What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-02 · 92 added, 82 removed, 107 unchanged (62% of the section changed)

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

(20) unfavorable global economic conditions, including high inflation rates;

(20) unfavorable global economic conditions, including increases in interest rates and high inflation rates;

(21) business disruptions from natural or man-made disasters, such as fire, or public health issues;

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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 second quarter of 2022 totaled $274,628,000, representing an increase of 2% from the second quarter of 2021.

The increase was driven by higher revenue from the consumer electronics industry, offset by lower revenue in the logistics industry and the unfavorable impact of foreign currency exchange rate changes on revenue.

Gross margin as a percentage of revenue was 72% for the second quarter of 2022 compared to 75% for the second quarter of 2021 due largely to higher inventory purchase prices paid to secure strategic inventories during the global supply chain shortage.

Operating expenses of $131,344,000 increased 21% for the second quarter of 2022 over the prior year.

On June 7, 2022, our third-party contract manufacturer suffered a fire at its Indonesian facility destroying a large portion of the Company's component inventories.

The Company recorded a net loss related to the fire of $17,403,000, consisting of losses from inventories and other assets of $44,903,000, offset by an estimated insurance recovery of $27,500,000.

Excluding this recorded net loss, operating expenses grew 5% from the second quarter of 2021 due primarily to additional headcount to support our continued growth plans.

As a result of the loss from the fire and lower gross margin percentage, operating income declined to 24% of revenue for the second quarter of 2022 as compared to 34% of revenue for the second quarter of 2021.

Operating income excluding the impact of the loss from fire was 30% of revenue for the second quarter of 2022.

Tax expense declined as a result of favorable discrete tax adjustments related to the loss of assets from the fire and reversal of reserves for an Internal Revenue Service (IRS) audit closed in the second quarter, as well as a more favorable effective tax rate.

Net income declined to 21% of revenue for the second quarter of 2022 from 29% of revenue for the second quarter of 2021.

Revenue for the third quarter of 2022 totaled $209,622,000, representing a decrease of 26% from the third quarter of 2021.

The decrease was driven by three primary factors:

(i) lower revenue from the logistics industry as a result of the slowing of large customer projects due to a slowdown in capacity expansion for e-commerce fulfillment;

(ii) the impact of the fire on June 7, 2022 at our primary contract manufacturer in Indonesia, which destroyed a large amount of component inventory limiting our ability to fulfill certain orders in the quarter;

and (iii) the unfavorable impact of foreign currency exchange rate changes on revenue.

Gross margin as a percentage of revenue was 73% for the third quarter of 2022 compared to 70% for the third quarter of 2021 due to a more favorable revenue mix, partially offset by the unfavorable effect of currency exchange rates on revenue.

Operating expenses of $112,216,000 were flat for the third quarter of 2022 over the prior year.

On June 7, 2022, our primary third-party contract manufacturer suffered a fire at its Indonesian facility destroying a large portion of the Company's component inventories.

In the third quarter, the Company recorded a loss of $2,891,000 primarily related to the deleveraging of fixed costs of distribution centers and inventory write-offs for products deemed to have a net realizable value of zero as a result of the fire.

Excluding this recorded loss from fire, operating expenses were 2% lower from the third quarter of 2021 due primarily to lower incentive compensation and the favorable impact of foreign currency exchange rate changes on expenses, partially offset by additional headcount to support our continued growth plans and salary increases provided to employees related to merit and promotions.

As a result of the lower revenue level, operating income declined to 19% of revenue for the third quarter of 2022 as compared to 31% of revenue for the third quarter of 2021.

Operating income, excluding the impact of the recorded loss from fire of $2,891,000, was 20% of revenue for the third quarter of 2022.

Tax expense declined as a result of lower operating income in the third quarter of 2022 as compared to the third quarter of 2021.

Net income declined to 16% of revenue for the third quarter of 2022 from 28% of revenue for the third quarter of 2021.

Results of Operations

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GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S.

Revenue increased by $5,470,000, or 2%, for the three-month period and increased by $48,850,000, or 10%, for the six-month period compared to the same periods in 2021.

Changes in foreign exchange rates resulted in a lower level of reported revenue in 2022 as compared to 2021.

Excluding the impact of foreign currency exchange rate changes, revenue increased by 6% for the three-month period and by 13% for the six-month period compared to the same periods in 2021.

The largest contributor to growth over the prior year came from the consumer electronics industry, which also increased in the second quarter of 2022 from the first quarter of 2022 due to the timing of large customer deployments.

In contrast, revenue from the logistics industry declined in the second quarter of 2022 from the first quarter of 2022 due to the timing of large customer projects.

This trend resulted in a decrease in logistics revenue for the three-month period, while revenue for the six-month period was slightly higher than the prior year benefiting from a strong first quarter of 2022.

The broader factory automation market experienced slower spending trends in the second quarter of 2022 from the first quarter of 2022, although the majority of these markets delivered higher revenue than the prior year, including the automotive industry.

Revenue decreased by $75,226,000, or 26%, for the three-month period and decreased by $26,376,000, or 3%, for the nine-month period compared to the same periods in 2021.

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2022 as compared to 2021.

Excluding the impact of foreign currency exchange rate changes, revenue decreased 21% for the three-month period and was flat for the nine-month period compared to the same periods in 2021.

The largest contributors to the revenue decline over the prior year for the three-month and nine-month periods were lower revenue from the logistics industry as a result of the slowing of large customer projects, the impact of the fire at our primary contract manufacturer in Indonesia, which destroyed a large amount of component inventory limiting our ability to fulfill certain orders, and the unfavorable impact of foreign currency exchange rate changes on revenue.

Changes in revenue from a geographic perspective were as follows:

• Revenue from customers based in the Americas decreased from the prior year by 16% for the three-month period and was slightly higher for the six-month period compared to the same periods in 2021.

The decrease in revenue for the three-month period was driven by lower revenue in the logistics industry.

• Revenue from customers based in Europe increased by 3% for the three-month period and 7% for the six-month period compared to the same periods in 2021.

• Revenue from customers based in the Americas decreased from the prior year by 42% for the three-month period and 14% for the nine-month period compared to the same periods in 2021.

The decrease in revenue for the three-month and nine-month periods was primarily driven by lower revenue from customers in the logistics industry due to the slowing of large customer projects and the impact of the June fire on inventory levels, partially offset by increases in the automotive industry.

• Revenue from customers based in Europe decreased by 25% for the three-month period and 5% for the nine-month period compared to the same periods in 2021.

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2022, as sales denominated in Euros were translated into U.S.

Dollars at a lower rate.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Europe increased by 13% for the three-month period and 15% for the six-month period, coming from customers in a variety of industries.

• Revenue from customers based in Greater China increased by 32% for the three-month period and 30% for the six-month period compared to the same periods in 2021.

Changes in foreign currency exchange rates did not have a material impact on revenue.

The increase came from multiple industries, led by strong growth in consumer electronics.

• Revenue from other countries in Asia increased by 4% for the three-month period and 13% for the six-month period compared to the same periods in 2021.

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2022, primarily from sales denominated in Japanese Yen and Korean Won.

Excluding the impact of foreign currency exchange rate changes, revenue from these customers increased by 11% for the three-month period and 20% for the six-month period, coming from a variety of industries, most notably semiconductor.

Based on our ongoing assessment and as of the date of this report, we currently expect that revenue for the third quarter of 2022 will be significantly lower than the second quarter of 2022 due to the impact of the fire on June 7, 2022 at our primary contract manufacturer in Indonesia.

Although production has resumed, a large amount of component inventories were destroyed in the fire restricting our ability to manufacture finished products.

Accordingly, we anticipate challenges in meeting certain customer-requested delivery dates in the third quarter, resulting in delayed shipments or possible loss of sales.

Further contributing to the decline in revenue for the third quarter of 2022, we currently expect lower revenue from e-commerce logistics customers.

Gross margin as a percentage of revenue was 72% for both the three-month and six-month periods in 2022 compared to 75% and 76% for the three-month and six-month periods in 2021, respectively.

The decrease was almost entirely due to higher prices paid to purchase inventories, including higher costs for components and freight, due largely to global supply chain constraints.

Based on our ongoing assessment and as of the date of this report, we currently expect that gross margin as a percentage of revenue for the third quarter of 2022 will be approximately 70%.

The expected gross margin percentage reflects our expectations that higher inventory purchase prices will continue to put pressure on margins throughout and beyond the third quarter of 2022 as we work to replenish inventories destroyed by the fire on June 7, 2022 at our primary contract manufacturer.

These efforts are expected to include broker-buy purchases at higher-than-normal prices.

Excluding the impact of foreign currency exc hange rate changes, revenue from customers based in Europe decreased by 13% for the three-month period, due to a decline in revenue from

customers in the logistics industry due to the slowing of large customer projects and the impact of the June fire on inventory levels.

Excluding the impact of foreign currency exchange rate changes, revenue increased 5% for the nine-month period with broad-based growth across a variety of industries.

• Revenue from customers based in Greater China was flat for the three-month p eriod and increased 18% for the nine-month period compared to the same periods in 2021.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Greater China increased 5% for the three-month period and 21% for the nine-month period.

The increase in the three-month period was led by strong growth in consumer electronics revenue, partially offset by the impact of the June fire on inventory levels.

The increase in revenue for the nine-month period came from customers in multiple industries, led by strong growth in consumer electronics.

• Revenue from other countries in Asia decreased by 29% for the three-month period and was flat for the nine-month period compared to the same periods in 2021.

Excluding the impact of foreign currency exchange rate changes, revenue decreased by 20% for the three-month period due to declines in revenue from customers in multiple industries and the impact of the June fire on inventory levels.

Excluding the impact of foreign currency exchange rate changes, revenue increased 6% for the nine-month period, as a result of increases in revenue from customers in the automotive and logistics industries.

As of the date of this report, we currently expect that revenue for the fourth quarter of 2022 will be significantly higher than the third quarter of 2022.

Production has resumed at our primary contract manufacturer in Indonesia and component inventory has returned to more typical levels.

We currently expect that revenue for the fourth quarter of 2022 will be roughly flat with the fourth quarter of 2021 as we anticipate that lower spending on large customer projects in the logistics industry and the unfavorable impact of foreign currency exchange rate changes will be offset by broad-based growth in other industries.

Gross margin as a percentage of revenue was 73% and 72% for the three-month and nine-month periods in 2022 compared to 70% and 74% for the three-month and nine-month periods in 2021, respectively.

The increase in the three-month period was due to a more favorable revenue mix, partially offset by the unfavorable effect of foreign currency exchange rates on revenue.

The decrease in the nine-month period was due to higher prices to purchase inventories, including higher cost of components, due largely to global supply chain constraints, which include broker-buy purchases at higher-than-normal prices, offset slightly by an overall, more favorable revenue mix.

As of the date of this report, we currently expect that gross margin as a percentage of revenue for the fourth quarter of 2022 will be in the low 70% range.

The expected gross margin percentage reflects our expectations that higher inventory purchase prices will continue to put pressure on margins throughout and beyond the fourth quarter of 2022 as the cost to replenish inventories destroyed by the June fire includes broker-buy purchases at higher-than-normal prices, which will be expensed as inventory is sold.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses increased by $2,689,000, or 9%, for the three-month period and increased by $4,638,000, or 7%, for the six-month period as detailed in the table below (in thousands).

Three-month period Six-month period

Research, development, and engineering (RD&E) expenses decreased by $522,000, or 2%, for the three-month period and increased by $4,116,000, or 4%, for the nine-month period compared to the same periods in 2021 as detailed in the table below (in thousands).

Three-month period Nine-month period

RD&E expenses in 2021 $ 34,476 $ 99,883

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Stock-based compensation expense 1,282 2,776

Prototyping materials 47 627

Outsourced engineering services 375 803

Incentive compensation (2,620) (3,997)

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RD&E expenses in 2022 $ 33,954 $ 103,999

RD&E expenses increased due to higher personnel-related costs due to headcount additions to support new product initiatives and salary increases provided to employees.

Stock-based compensation expense was also higher than the prior year due to a higher level of stock-based grants at a higher average economic value, as well as the impact of a forfeiture rate true-up that resulted in higher expense.

Higher spending on prototyping materials and outsourced engineering services also contributed to the increase.

These increases were partially offset by lower incentive compensation expenses than the prior year.

Relevant performance goals for these compensation plans are set at the beginning of each year, with the ability to earn

upside if the goals are exceeded.

Performance goals set for 2021 incentive bonuses were exceeded, resulting in a higher level of bonus expense recorded in the first half of 2021.

RD&E expenses were also lower than the prior year due primarily to the impact of foreign currency exchange rate changes, as costs denominated in foreign currencies were translated into U.S.

Personnel-related costs increased due to headcount additions to support new product initiatives and salary increases provided to employees as part of merit and promotion process.

Stock-based compensation expense was

also higher than the prior year due to a higher level of stock-based grants at a higher average economic value, as well as the impact of a forfeiture rate true-up that resulted in higher expense.

These increases were offset by lower incentive compensation expenses than the prior year.

Relevant performance goals for these compensation plans are set at the beginning of each year, with the ability to earn upside if the goals are exceeded.

In contrast to the current year, performance goals set for 2021 incentive bonuses were exceeded, resulting in a higher level of bonus expense recorded in 2021.

RD&E expenses were also lower than the prior year primarily due to the impact of foreign currency exchange rate changes, as costs denominated in foreign currencies were translated into U.S.

Dollars at a lower rate.

RD&E expenses as a percentage of revenue were 12% and 13% for the three-month period and six-month period, respectively, compared to 12% and 13% for the same periods in 2021.

RD&E expenses as a percentage of revenue were 16% and 14% for the three-month period and nine-month period, respectively, compared to 12% and 13% for the same periods in 2021.

We believe that a continued commitment to RD&E activities is essential 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.

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Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased by $3,107,000, or 4%, for the three-month period and $11,518,000, or 8%, for the six-month period of 2021 as detailed in the table below (in thousands).

Three-month period Six-month period

Selling, general, and administrative (SG&A) expenses decreased by $1,742,000, or 2%, for the three-month period and increased $9,776,000, or 4%, for the nine-month period compared to the same periods in 2021 as detailed in the table below (in thousands).

Three-month period Nine-month period

SG&A expenses in 2021 $ 77,113 $ 226,380

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SG&A expenses in 2022 $ 75,371 $ 236,156

SG&A expenses increased due to higher personnel-related costs due to headcount additions, primarily for Sales personnel to support the Company's revenue growth, and salary increases provided to employees given the increasingly competitive job market within certain regions and specialties.

Personnel-related costs increased due to headcount additions, primarily for Sales personnel to support the Company's anticipated revenue growth, and salary increases provided to employees given the increasingly competitive job market within certain regions and specialties.

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

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While travel expenses increased due to the number of sales personnel added, expenses also increased due to a higher level of travel activity as restrictions related to COVID-19 continued to ease.

Higher spending on sales demonstration equipment tied to new product launches in the first quarter also contributed to the year-over-year increase.

These increases were partially offset by lower incentive compensation expenses than the prior year, which included sales commissions and incentive bonuses.

Higher spending on sales demonstration equipment tied to new product launches in the first quarter also contributed to the year-to-date increase.

These increases were offset by lower incentive compensation expenses than the prior year, which included sales commissions and incentive bonuses.

Relevant performance goals for these plans are set at the beginning of each year, with the ability to earn upside if the goals are exceeded.

Performance goals set for 2021 incentive bonuses were exceeded, resulting in a higher level of bonus expense recorded in the first half of 2021.

In contrast to the current year, performance goals set for 2021 incentive bonuses were exceeded, resulting in a higher level of bonus expense recorded in 2021.

SG&A expenses were also lower than the prior year due to the impact of foreign currency exchange rate changes, as costs denominated in foreign currencies were translated into U.S.

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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.

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 replenish 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 in the second quarter of 2022, including $36,484,000 of Cognex-owned inventories and $8,419,000 of primarily prepayments related to Cognex-designated components that were owned by the contract manufacturer.

As a result of the fire, the

Company recorded $47,794,000 in gross losses in 2022, including $44,903,000 in the second quarter and $2,891,000 in the third quarter.

Gross losses related to $37,643,000 of Cognex-owned inventories, $8,184,000 of primarily prepayments related to Cognex-designated components that were owned by the contract manufacturer, and $1,967,000 related to deleveraging of costs related to our distribution centers.

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 in the second quarter of 2022.

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 yet estimate additional recoveries that could be available from the contract manufacturer.

The Company has determined that partial recovery of the incurred losses is probable and therefore recorded an insurance recovery of $27,500,000 in the second quarter of 2022.

Gross losses, net of insurance recovery, total $2,891,000 and $20,294,000 for the three-month and nine-month periods ended October 2, 2022, respectively, and are presented in the caption “Loss from fire” on the Consolidated Statements of Operations.

Subsequent to the October 2, 2022 balance sheet date, but prior to the date of financial statement issuance, the Company received insurance proceeds of $27,560,000 from the Company's insurance carrier.

In the fourth quarter of 2022, the loss from fire will be reduced by the proceeds received in excess of the original estimated insurance recovery recorded of $27,500,000.

As of October 2, 2022 and through the date of financial statement issuance, management cannot yet 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 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.

There can be no assurance, however, that the insurance coverage and/or recoveries from the contract manufacturer will be available to cover the losses from the fire.

Non-operating Income (Expense)

The Company recorded foreign currency losses of $2,043,000 and $2,487,000 for the three-month and six-month periods in 2022, respectively, compared to foreign currency losses of $639,000 and $1,647,000 for the same periods in 2021.

The Company recorded foreign currency losses of $1,880,000 and $4,367,000 for the three-month and nine-month periods in 2022, respectively, compared to foreign currency losses of $586,000 and $2,233,000 for the same periods in 2021.

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 currency of the Company, which is the U.S.

Dollar, or its subsidiaries.

Investment income decreased $218,000, or 13%, for the three-month period and $303,000, or 9%, for the six-month period, compared to the same periods in 2021.

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 $188,000 and $236,000 for the three-month and six-month periods in 2022, respectively, compared to $127,000 and $295,000 for the same periods in 2021.

Investment income decreased $332,000, or 19%, for the three-month period and $636,000, or 13%, for the nine-month period, compared to the same periods in 2021.

The decrease for the three-month period was due primarily to lower investment balances, partially offset by higher yields on the Company's portfolio of debt securities.

The decrease in the nine-month period was due to lower investment balances and lower yields on the Company's portfolio of debt securities year-to-date.

The Company recorded other expense of $214,000 and $450,000 for the three-month and nine-month periods in 2022, respectively, compared to $125,000 and $420,000 for the same periods in 2021.

Income Tax Expense (Benefit)

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 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 decrease in the effective tax rate for the three-month and six-month periods ended July 3, 2022 and July 4, 2021 was due to more of the Company's profits being earned and taxed in lower tax jurisdictions, as well as lower state taxes.

The Company's effective tax rate was 14% and 16% for the three-month and nine-month periods ended October 2, 2022, respectively, and 11% and 13% for the three-month and nine-month periods ended October 3, 2021, respectively.

The Company recorded a net discrete tax benefit totaling $930,000 and a net discrete tax expense totaling $616,000 for the three-month and nine-month periods ended October 2, 2022, respectively, and net discrete tax benefits totaling $6,262,000 and $12,365,000 for the same periods in 2021.

Discrete tax items for the three-month and nine-month periods ended October 2, 2022 included (1) a decrease in tax expense during the three-month and nine-month periods ended October 2, 2022 of $928,000 and $3,368,000, respectively, arising from the impact of the loss from fire recorded (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 during the three-month period ended April 3, 2022, (4) an increase in tax expense of $883,000 and $4,236,000 during the three-month and nine-month periods ended October 2, 2022, respectively, primarily consisting of transfer pricing and return-to-provision adjustments, and (5) a decrease in tax expense of $884,000 during both the three-month and nine-month periods ended October 2, 2022 related to the release of tax reserves due to closed periods.

Discrete tax items for the three-month and nine-month periods ended October 3, 2021 included a decrease in tax expense of $3,250,000 and $9,888,000, 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 nine-month periods ended October 2, 2022.

The remaining discrete tax benefits for the three-month and nine-month periods ended October 3, 2021 of $3,012,000 and $2,477,000, respectively, consisted of primarily return-to-provision adjustments and the release of tax reserves.

Excluding the impact of these discrete items, the Company’s effective tax rate was 16% for both the three-month and nine-month periods ended October 2, 2022, and 18% for both the three-month and nine-month periods ended October 3, 2021.

The decrease in the effective tax rate for the three-month and nine-month periods ended October 2, 2022 and October 3, 2021 was due to more of the Company's profits being earned and taxed in lower tax jurisdictions, as well as lower state taxes.

The Inflation Reduction Act ("IRA") was enacted into law on August 16, 2022.

Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on “adjusted financial statement income” for applicable corporations and a 1% excise tax on repurchases of stock.

These provisions are effective for tax years beginning after December 31, 2022.

We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows, approach to stock repurchases, or financial position when it becomes effective.

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 $788,081,000 as of July 3, 2022.

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

The Company’s cash requirements for the six-month period in 2022 were primarily met with positive cash flows from operations, as well as the sale and maturity of investments.

The Company’s cash requirements for the nine-month period in 2022 were primarily met with positive cash flows from operations, as well as the sale and maturity of investments.

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

Cash flows from operating activities included the purchase of inventories intended to support higher business levels, secure key strategic components to meet customer demand, and carry higher stocking levels to mitigate the Company's exposure to demand changes or supply disruptions.

It is expected that the Company's efforts to replenish inventories destroyed by the fire on June 7, 2022 at the Company's primary contract manufacturer will result in significant cash outflows for inventories through at least the remainder of the year.

Capital expenditures for the six-month period in 2022 totaled $11,253,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and leasehold improvements related to a new distribution center in Southborough, Massachusetts.

It is expected that payments related to the Company's outstanding inventory purchase orders, which total $81,565,000 as of October 2, 2022 (refer to Note 10), will result in significant cash outflows for inventories through the remainder of the year and thereafter.

This is due in part to the Company's efforts to replenish inventories destroyed by the fire on June 7, 2022 at the Company's primary contract manufacturer.

Capital expenditures for the nine-month period in 2022 totaled $15,605,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and leasehold improvements related to a new distribution center in Southborough, Massachusetts.

During the first quarter of 2022, the Company placed into service new business systems related to its sales process.

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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 the authorized purchases under this program.

As of October 2, 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 first quarter of 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.

During the nine-month period ended October 2, 2022, the Company repurchased 1,125,000 shares, and an additional 5,000 shares that were repurchased in 2021 and settled in 2022, at a total cost of $61,387,000 under this additional authorization, leaving a remaining balance of $438,613,000 as of October 2, 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.

The Company’s Board of Directors declared and paid cash dividends of $0.065 per share for the first and second quarters of 2022, totaling $22,573,000.

The Company’s Board of Directors declared and paid cash dividends of $0.065 per share for the first, second and third quarters of 2022, totaling $33,837,000.

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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis