company’s material contractual obligations, both fixed and contingent (in thousands):

Year Ended December 31, Inventory Purchase Commitments Leases Total

2021 $ 32,315 $ 9,101 $ 41,416

2022 — 6,863 6,863

2023 — 5,072 5,072

2024 — 2,074 2,074

2025 — 1,317 1,317

Thereafter — 4,960 4,960

$ 32,315 $ 29,387 $ 61,702

Capital expenditures in 2021 totaled $15,455,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and improvements made to the Company's headquarters building in Natick, Massachusetts.

In 2021, the Company made investments in business systems related to its sales process, the majority of which were accounted for as a capital asset that was placed into service in the first quarter of 2022.

Although the Company continues to make investments in its business systems related to its sales process, these investments are not expected to be material over the long term.

The Company's material cash requirements include contractual obligations related to inventory purchase commitments and leases.

As of December 31, 2021, the Company had inventory purchase commitments of $100,750,000, with the majority payable within 12 months, and lease payment obligations of $37,968,000, with $9,178,000 payable within 12 months.

In addition to the obligations described above, the following items may also result in future material uses of cash:

1 unchanged sentence

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

As of December 31, 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 2020, leaving a remaining balance of $78,652,000.

Under this October 2018 program, the Company repurchased 1,398,000 shares at a cost of $61,690,000 in 2019, 1,215,000 shares at a cost of $51,036,000 in 2020, and 957,000 shares at a cost of $78,652,000 in 2021, which completed purchases under this 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.

Under this March 2020 program, the Company repurchased 1,060,000 shares at a cost of $83,000,000 in 2021, leaving a remaining balance of $117,000,000.

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.

Table of Content

The Company’s Board of Directors declared and paid cash dividends of $0.050 per share in the first, second, and third quarters of 2019, and $0.055 in the fourth quarter of 2019, as well as in the first, second, and third quarters of 2020.

The Company’s Board of Directors declared and paid cash dividends of $0.050 per share in the first, second, and third quarters of 2019, $0.055 per share in the fourth quarter of 2019 and in the first, second, and third quarters of 2020, and $0.060 per share in the fourth quarter of 2020 and in the first, second, and third quarters of 2021.

The dividend was increased to $0.065 per share in the fourth quarter of 2021.

Also, in the fourth quarter of 2020, an additional special cash dividend of $2.00 per share was declared and paid.

Total dividends amounted to $390,508,000 in 2020, which included $351,428,000 paid for the special cash dividend, $35,124,000 in 2019, and $31,865,000 in 2018.

Future dividends will be declared at the discretion of the Company's Board of Directors and will depend upon such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations.

Total dividends amounted to $43,263,000 in 2021, $390,508,000 in 2020, which included $351,428,000 paid for the special cash dividend, and $35,124,000 in 2019.

Future dividends will be declared at the discretion of the Company's Board of Directors and will depend on such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations.

Table of Content

Business Acquisitions

The total consideration for the 2019 acquisition of Sualab Co., Ltd.

included deferred payments of $24,040,000 that may become payable on the fourth anniversary date of the closing, contingent upon the continued employment of key talent.

In conjunction with the acquisition of Sualab, the Company migrated acquired intellectual property to certain subsidiaries in 2019, which resulted in a foreign tax payment of approximately $27,000,000 in 2020.

The Tax Cuts and Jobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax, which is expected to result in tax payments of $51,113,000 starting in 2021 through 2025.

included deferred payments of $24,040,000 that may become payable in October 2023, contingent upon the continued employment of key talent.

The Tax Cuts and Jobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax, which is expected to result in tax payments of $51,113,000.

These payments started in 2021 and are expected to continue through 2025.

The Company believes that its existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months.

As of December 31, 2020, the Company had $767,438,000 in cash and investments.

In addition, the Company has no long-term debt and does not anticipate needing debt financing in the near future.

In addition, the Company has no long-term debt.

We believe that our strong cash position has put us in a relatively good position with respect to anticipated longer-term liquidity needs.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2020, the Company has no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States.

6 unchanged sentences

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

The framework in support of this core principle includes:

(1) identifying the contract with the customer;

(2) identifying the performance obligations in the contract;

(3) determining the transaction price;

(4) allocating the transaction price to the performance obligations;

and (5) recognizing revenue when (or as) the performance obligations are satisfied.

Identifying the Contract with the Customer

The Company identifies contracts with customers as agreements that create enforceable rights and obligations, which typically take the form of customer contracts or purchase orders.

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility of consideration is probable.

Table of Content

Identifying the Performance Obligations in the Contract

The Company identifies performance obligations as promises in contracts to transfer distinct goods or services.

Standard products and services that the Company regularly sells separately are accounted for as distinct performance obligations.

Application-specific customer solutions that are comprised of a combination of products and services are accounted for as one performance obligation to deliver a total solution to the customer.

Management uses significant estimates and judgment when determining the amount of revenue to be recognized each period for application-specific customer solutions.

Accounting for application-specific customer solutions requires management to monitor and evaluate customer contracts to determine the point in time at which the solution is validated.

The Company’s application-specific customer solutions are comprised of a combination of products and services which are accounted for as one performance obligation to deliver a total solution to the customer.

On-site support services that are provided to the customer after the solution is deployed are accounted for as a separate performance obligation.

These solutions are provided to customers in a variety of industries, including the consumer electronics and logistics industries.

Shipping and handling activities for which the Company is responsible under the terms and conditions of the sale are not accounted for as performance obligations but as fulfillment costs.

These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized.

The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract.

If revenue is recognized before immaterial promises have been completed, then the costs related to such immaterial promises are accrued at the time of sale.

Determining the Transaction Price

The Company determines the transaction price as the amount of consideration it expects to receive in exchange for transferring promised goods or services to the customer.

Amounts collected from customers for sales taxes are excluded from the transaction price.

If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances.

The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved.

The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances.

The Company does not grant customers the explicit right to return product.

However, from time to time, the Company may allow a customer to return a product.

As a practical expedient, the Company estimates the transaction price using the expected value based on its history of return experience using a portfolio approach in which the Company’s total revenue is reduced by an estimate of total customer returns.

Management reasonably expects that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately.

Allocating the Transaction Price to the Performance Obligations

The Company allocates the transaction price to each performance obligation at contract inception based on a relative stand-alone selling price basis, or the price at which the Company would sell the good or service separately to similar customers in similar circumstances.

Recognizing Revenue When (or As) the Performance Obligations are Satisfied

The Company recognizes revenue when it transfers the promised goods or services to the customer.

Revenue for standard products is recognized at the point in time when the customer obtains control of the goods, which is typically upon delivery when the customer has legal title, physical possession, the risks and rewards of ownership, and an enforceable obligation to pay for the products.

Revenue for services, which are not material, is typically recognized over the time the service is provided.

Revenue for application-specific customer solutions is recognized at the point in time when the solution is validated, which is the point in time when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligations in the arrangement.

5 unchanged sentences

Table of Content

For the Company’s standard products and services, revenue recognition and billing typically occur at the same time.

For application-specific customer solutions, however, the agreement with the customer may provide for billing terms which differ from revenue recognition criteria, resulting in either deferred revenue or unbilled revenue.

Credit assessments are performed to determine payment terms, which vary by region, industry, and customer.

Prepayment terms result in contract liabilities for customer deposits.

When credit is granted to customers, payment is typically due 30 to 90 days from billing.

The Company's contracts have an original expected duration of less than one year, and therefore as a practical expedient, the Company has elected to ignore the impact of the time value of money on a contract and to expense sales commissions.

The Company recognizes an asset for costs to fulfill a contract if the costs relate directly to the contract and to future performance, and the costs are expected to be recovered.

Management exercises judgment when determining the amount of revenue to be recognized each period.

Such judgments include, but are not limited to, assessing the customer’s ability and intention to pay substantially all of the contract consideration when due, determining when two or more contracts should be combined and accounted for as a single contract, determining whether a contract modification has occurred, assessing whether promises are immaterial in the context of the contract, determining whether material promises in a contract represent distinct performance obligations, estimating the transaction price for a contract that contains variable consideration, determining the stand-alone selling price of each performance obligation, determining whether control is transferred over time or at a point in time for performance obligations, and assessing whether formal customer acceptance provisions are substantive.

As of December 31, 2021, the Company’s investment portfolio of debt securities totaled $721,203,000.

These debt securities are reported at fair value, with unrealized gains and losses, net of tax, included in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities.

As of December 31, 2020, the Company’s portfolio of debt securities had an unrealized gain of $5,690,000, and no unrealized losses.

The fair value of the Company's debt securities is 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.

Management is responsible for estimating the fair value of these financial assets, and in doing so, considers valuations provided by a large, third-party pricing service.

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.

As of December 31, 2021, the Company’s portfolio of debt securities had a net unrealized loss of $3,902,000.

Included in this net loss, were gross unrealized losses totaling $4,971,000, of which $4,896,000 were in a loss position for less than twelve months and $75,000 were in a loss position for greater than twelve months.

Management monitors its debt securities that are in an unrealized loss position to determine whether a loss exists related to the credit quality of the issuer.

When developing an estimate of expected credit losses, management considers all relevant information including historical experience, current conditions, and reasonable forecasts that project the expected future cash flows.

Credit losses on debt securities were not material in 2021, 2020, or 2019.

Inventories are stated at the lower of cost and net realizable value.

Cost is determined using standard costs, which approximates actual costs under the first-in, first-out (FIFO) method.

Net realizable value is the estimated selling price in the ordinary course of business, less readily predictable costs of completion, disposal, and transportation.

Management estimates excess and obsolescence exposures based on assumptions about future demand, product transitions, and market conditions, and records reserves to reduce the carrying value of inventories to their net realizable value.

Management estimates excess and obsolescence exposures based on assumptions about future demand, product transitions, and general economic and industry conditions, and records reserves to reduce the carrying value of inventories to their net realizable value.

Volatility in the global economy makes these assumptions about future demand more judgmental.

Among the risks associated with the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product.

In addition, we may strategically enter into non-cancelable commitments with vendors to purchase materials for products in advance of demand to take advantage of favorable pricing or address concerns about the availability of future supplies and long lead times.

Estimates in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

As of December 31, 2020, the Company’s reserve for excess and obsolete inventory totaled $14,578,000, or 19% of the gross inventory balance.

A 10% difference in inventory reserves as of December 31, 2020 would have affected net income by approximately $1,210,000.

Table of Content

In addition, we may strategically enter into non-cancelable commitments with vendors to purchase materials for products in advance of demand to address concerns about the availability of future supplies, build safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times, or take advantage of favorable pricing.

Intangible Assets

9 unchanged sentences

Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of intangible assets for potential impairment in the second quarter of 2020.

This review resulted in intangible asset impairment charges totaling $19,571,000 recorded in 2020.

No impairment charges related to intangible assets were recorded in 2021 or 2019.

1 unchanged sentence

Compensation expense is recognized for all grants of stock options and restricted stock units.

Determining the appropriate valuation model and estimating the fair values of these grants requires the input of subjective assumptions, including expected stock price volatility, dividend yields, expected term, and forfeiture rates.

Determining the appropriate valuation model and estimating the fair values of stock option grants requires the input of subjective assumptions, including expected stock price volatility, dividend yields, expected term, and forfeiture rates.

The expected volatility assumption is based partially upon the historical volatility of the Company’s common stock, which may or may not be a true indicator of future volatility.

The assumptions used in calculating the fair values of stock option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment.

The assumptions used in calculating the fair values of stock option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the

Table of Content

application of judgment.

As a result, if factors change and different assumptions are used, stock-based compensation expense could be significantly different from what the Company recorded in the current period.

2 unchanged sentences

All tax positions are analyzed periodically and adjustments are made as events occur that warrant modification, such as the completion of audits or the expiration of statutes of limitations, which may result in future charges or credits to income tax expense.

The Company is currently under audit by the Internal Revenue Service (“IRS”) for the tax years 2017 and 2018.

Additionally, the Company is under audit by the Commonwealth of Massachusetts for tax years 2017 and 2018.

Although management believes the Company is adequately reserved for these audits, the evaluation of the Company’s tax positions involves significant judgment, and the final determination these tax audits and any related litigation could result in material changes in our estimates.

As part of the process of preparing consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates.

4 unchanged sentences

Management has determined that this change is considered preferable, based on the conclusion that it appropriately matches the Company’s current and deferred income tax implications related to the change in tax structure noted below.

In 2019, the Company made changes to its international tax structure as a result of tax reform legislation enacted by the European Union that resulted in an intercompany sale of intellectual property based on the fair value of this

Table of Content

intellectual property.

Also in 2019, in connection with the acquisition of Sualab Co.

1 unchanged sentence

Significant judgment was required to estimate the fair value of the migrated intellectual property, including management estimates related to forecasted future cash flows and discount rates.

Business Acquisitions

Business combinations are accounted for under the acquisition method of accounting.

Determining what constitutes a business to qualify as a business combination requires some judgment.

Allocating the purchase price requires the Company to identify and estimate the fair values of various assets acquired and liabilities assumed.

Management is responsible for determining the appropriate valuation model and estimated fair values, and in doing so, considers a number of factors, including information provided by an outside valuation advisor.

Management primarily establishes fair value using the income approach based on a discounted cash flow model.

The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors.

Contingent consideration liabilities are reported at their estimated fair values based on probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates.

Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement.

The fair value of these contingent consideration liabilities are remeasured each reporting period, with changes in the fair value included in current operations.

The remeasured liability amount could be significantly different from the amount at the acquisition date, resulting in material charges or credits in future reporting periods.

Restructuring Charges

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

The majority of these actions were completed as of December 31, 2020 and resulted in total restructuring charges of $15,924,000 in 2020.

The Company made significant estimates and judgments in the determination of the restructuring charges, including the assessment that the workforce reduction met the criteria to be accounted for as one-time termination benefits and the date the criteria were met to record this liability, severance estimates for employees who had not yet signed termination agreements, the date that closed offices were abandoned, and estimates of remaining lease obligations for abandoned offices.

As of December 31, 2020, the Company had trued up the majority of these estimates based on actual negotiated payments with employees or landlords, with adjustments recorded in the second half of 2020 based on the Company's revised estimates of these liabilities.

NEW PRONOUNCEMENTS

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis