COGNEX CORP 10-Q

ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three-months Ended Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 (unaudited) (unaudited) Revenue $ 274,628 $ 269,158 $ 557,035 $ 508,185 Cost of revenue 78,143 68,432 156,933 122,477 Gross margin 196,485 200,726 400,102 385,708 Research, development, and engineering expenses 33,991 31,302 70,045 65,407 Selling, general, and administrative expenses 79,950 76,843 160,785 149,267 Loss from fire (Note 17) 17,403 — 17,403 — Operating income 65,141 92,581 151,869 171,034 Foreign currency gain (loss) ( 2,043 ) ( 639 ) ( 2,487 ) ( 1,647 ) Investment income 1,505 1,723 2,973 3,277 Other income (expense) ( 188 ) ( 127 ) ( 236 ) ( 295 ) Income before income tax expense 64,415 93,538 152,119 172,369 Income tax expense 5,514 15,940 25,885 24,923 Net income $ 58,901 $ 77,598 $ 126,234 $ 147,446 Net income per weighted-average common and common-equivalent share: Basic $ 0.34 $ 0.44 $ 0.73 $ 0.84 Diluted $ 0.34 $ 0.43 $ 0.72 $ 0.82 Weighted-average common and common-equivalent shares outstanding: Basic 173,507 176,626 173,830 176,454 Diluted 174,993 179,991 175,874 179,982 Cash dividends per common share $ 0.065 $ 0.060 $ 0.130 $ 0.120 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 Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 (unaudited) (unaudited) Net income $ 58,901 $ 77,598 $ 126,234 $ 147,446 Other comprehensive income (loss), net of tax: Available-for-sale investments: Net unrealized gain (loss), net of tax of $( 698 ) and $( 61 ) in the three-month periods, and net of tax of $( 4,734 ) and $( 646 ) in the six-month periods, respectively ( 2,322 ) ( 138 ) ( 15,870 ) ( 2,096 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations ( 12 ) ( 68 ) 24 ( 68 ) Net change related to available-for-sale investments ( 2,334 ) ( 206 ) ( 15,846 ) ( 2,164 ) Foreign currency translation adjustments: Foreign currency translation adjustments ( 3,962 ) ( 337 ) ( 6,073 ) ( 3,107 ) Net change related to foreign currency translation adjustments ( 3,962 ) ( 337 ) ( 6,073 ) ( 3,107 ) Other comprehensive income (loss), net of tax ( 6,296 ) ( 543 ) ( 21,919 ) ( 5,271 ) Total comprehensive income $ 52,605 $ 77,055 $ 104,315 $ 142,175 The accompanying notes are an integral part of these consolidated financial statements. 4 COGNEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) July 3, 2022 December 31, 2021 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 177,046 $ 186,161 Current investments, amortized cost of $ 184,849 and $ 137,124 in 2022 and 2021, respectively, allowance for credit losses of $ 0 in 2022 and 2021 182,634 137,455 Accounts receivable, allowance for credit losses of $ 741 and $ 776 in 2022 and 2021, respectively 171,414 130,348 Unbilled revenue 2,268 3,990 Inventories 96,012 113,102 Prepaid expenses and other current assets 105,384 68,742 Total current assets 734,758 639,798 Non-current investments, amortized cost of $ 450,669 and $ 587,981 in 2022 and 2021, respectively, allowance for credit losses of $ 0 in 2022 and 2021 428,401 583,748 Property, plant, and equipment, net 79,468 77,546 Operating lease assets 32,128 23,157 Goodwill 239,798 241,713 Intangible assets, net 10,226 11,888 Deferred income taxes 411,505 418,570 Other assets 6,799 7,242 Total assets $ 1,943,083 $ 2,003,662 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 20,364 $ 44,051 Accrued expenses 70,051 92,432 Accrued income taxes 18,285 8,577 Deferred revenue and customer deposits 75,385 35,743 Operating lease liabilities 8,156 7,786 Total current liabilities 192,241 188,589 Non-current operating lease liabilities 26,096 17,795 Deferred income taxes 271,592 293,769 Reserve for income taxes 12,876 14,780 Non-current accrued income taxes 33,008 43,160 Other liabilities 17,285 15,476 Total liabilities 553,098 573,569 Commitments and contingencies (Note 10) Shareholders’ equity: Preferred stock, $ .01 par value – Authorized: 400 shares in 2022 and 2021, respectively; no shares issued and outstanding — — Common stock, $ .002 par value – Authorized: 300,000 shares in 2022 and 2021, respectively; issued and outstanding: 173,397 and 175,481 shares in 2022 and 2021, respectively 347 351 Additional paid-in capital 947,269 914,802 Retained earnings 512,230 562,882 Accumulated other comprehensive loss, net of tax ( 69,861 ) ( 47,942 ) Total shareholders’ equity 1,389,985 1,430,093 Total liabilities and shareholders' equity $ 1,943,083 $ 2,003,662 The accompanying notes are an integral part of these consolidated financial statements. 5 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six-months Ended July 3, 2022 July 4, 2021 (unaudited) Cash flows from operating activities: Net income $ 126,234 $ 147,446 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 28,053 22,739 Depreciation of property, plant, and equipment 8,114 8,510 Loss (gain) on disposal of property, plant, and equipment 12 4 Amortization of intangible assets 1,662 1,853 Excess and obsolete inventory charges 741 1,816 Non-cash impact of write-offs related to fire (Note 17) 44,903 — Amortization of discounts or premiums on investments 2,714 1,840 Realized loss (gain) on sale of investments 24 ( 68 ) Change in deferred income taxes ( 10,809 ) 973 Change in operating assets and liabilities: Accounts receivable ( 44,118 ) ( 23,488 ) Unbilled revenue 1,704 3,844 Inventories ( 20,122 ) ( 9,521 ) Prepaid expenses and other current assets ( 45,752 ) ( 28,830 ) Accounts payable ( 23,525 ) 16,058 Accrued expenses ( 20,024 ) 206 Accrued income taxes ( 372 ) ( 5,588 ) Deferred revenue and customer deposits 41,535 55,220 Other 2,655 1,711 Net cash provided by operating activities 93,629 194,725 Cash flows from investing activities: Purchases of investments ( 77,760 ) ( 511,625 ) Maturities and sales of investments 164,610 270,696 Purchases of property, plant, and equipment ( 11,253 ) ( 6,550 ) Net cash provided by (used in) investing activities 75,597 ( 247,479 ) Cash flows from financing activities: Net proceeds from issuance of common stock under stock plans 4,414 44,407 Repurchase of common stock ( 154,317 ) ( 20,877 ) Payment of dividends ( 22,573 ) ( 21,192 ) Net cash provided by (used in) financing activities ( 172,476 ) 2,338 Effect of foreign exchange rate changes on cash and cash equivalents ( 5,865 ) ( 1,620 ) Net change in cash and cash equivalents ( 9,115 ) ( 52,036 ) Cash and cash equivalents at beginning of period 186,161 269,073 Cash and cash equivalents at end of period $ 177,046 $ 217,037 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 April 3, 2022 173,738 $ 347 $ 933,452 $ 488,511 $ ( 63,565 ) $ 1,358,745 Net issuance of common stock under stock plans 47 — 820 — — 820 Repurchase of common stock ( 388 ) — — ( 23,912 ) — ( 23,912 ) Stock-based compensation expense — — 12,997 — — 12,997 Payment of dividends ($ 0.065 per common share) — — — ( 11,270 ) — ( 11,270 ) Net income — — — 58,901 — 58,901 Net unrealized gain (loss) on available-for-sale investments, net of tax of $( 698 ) — — — — ( 2,322 ) ( 2,322 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 12 ) ( 12 ) Foreign currency translation adjustment — — — — ( 3,962 ) ( 3,962 ) Balance as of July 3, 2022 (unaudited) 173,397 $ 347 $ 947,269 $ 512,230 $ ( 69,861 ) $ 1,389,985 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of April 4, 2021 176,608 $ 353 $ 854,491 $ 540,686 $ ( 38,529 ) $ 1,357,001 Net issuance of common stock under stock plans 277 1 9,662 — — 9,663 Repurchase of common stock ( 178 ) ( 1 ) — ( 14,397 ) — ( 14,398 ) Stock-based compensation expense — — 10,730 — — 10,730 Payment of dividends ($ 0.060 per common share) — — — ( 10,597 ) — ( 10,597 ) Net income — — — 77,598 — 77,598 Net unrealized gain (loss) on available-for-sale investments, net of tax of $( 61 ) — — — — ( 138 ) ( 138 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 68 ) ( 68 ) Foreign currency translation adjustment — — — — ( 337 ) ( 337 ) Balance as of July 4, 2021 (unaudited) 176,707 $ 353 $ 874,883 $ 593,290 $ ( 39,072 ) $ 1,429,454 The accompanying notes are an integral part of these consolidated financial statements. 7 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, 2021 175,481 $ 351 $ 914,802 $ 562,882 $ ( 47,942 ) $ 1,430,093 Net issuance of common stock under stock plans 183 — 4,414 — — 4,414 Repurchase of common stock ( 2,267 ) ( 4 ) — ( 154,313 ) — ( 154,317 ) Stock-based compensation expense — — 28,053 — — 28,053 Payment of dividends ($ 0.130 per common share) — — — ( 22,573 ) — ( 22,573 ) Net income — — — 126,234 — 126,234 Net unrealized gain (loss) on available-for-sale investments, net of tax of $( 4,734 ) — — — — ( 15,870 ) ( 15,870 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — 24 24 Foreign currency translation adjustment — — — — ( 6,073 ) ( 6,073 ) Balance as of July 3, 2022 (unaudited) 173,397 $ 347 $ 947,269 $ 512,230 $ ( 69,861 ) $ 1,389,985 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 1,175 2 44,405 — — 44,407 Repurchase of common stock ( 258 ) ( 1 ) — ( 20,876 ) — ( 20,877 ) Stock-based compensation expense — — 22,739 — — 22,739 Payment of dividends ($ 0.120 per common share) — — — ( 21,192 ) — ( 21,192 ) Net income — — — 147,446 — 147,446 Net unrealized gain (loss) on available-for-sale investments, net of tax of $( 646 ) — — — — ( 2,096 ) ( 2,096 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 68 ) ( 68 ) Foreign currency translation adjustment — — — — ( 3,107 ) ( 3,107 ) Balance as of July 4, 2021 (unaudited) 176,707 $ 353 $ 874,883 $ 593,290 $ ( 39,072 ) $ 1,429,454 The accompanying notes are an integral part of these consolidated financial statements. 8 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, 2021 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, adjustments related to the loss from fire (Note 17), and financial statement reclassifications necessary to present fairly the Company’s financial position as of July 3, 2022, and the results of its operations for the three-month and six-month periods ended July 3, 2022 and July 4, 2021, and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented. The results disclosed in the Consolidated Statements of Operations for the three-month and six-month periods ended July 3, 2022 are not necessarily indicative of the results to be expected for the full year. NOTE 2: New Pronouncements 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. Accounting Standards Update (ASU) 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" The amendments in this ASU primarily address the accounting for contract assets and contract liabilities related to revenue contracts with customers in a business combination. The ASU clarifies that an acquirer should account for the related revenue contracts in accordance with Accounting Standards Codification 606 as if the acquirer had originated the contracts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, although early adoption is permitted. The amendments in the ASU should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The expected financial statement impact of this new accounting standard cannot be reasonably estimated at this time, as the impact in future periods will depend on the contract assets and contract liabilities acquired in future business combinations. Management does not expect this ASU to have a material impact on the Company's disclosures. 9 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 July 3, 2022 (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 $ 3,149 $ — $ — Corporate bonds — 495,188 — Asset-backed securities — 70,163 — Treasury bills — 25,030 — Agency bonds — 18,578 — Sovereign bonds — 1,976 — Municipal bonds — 624 — Economic hedge forward contracts — 46 — Liabilities: Economic hedge forward contracts — 425 — 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 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. The balance remained at zero through the remainder of the five-year assessment period which concluded during the six-month period ended July 3, 2022. 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 did not record impairment charges related to non-financial assets during the three-month or six-month periods ended July 3, 2022 or July 4, 2021. 10 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): July 3, 2022 December 31, 2021 Cash $ 173,373 $ 185,624 Money market instruments 3,149 537 Treasury bills 524 — Cash and cash equivalents 177,046 186,161 Corporate bonds 124,805 73,088 Asset-backed securities 26,465 37,655 Agency bonds 18,578 2,802 Treasury bills 12,162 18,912 Municipal bonds 624 4,998 Current investments 182,634 137,455 Corporate bonds 370,383 481,218 Asset-backed securities 43,698 43,940 Treasury bills 12,344 39,753 Sovereign bonds 1,976 2,119 Agency bonds — 16,077 Municipal bonds — 641 Non-current investments 428,401 583,748 $ 788,081 $ 907,364 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; agency bonds consist of domestic or foreign obligations of government agencies and government-sponsored enterprises that have government backing; municipal bonds consist of debt securities issued by state and local government entities; and sovereign bonds consist of direct debt issued by foreign governments. All of the Company's securities as of July 3, 2022 and December 31, 2021 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 $ 2,732,000 and $ 3,037,000 as of July 3, 2022 and December 31, 2021, respectively. 11 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the Company’s available-for-sale investments as of July 3, 2022 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 126,286 $ — $ ( 1,481 ) $ 124,805 Asset-backed securities 26,756 — ( 291 ) 26,465 Agency bonds 18,936 — ( 358 ) 18,578 Treasury bills 12,236 — ( 74 ) 12,162 Municipal bonds 635 — ( 11 ) 624 Non-current: Corporate bonds 390,702 — ( 20,319 ) 370,383 Asset-backed securities 45,269 8 ( 1,579 ) 43,698 Treasury bills 12,580 — ( 236 ) 12,344 Sovereign bonds 2,118 — ( 142 ) 1,976 $ 635,518 $ 8 $ ( 24,491 ) $ 611,035 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 July 3, 2022 (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 $ 443,391 $ ( 19,208 ) $ 51,797 $ ( 2,592 ) $ 495,188 $ ( 21,800 ) Asset-backed securities 67,533 ( 1,867 ) 323 ( 3 ) 67,856 ( 1,870 ) Treasury bills 22,246 ( 307 ) 102 ( 3 ) 22,348 ( 310 ) Agency bonds 18,578 ( 358 ) — — 18,578 ( 358 ) Sovereign bonds 1,976 ( 142 ) — — 1,976 ( 142 ) Municipal bonds 624 ( 11 ) — — 624 ( 11 ) $ 554,348 $ ( 21,893 ) $ 52,222 $ ( 2,598 ) $ 606,570 $ ( 24,491 ) Management monitors 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 of expected future cash flows. Based on this evaluation, no allowance for credit losses on debt securities was recorded as of July 3, 2022 or December 31, 2021. There was no activity recorded in the allowance for credit losses during the three-month or six-month periods ended July 3, 2022 or July 4, 2021. The Company recorded gross realized gains on the sale of debt securities totaling $ 15,000 and $ 133,000 for the three-month and six-month periods ended July 3, 2022, respectively, and gross realized losses on the sale of debt securities totaling $ 3,000 and $ 157,000 for the three-month and six-month periods ended July 3, 2022. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 68,000 and $ 0 , respectively, for both the three-month and six-month periods ended July 4, 2021. Realized 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, were recorded in shareholders’ equity as accumulated other comprehensive loss. 12 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 July 3, 2022 (in thousands): <1 year 1-2 Years 2-3 Years 3-4 Years 4-5 Years Total Corporate bonds $ 124,805 $ 177,030 $ 129,638 $ 51,152 $ 12,563 $ 495,188 Asset-backed securities 26,465 27,660 6,176 9,862 — 70,163 Treasury bills 12,162 9,852 2,492 — — 24,506 Agency bonds 18,578 — — — — 18,578 Sovereign bonds — — 992 984 — 1,976 Municipal bonds 624 — — — — 624 $ 182,634 $ 214,542 $ 139,298 $ 61,998 $ 12,563 $ 611,035 NOTE 5: Inventories Inventories consisted of the following (in thousands): July 3, 2022 December 31, 2021 Raw materials $ 41,568 $ 50,452 Work-in-process 1,704 5,293 Finished goods 52,740 57,357 $ 96,012 $ 113,102 Refer to Note 17 for information regarding losses incurred from the fire at the Company's primary contract manufacturer's plant in Indonesia during the three-month period ended July 3, 2022, including the impact on inventories. 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 July 3, 2022, there were no options to terminate that were accounted for in the determination of the lease term for outstanding leases, and three options to extend that were accounted for in the determination of the lease term of three of the Company's 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 July 3, 2022. The total operating lease expense for the three-month and six-month periods ended July 3, 2022 were $ 2,215,000 and $ 4,444,000 , respectively. The total operating lease cash payments for the three-month and six-month periods ended July 3, 2022 were $ 2,227,000 and $ 4,306,000 , 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 for the three-month and six-month periods ended July 3, 2022 were $ 37,000 and $ 75,000 , respectively. The total operating lease expense for the three-month and six-month periods ended July 4, 2021 were $ 2,021,000 and $ 4,023,000 , respectively. The total operating lease cash payments for the three-month and six-month periods ended July 4, 2021 were $ 2,014,000 and $ 4,075,000 , 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 for the three-month and six-month periods ended July 4, 2021 were $ 38,000 and $ 78,000 , respectively. 13 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 2022 $ 4,536 2023 8,002 2024 5,114 2025 3,408 2026 2,731 2027 2,662 Thereafter 11,035 $ 37,488 The discounted present value of the future lease cash payments resulted in a lease liability of $ 34,252,000 and $ 25,581,000 as of July 3, 2022 and December 31, 2021, respectively. The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of July 3, 2022. In December 2021, the Company entered into a lease for a 65,000 square-foot building in Southborough, Massachusetts for a term of ten years to serve as a new distribution center for customers in the Americas. The Company has the right and option to extend the term of this lease for an additional period of five years , commencing upon the expiration of the original ten-year term. This lease commenced during the six-month period ended July 3, 2022, and therefore the Company recorded approximately $ 9,271,000 within "Operating lease assets" and "Operating lease liabilities" on the Consolidated Balance Sheets on the commencement date. The weighted-average discount rate was 2.9 % and 3.4 % for the leases outstanding as of July 3, 2022 and December 31, 2021, respectively. The weighted-average remaining lease term was 6.9 and 5.1 years for the leases outstanding as of July 3, 2022 and December 31, 2021, respectively. NOTE 7: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Balance as of December 31, 2021 $ 241,713 Foreign exchange rate changes ( 1,915 ) Balance as of July 3, 2022 $ 239,798 14 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 16,519 7,698 Customer relationships 10,578 8,241 2,337 Non-compete agreements 710 519 191 Trademarks 110 110 — Balance as of July 3, 2022 $ 73,675 $ 63,449 $ 10,226 Gross Carrying Value Accumulated Amortization Net Carrying Value Distribution networks $ 38,060 $ 38,060 $ — Completed technologies 24,217 15,234 8,983 Customer relationships 10,578 7,891 2,687 Non-compete agreements 710 492 218 Trademarks 110 110 — Balance as of December 31, 2021 $ 73,675 $ 61,787 $ 11,888 As of July 3, 2022, estimated future amortization expense related to intangible assets was as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2022 $ 1,613 2023 2,594 2024 2,080 2025 1,757 2026 1,452 2027 730 $ 10,226 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, 2021 $ 5,427 Provisions for warranties issued during the period 1,255 Fulfillment of warranty obligations ( 1,461 ) Balance as of July 3, 2022 $ 5,221 15 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10: Commitments and Contingencies As of July 3, 2022, the Company had outstanding purchase orders totaling $ 67,516,000 to procure inventory from various vendors, due in part to higher inventory purchases in response to global supply chain constraints. Certain of these purchase orders may be canceled by the Company, subject to cancellation penalties. These purchase commitments relate primarily to expected sales in the next twelve months. The Company expects the level of outstanding purchase orders to increase for the remainder of the year as it replenishes inventories destroyed in the fire on June 7, 2022 at its primary contract manufacturer (refer to Note 17). A significant portion of the Company's outstanding inventory purchase orders as of July 3, 2022, as well as additional preauthorized commitments to procure strategic components based on the Company's expected customer demand, are placed with the Company's primary contract manufacturer for the Company's assembled products. The Company has the obligation to purchase any non-cancelable and non-returnable components that have been purchased by this contract manufacturer with the Company's preauthorization, when these components have not been consumed within the period defined in the terms of the Company's agreement with this contract manufacturer. NOTE 11: 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 that do not exceed approximately three months 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): July 3, 2022 December 31, 2021 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Euro 75,000 $ 78,329 65,000 $ 73,748 Chinese Renminbi 183,500 27,377 54,374 8,500 Mexican Peso 220,000 10,839 140,000 6,842 Japanese Yen 650,000 4,789 600,000 5,213 British Pound 3,150 3,833 3,370 4,552 Hungarian Forint 1,355,000 3,552 1,355,000 4,155 Korean Won 4,270,000 3,302 — — Canadian Dollar — — 1,480 1,167 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 July 3, 2022 December 31, 2021 Sheet Location July 3, 2022 December 31, 2021 Derivatives Not Designated as Hedging Instruments: Economic hedge forward contracts Prepaid expenses and other current assets $ 46 $ 39 Accrued expenses $ 425 $ 230 16 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands): Asset Derivatives Liability Derivatives July 3, 2022 December 31, 2021 July 3, 2022 December 31, 2021 Gross amounts of recognized assets $ 46 $ 39 Gross amounts of recognized liabilities $ 425 $ 230 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 46 $ 39 Net amount of liabilities presented $ 425 $ 230 Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands): Location in Financial Statements Three-months Ended Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ 6,191 $ ( 746 ) $ 7,930 $ 2,148 17 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 12: 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 Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Americas $ 91,551 $ 108,418 $ 218,210 $ 216,254 Europe 61,840 59,967 124,631 117,015 Greater China 78,616 59,706 127,021 97,944 Other Asia 42,621 41,067 87,173 76,972 $ 274,628 $ 269,158 $ 557,035 $ 508,185 The following table summarizes disaggregated revenue information by revenue type (in thousands): Three-months Ended Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Standard products and services $ 221,474 $ 234,322 $ 479,354 $ 456,648 Application-specific customer solutions 53,154 34,836 77,681 51,537 $ 274,628 $ 269,158 $ 557,035 $ 508,185 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 $ 14,428,000 and $ 10,854,000 as of July 3, 2022 and December 31, 2021, 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 six-month period ended July 3, 2022 (in thousands): Balance as of December 31, 2021 $ 776 Write-offs, net of recoveries ( 36 ) Foreign exchange rate changes 1 Balance as of July 3, 2022 $ 741 18 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the deferred revenue and customer deposits activity for the six-month period ended July 3, 2022 (in thousands): Balance as of December 31, 2021 $ 35,743 Deferral of revenue billed in the current period, net of recognition 69,834 Recognition of revenue deferred in prior period ( 28,557 ) Foreign exchange rate changes ( 1,635 ) Balance as of July 3, 2022 $ 75,385 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 13: Stock-Based Compensation Expense Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options, restricted stock units ("RSUs"), and performance restricted stock units ("PRSUs"). As of July 3, 2022, the Company had 14,250,000 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 or four years of continuous employment or incrementally over such three or four-year period. PRSUs generally vest upon three years of continuous employment and achievement of performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Participants are not entitled to dividends on RSUs or PRSUs. Stock Options The following table summarizes the Company’s stock option activity for the six-month period ended July 3, 2022: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 7,610 $ 49.38 Granted 1,030 64.02 Exercised ( 133 ) 44.66 Forfeited or expired ( 118 ) 59.53 Outstanding as of July 3, 2022 8,389 $ 51.11 6.47 $ 26,951 Exercisable as of July 3, 2022 4,347 $ 43.46 5.30 $ 26,615 Options vested or expected to vest as of July 3, 2022 (1) 7,927 $ 50.45 6.36 $ 26,938 (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. 19 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Three-months Ended Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Risk-free rate 1.9 % 1.5 % 1.9 % 1.3 % Expected dividend yield 0.53 % 0.31 % 0.40 % 0.27 % Expected volatility 37 % 39 % 37 % 39 % Expected term (in years) 6.1 7.1 5.2 5.8 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 and six-month periods ended July 3, 2022 were $ 18.21 and $ 22.33 , respectively, and during the three-month and six-month periods ended July 4, 2021 were $ 32.07 and $ 33.47 , respectively. The total intrinsic values of stock options exercised for the three-month and six-month periods ended July 3, 2022 were $ 934,000 and 3,099,000 , respectively, and for the three-month and six-month periods ended July 4, 2021 were $ 11,621,000 and $ 53,948,000 , respectively. The total fair values of stock options vested for the three-month and six-month periods ended July 3, 2022 were $ 1,188,000 and $ 26,723,000 , respectively, and for the three-month and six-month periods ended July 4, 2021 were $ 1,830,000 and $ 37,430,000 , respectively. Restricted Stock Units (RSUs) The following table summarizes the Company's RSUs activity for the six-month period ended July 3, 2022: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2021 823 $ 65.26 Granted 481 63.37 Vested ( 74 ) 81.31 Forfeited or expired ( 36 ) 66.56 Nonvested as of July 3, 2022 1,194 $ 63.47 20 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The fair value of RSUs is determined based on the observable market price of the Company's stock on the grant date less the present value of expected future dividends. The weighted-average grant-date fair values of RSUs granted during the three-month and six-month periods ended July 3, 2022 were $ 45.25 and $ 63.37 , respectively, and during the three-month and six-month periods ended July 4, 2021 were $ 75.98 and $ 87.46 , respectively. There were 20,000 and 74,000 RSUs that vested during the three-month and six-month periods ended July 3, 2022, respectively, and 13,000 and 15,000 that vested during the three-month and six-month periods ended July 4, 2021, respectively. Performance Restricted Stock Units (PRSUs) The following table summarizes the Company's PRSUs activity for the six-month period ended July 3, 2022: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2021 — $ — Granted 33 62.49 Vested — — Forfeited or expired — — Nonvested as of July 3, 2022 33 $ 62.49 No PRSUs were granted or vested during the three-month period ended July 3, 2022. No PRSUs were granted or vested during the three-month and six-month periods ended July 4, 2021. The fair value of PRSUs is calculated using the Monte Carlo simulation model to estimate the probability of satisfying the service and market conditions stipulated in the award grant. Stock-Based Compensation Expense The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently applies an estimated annual forfeiture rate of 7 % 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 an increase to compensation expense of $ 1,536,000 in 2022 and a decrease to compensation expense of $ 255,000 in 2021. As of July 3, 2022, total unrecognized compensation expense related to non-vested equity awards, including stock options, RSUs and PRSUs, was $ 69,142,000 , which is expected to be recognized over a weighted-average period of 1.6 years. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended July 3, 2022 were $ 12,997,000 and $ 2,044,000 , respectively, and for the six-month period ended July 3, 2022 were $ 28,053,000 and $ 4,363,000 , respectively. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended July 4, 2021 were $ 10,730,000 and $ 1,651,000 , respectively, and for the six-month period ended July 4, 2021 were $ 22,739,000 and $ 3,464,000 , respectively. No compensation expense was capitalized as of July 3, 2022 or December 31, 2021. 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 Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Cost of revenue $ 482 $ 351 $ 1,045 $ 599 Research, development, and engineering 3,851 3,064 8,299 7,067 Selling, general, and administrative 8,664 7,315 18,709 15,073 $ 12,997 $ 10,730 $ 28,053 $ 22,739 21 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 14: Stock Repurchase Program On March 12, 2020, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock. As of July 3, 2022, the Company repurchased 2,737,000 shares at a cost of $ 200,000,000 under this program, including 1,677,000 shares at a cost of $ 117,000,000 during the six-month period ended July 3, 2022, which completed purchases under this program. On March 3, 2022, the Company's Board of Directors authorized the repurchase of an additional $ 500,000,000 of the Company's common stock. During the six-month period ended July 3, 2022, the Company repurchased 590,000 shares at a cost of $ 37,317,000 under this program, leaving a remaining balance of $ 462,683,000 as of July 3, 2022. 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 15: Income Taxes The Company's effective tax rate was 9 % and 17 % for the three-month and six-month periods ended July 3, 2022, respectively, and 17 % and 14 % for the three-month and six-month periods ended July 4, 2021, respectively. The Company recorded a net discrete tax benefit totaling $ 4,792,000 and a net discrete tax expense totaling $ 1,546,000 for the three-month and six-month periods ended July 3, 2022, respectively, and net discrete tax benefits totaling $ 896,000 and $ 6,103,000 for the same periods in 2021. Discrete tax items for the six-month period ended July 3, 2022 included (1) a decrease in tax expense of $ 2,440,000 arising from the impact of the loss from fire recorded during the three-month period ended July 3, 2022 (refer to Note 17), (2) an increase in tax expense of $ 1,417,000 arising from an Internal Revenue Service (IRS) audit recorded during the three-month period ended April 3, 2022, which was offset by a decrease in tax expense of $ 2,519,000 related to releases of reserves for income taxes due to the closure of this Internal Revenue Service (IRS) audit during the three-month period ended July 3, 2022, (3) an increase in tax expense of $ 1,734,000 to establish a full valuation allowance against deferred tax assets related to foreign tax credits recorded during the three-month period ended April 3, 2022, and (4) an increase in tax expense of $ 3,353,000 primarily consisting of transfer pricing and return-to-provision adjustments. Discrete tax items for the three-month and six-month periods ended July 4, 2021 included a decrease in tax expense of $ 1,431,000 and $ 6,638,000 , respectively, related to stock-based compensation, 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. This impact was not material for the three-month and six-month periods ended July 3, 2022. Excluding the impact of these discrete tax items, the Company’s effective tax rate was 16 % for both the three-month and six-month periods ended July 3, 2022, and 18 % for both the three-month and six-month periods ended July 4, 2021. 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 22 % in Korea compared to the U.S. federal statutory corporate tax rate of 21 %. These differences resulted in a lower effective tax rate for the three-month and six-month periods ended July 3, 2022 as compared to the same periods in 2021 due to more of the Company's profits being earned and taxed in lower tax jurisdictions. The remaining decrease in the effective tax rate for the three-month and six-month periods was primarily attributable to lower state taxes. The Company’s reserve for income taxes, including gross interest and penalties, was $ 13,444,000 as of July 3, 2022, which included $ 12,876,000 classified as a non-current liability and $ 568,000 recorded as a reduction to non-current deferred tax assets. 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. 22 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Within the United States, the tax years 2019 through 2020 remain open to examination by the IRS, and 2017 through 2020 remain open to examination by various state tax authorities. The tax years 2016 through 2021 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. The Company received the Closing Letter for Agreed Income Tax Cases from the IRS and the Company is no longer under audit by the IRS for the tax years 2017 and 2018. As a result, management released reserves associated with the periods under audit which decreased tax expense by approximately $ 2,519,000 during the three-month period ended July 3, 2022. The Company is no longer under audit by the Commonwealth of Massachusetts for tax years 2017 and 2018. The audit was completed during the six-month period ended July 3, 2022 and resulted in no material tax impact to the Company's financial statements. NOTE 16: Weighted-Average Shares Weighted-average shares were calculated as follows (in thousands): Three-months Ended Six-months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Basic weighted-average common shares outstanding 173,507 176,626 173,830 176,454 Effect of dilutive equity awards 1,486 3,365 2,044 3,528 Weighted-average common and common-equivalent shares outstanding 174,993 179,991 175,874 179,982 Stock options to purchase 4,048,000 and 1,818,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended July 3, 2022, respectively, and 701,000 and 591,000 for the same periods in 2021, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Restricted stock units totaling 480,000 and 21,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended July 3, 2022, respectively and 500 and 1,000 for the same periods in 2021, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Performance restricted stock units totaling 33,000 and 0 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended July 3, 2022, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. There were no anti-dilutive performance restricted stock units outstanding, on a weighted-average basis, during the three-month and six-month periods July 4, 2021. NOTE 17: Loss from Fire On June 7, 2022, the Company’s primary contract manufacturer experienced a fire at its plant in Indonesia. The fire destroyed a significant amount of Cognex-owned consigned inventories as well as component inventories owned by the contract manufacturer that were designated for Cognex products. There was no significant damage to the Company's production equipment. Since the date of the fire and continuing through the date of this report, the Company has worked with the contract manufacturer to assess the damage, resume production, and begin the process of replenishing inventories destroyed by the fire. Additionally, beginning last year, the Company has been working to ramp up an additional contract manufacturer to further mitigate risk, diversify supply chain, and expand production capacity. We expect this additional contract manufacturer to commence production later in the year. As a result of the fire, the Company recorded $ 44,903,000 in gross losses, including $ 36,484,000 of primarily Cognex-owned inventory that was destroyed or deemed to have a net realizable value of zero and $ 8,419,000 of primarily prepayments related to Cognex-designated components that were owned by the contract manufacturer. Based on the provisions of the Company's insurance policies, the gross losses have been reduced by the estimated insurance proceeds expected to be received from the Company’s insurance carrier. The Company has determined that partial recovery of the incurred losses is probable and therefore recorded an insurance recovery of $ 27,500,000 during the three-month period ended July 3, 2022. The insurance receivable is included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets. The gross losses, net of insurance recovery, total $ 17,403,000 and is presented in the caption “Loss from fire” on the Consolidated Statements of Operations. As of July 3, 2022 and through the date of financial statement issuance, management cannot estimate additional recoveries that could be available from the contract manufacturer. Any future, additional recoveries in excess of recognized losses will be treated as gain contingencies and will be recognized when the gain is realized or 23 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) realizable. There can be no assurance, however, that the expected insurance coverage and/or recoveries from the contract manufacturer will be available to cover the losses from the fire. After considering all the relevant events and circumstances resulting from the fire, management does not believe that the carrying value of the Company exceeds its fair value, or that the carrying amount of the Company’s intangible assets may not be recoverable. As such, no goodwill or intangible asset impairment charges were recorded during the three-month period ended July 3, 2022 as a result of the fire. NOTE 18: Subsequent Events On August 2, 2022, the Company’s Board of Directors declared a cash dividend of $ 0.065 per share. The dividend is payable on September 2, 2022 to all shareholders of record as of the close of business on August 19, 2022. 24