What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 201 added, 188 removed, 175 unchanged (69% of the section changed)

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Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense.

Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” "potential," “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense.

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

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

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

Such risks and uncertainties include:

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

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

(1) the reliance on key suppliers, such as our primary contract manufacturer, to manufacture and deliver products;

(2) the expected impact of the fire at our primary contract manufacturer's plant on our assets, business, and results of operations and related insurance recoveries;

(3) delays in the delivery of our products, the failure to meet delivery schedules, and resulting customer dissatisfaction or loss of sales;

(4) the inability to obtain, or the delay in obtaining, components for our products at reasonable prices;

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

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

(6) the inability to manage disruptions to our distribution centers or to our key suppliers;

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

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

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

(8) the impact, duration, and severity of the COVID-19 pandemic, particularly in China, including the availability and effectiveness of vaccines as well as government lockdowns;

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

(10) information security breaches;

(11) the failure to comply with laws or regulations relating to data privacy or data protection;

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

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

(12) the failure to properly manage the distribution of products and services;

(15) the failure to properly manage the distribution of products and services, including the management of lead times and delivery dates;

(16) the impact of competitive pressures;

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

(17) exposure to additional tax liabilities;

(20) exposure to additional tax liabilities, increases and fluctuations in our effective tax rate, and other tax matters;

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

(19) unfavorable global economic conditions;

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

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

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

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

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

(24) economic, political, and other risks associated with international sales and operations, including the impact of trade disputes on the economic climate in China and the war in Ukraine;

(25) exposure to potential liabilities, increased costs, reputational harm, and other adverse effects associated with expectations relating to environmental, social, and governance considerations;

(26) stock price volatility;

and (27) our involvement in time-consuming and costly litigation or activist shareholder activities.

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

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EXECUTIVE OVERVIEW

Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks where vision is required.

In addition to product revenue derived from the sale of machine vision products, the Company also generates revenue by providing maintenance and support, consulting, and training services to its customers;

however, service revenue accounted for less than 10% of total revenue for all periods presented.

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

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

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

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

Cognex Corporation (“the Company”) invents and commercializes technologies that address some of the most critical manufacturing and distribution challenges.

We are a leading global provider of machine vision products and solutions that seek to improve efficiency and quality in a wide range of businesses across attractive industrial end markets.

In addition to product revenue derived from the sale of machine vision products, the Company also

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

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

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

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

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

generates revenue by providing maintenance and support, consulting, and training services to its customers;

however, service revenue accounted for less than 10% of total revenue for all periods presented.

Machine vision is used in a variety of industries where technology is widely recognized as an important component of automated production, distribution, and quality assurance.

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

Revenue for the year ended December 31, 2022 totaled $1,006,090,000, representing a decrease of 3% from 2021.

The decrease was driven by three primary factors:

(i) lower revenue from the logistics industry, our largest market in 2021, as a result of the slowing of large e-commerce customer projects as such customers absorbed excess capacity built up during the pandemic;

(ii) the unfavorable impact of foreign currency exchange rate changes on revenue;

and (iii) the impact of the June 7, 2022 fire at our primary contract manufacturer's plant in Indonesia, which destroyed a large amount of component inventory limiting our ability to fulfill certain orders in the year.

This decrease was partially offset by growth in the broader factory automation market, most notably in the consumer electronics, automotive, and semiconductor industries.

Gross margin as a percentage of revenue was 72% in 2022 compared to 73% in 2021.

The decrease resulted primarily from higher inventory costs, due largely to global supply chain constraints and the expedited replenishment of inventories lost in the fire at our primary contract manufacturer's plant on June 7, 2022.

These circumstances have resulted in broker-buy purchases for components at higher-than-normal costs.

A more favorable revenue mix and the Company's price increases partially offset this decrease in gross margin.

Operating expenses increased by $30,950,000, or 7%, from 2021.

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

In 2022, the Company recorded a net loss related to the fire of $20,779,000, consisting primarily of losses from inventories and other assets of $48,339,000, offset by insurance recoveries of $27,560,000.

Excluding the loss from fire of $20,779,000 and restructuring charges of $1,657,000 related to a business acquisition in 2022, operating expenses increased by $8,514,000, or 2%, as higher personnel-related costs and stock-based compensation expense, were largely offset by decreases in incentive compensation due to weaker business performance and the favorable impact of foreign currency exchange rate changes on expenses.

Operating income decreased to 24% of revenue in 2022 compared to 30% of revenue in 2021.

This decrease was driven primarily by the loss from the fire of $20,779,000 and the decrease in revenue of $31,008,000.

This lower level of operating income resulted in net income of 21% of revenue in 2022 compared to 27% of revenue in 2021, and net income per diluted share of $1.23 in 2022 compared to $1.56 in 2021.

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

Year Ended December 31,

2021 2020 2019

Revenue 100 % 100 % 100 %

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Selling, general, and administrative expenses 31 30 33

Loss from fire 2 — —

Restructuring charges — — 2

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Non-operating income — 1 2

Income before income tax expense (benefit) 31 23 23

Income tax expense (benefit) 4 1 (5)

Income before income tax expense 25 31 23

Income tax expense 3 4 1

Net income 21 % 27 % 22 %

(1) Amounts may not total properly due to rounding.

RESULTS OF OPERATIONS

As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods.

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understand our operating results and evaluate our performance in comparison to prior periods.

We also use results on a constant-currency basis as one measure to evaluate our performance.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Revenue for the year ended December 31, 2022 was $1,006,090,000 compared to $1,037,098,000 for the prior year, representing a decrease of 3%.

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 1% compared to 2021.

The fire on June 7, 2022 at our primary contract manufacturer’s plant in Indonesia, which destroyed a large amount of component inventory, limited our ability to fulfill certain orders in the year, which resulted in lower revenue.

Revenue from the logistics industry, our largest market in 2021, decreased by approximately 25% as a result of the slowing of large e-commerce customer projects as such customers absorbed excess capacity built up during the pandemic.

Excluding these decreases in revenue from a few large logistics customers, revenue from the remainder of the logistics industry grew, as the broader base of logistics customers continued to invest in automation.

The decline in overall revenue from the logistics industry was partially offset by growth in the broader factory automation market, most notably in the consumer electronics, automotive, and semiconductor industries.

Consumer electronics revenue increased by approximately 8%, and 14% on a constant-currency basis, primarily as a result of increased large-customer demand.

Revenue from our largest industry in 2022, automotive, increased by 7%, and 13% on a constant-currency basis, primarily as a result of continued investment in electric vehicles.

Changes in revenue from a geographic perspective were as follows:

• Revenue from customers based in the Americas decreased by 10% from the prior year driven primarily by a decrease in revenue from customers in the logistics industry.

This decrease was partially offset by an increase in revenue from other industries, led by growth in the automotive and consumer electronics industries.

• Revenue from customers based in Europe decreased by 5% from the prior year.

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 5% from the prior year.

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

• Revenue from customers based in Greater China increased by 14% from the prior year.

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2022, primarily from sales denominated in Chinese Renminbi.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Greater China increased by 17% from the prior year.

The increase was driven primarily by higher revenue in the consumer electronics industry, particularly due to increased large-customer demand, and to a lesser extent, growth in the semiconductor and automotive industries.

• Revenue from other countries in Asia remained flat with the prior year.

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 in other countries in Asia increased by 8% from the prior year, led by higher revenue in semiconductor and automotive industries, and, to a lesser extent, the logistics industry.

These increases were partially offset by a decrease in revenue from the consumer electronic industry.

As of the date of this report, we expect revenue for the first quarter of 2023 to be lower than the revenue reported for the fourth quarter of 2022 of $239,433,000, primarily due to lower revenue from a few large e-commerce customers and broader macroeconomic softness.

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Gross margin as a percentage of revenue decreased to 72% in 2022 compared to 73% in 2021.

These circumstances have resulted in broker-buy purchases for components at higher-than-normal costs.

The decrease in gross margin was also due to an unfavorable impact of foreign currency exchange rate changes.

A more favorable revenue mix partially offset this decrease in gross margin.

A lesser percentage of revenue came from the logistics industry, which has relatively lower gross margins, and a greater percentage of revenue came from the consumer electronics industry, which has relatively higher gross margins.

Further, the Company has increased prices, which has offset the impact of component cost inflation (not including broker-buy purchases) on our gross margin.

As of the date of this report, we expect gross margin as a percentage of revenue for the first quarter of 2023 to be in the low-70% range, primarily as a result of the significant premiums the Company has paid to replenish inventories lost in the fire at our primary contract manufacturer's plant on June 7, 2022.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses in 2022 increased by $5,761,000, or 4%, from the prior year as detailed in the table below (in thousands).

RD&E expenses in 2021 $ 135,372

Personnel-related costs 8,060

Stock-based compensation 4,761

Foreign currency exchange rate changes (6,348)

Incentive compensation (4,453)

RD&E expenses in 2022 $ 141,133

RD&E expenses increased primarily due to higher personnel-related costs resulting from headcount additions to support new product initiatives and salary increases provided to employees as part of our merit and promotion process.

Stock-based compensation expense also increased from 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 partially offset by lower incentive compensation expense compared to the prior year due to weaker business performance.

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

In contrast to 2022, performance goals set for 2021 incentive bonuses were exceeded, resulting in a higher level of bonus expense recorded in 2021.

The impact of foreign currency exchange rate changes further offset the increase to RD&E expenses, as costs denominated in foreign currencies were translated into U.S.

Dollars at a lower rate.

RD&E expenses as a percentage of revenue was 14% in 2022 compared to 13% in 2021.

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

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

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

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Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased in 2022 by $2,753,000, or 1%, from the prior year as detailed in the table below (in thousands).

SG&A expenses in 2021 $ 309,354

Personnel-related costs 24,112

Stock-based compensation 6,436

Travel expenses 5,666

Incentive compensation (24,476)

Foreign currency exchange rate changes (14,613)

SG&A expenses in 2022 $ 312,107

SG&A expenses increased primarily due to higher personnel-related costs resulting from headcount additions, primarily for sales personnel to support the Company's anticipated revenue growth, and salary increases provided to employees as part of our merit and promotion process.

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

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.

These increases were partially offset by lower incentive compensation expenses than the prior year, which included sales commissions and incentive bonuses, primarily due to weaker business performance.

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.

In contrast to 2022, performance goals set for 2021 sales commissions and incentive bonuses were exceeded, resulting in a higher level of incentive compensation expenses recorded in 2021.

The impact of foreign currency exchange rate changes further offset the increase to SG&A expenses, as costs denominated in foreign currencies were translated into U.S.

Dollars at a lower rate.

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, the Company has worked with the contract manufacturer to assess the damage, resume production, maintain standards of product quality, and replenish inventories destroyed by the fire.

The Company has also been working to ramp up an additional contract manufacturer to further mitigate risk, diversify supply chain, and expand production capacity.

As a result of the fire, the Company recorded $48,339,000 in gross losses in 2022, related to $37,663,000 of Cognex-owned inventories, $8,709,000 of primarily prepayments related to Cognex-designated components that were owned by the contract manufacturer and other assets, and $1,967,000 related to deleveraging of costs related to our distribution centers.

Gross losses have been reduced by insurance proceeds received from the Company’s insurance carrier of $27,560,000 in the fourth quarter of 2022.

Gross losses net of insurance recovery of $20,779,000 are presented in the caption “Loss from fire” on the Consolidated Statements of Operations.

As of December 31, 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 additional insurance coverage and/or recoveries from the contract manufacturer will be available to cover the net loss from the fire.

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Restructuring Charges

On December 7, 2022, the Company acquired all of the outstanding shares of SAC Sirius Advanced Cybernetics GmbH ("SAC"), a leader in computational lighting technology based in Germany.

The acquisition of SAC and its technology is expected to expand the Company’s capabilities in defect detection, and accelerate our growth trajectory with electric vehicle battery manufacturers.

In December 2022, following its acquisition of SAC, the Company performed restructuring activities to align the cost and operating structure of the acquired business with the Company's business strategy.

The restructuring activities resulted in charges of $1,657,000 in 2022.

As of December 31, 2022, the majority of these restructuring actions were completed and no additional charges are expected to be incurred in future periods in relation to this restructuring plan.

Non-operating Income (Expense)

The Company recorded foreign currency losses of $1,837,000 in 2022 and $2,270,000 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 currencies of our subsidiaries or the reporting currency of our company, which is the U.S.

Investment income increased by $55,000, or 1%, from the prior year.

The slight increase was due primarily t o higher yields on investments, partially offset by lower average investment balances and changes in realized gains and losses .

The Company recorded other expense of $412,000 in 2022 and $591,000 in 2021.

Income Tax Expense

The Company’s effective tax rate was 14% of pre-tax income in 2022, compared to 12% in 2021.

The increase in effective tax rate in 2022 primarily resulted from the impact of discrete tax items, including a decrease in tax benefits related to stock-based compensation, an increase in certain international tax reserves, and a net expense related to return-to-provision adjustments.

These impacts were partially offset by discrete tax benefits related to audit settlements, a release in the valuation allowance, Global Intangible Low-Taxed Income ("GILTI") adjustments, and a rate revaluation on deferred state tax assets.

Excluding the impact of all discrete tax items, the Company’s effective tax rate was 16% of pre-tax income for both 2022 and 2021.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenue for the year ended December 31, 2021 was $1,037,098,000 compared to $811,020,000 for the prior year, representing an increase of 28%.

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

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

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

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

Changes in foreign currency exchange rates resulted in a higher level of reported revenue in 2021, as sales denominated in Chinese

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Renminbi were translated into U.S.

Dollars at a higher rate.

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

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

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

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

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

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

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

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

Operating Expenses

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

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

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

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

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

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses increased in 2021 by $41,761,000, or 16%, from the prior year as detailed in the table below (in thousands).

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SG&A expenses in 2020 $ 267,593

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

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

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

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

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Non-operating Income (Expense)

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

Income Tax Expense (Benefit)

Income Tax Expense

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue from customers based in Greater China increased by 46% from the prior year due largely to higher revenue in the consumer electronics industry, partially offset by lower revenue in the automotive industry.

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

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

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

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

The increase in the gross margin percentage was primarily due to the favorable impact of the higher revenue on fixed manufacturing costs, as well as favorable product mix.

In 2020, revenue from customers in the consumer electronics and logistics industries each represented a greater percentage of our total revenue than the prior year.

Although our logistics margins are lower relative to our total gross margin, these margins improved from 2019 and the impact of logistics on our gross margin was more than offset by a greater contribution of relatively higher-margin consumer electronics revenue.

The favorable impact of sales volume and product mix was partially offset by higher provisions for excess and obsolete inventories, which totaled $9,908,000 in 2020 compared to $5,296,000 in 2019.

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

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses in 2020 increased by $11,555,000, or 10%, from the prior year as detailed in the table below (in thousands).

RD&E expenses in 2019 $ 119,427

Acquisition-related compensation costs 7,963

Incentive compensation 7,912

Stock-based compensation expense (2,405)

Travel expenses (2,083)

RD&E expenses in 2020 $ 130,982

RD&E expenses increased due to higher compensation costs related to the Company's acquisition of Sualab Co., Ltd.

in the fourth quarter of 2019.

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

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

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

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.

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

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

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

In addition, credits were recorded to stock-based compensation expense in the second quarter of 2020 for awards canceled as a result of a workforce reduction.

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

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Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses decreased in 2020 by $6,249,000, or 2%, from the prior year as detailed in the table below (in thousands).

SG&A expenses in 2019 $ 273,842

Travel expenses (13,980)

Contract labor (2,444)

Marketing programs (1,813)

Recruiting fees (1,077)

Incentive compensation 19,079

Other (6,014)

SG&A expenses in 2020 $ 267,593

SG&A expenses decreased due to lower travel expenses resulting from COVID-19 restrictions.

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

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

These decreases were partially offset by higher expenses for annual incentive compensation plans.

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.

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

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

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

Non-operating Income (Expense)

The Company recorded foreign currency gains of $3,697,000 in 2020 and foreign currency losses of $509,000 in 2019.

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

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

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

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

The Company recorded other expense of $309,000 in 2020 and other income of $1,212,000 in 2019.

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

In 2019, the Company recorded favorable fair value adjustments related to its acquisition of GVi Ventures, Inc., resulting from a lower level of revenue in the Americas' automotive industry.

Income Tax Expense (Benefit)

The Company’s effective tax rate was an expense of 6% of pre-tax income in 2020 compared to a benefit of 25% of pre-tax income in 2019.

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

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

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

This included a decrease in tax expense of $13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the United States based on clarifications to rules related to the use of foreign tax credits.

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

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

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

The increase in effective tax rate in 2021 primarily resulted from the impact of discrete tax items, including a decrease in tax benefits related to stock-based compensation and return-to-provision adjustments.

These impacts were partially offset by a decrease in tax expenses for certain international tax reserves.

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

The Company’s cash requirements in 2022 were primarily met with positive cash flows from operations, the sale and maturity of investments, and the proceeds from stock option exercises.

Cash requirements consisted of operating activities, the repurchase of common stock, the payment of dividends, capital expenditures, purchases of investments, and payments related to our acquisition of SAC on December 7, 2022.

Cash flows from operating activities included the purchase of inventories intended to support higher business levels, secure key strategic components to meet customer demand, carry higher stocking levels to mitigate the Company's exposure to demand changes or supply disruptions, and replenish inventories destroyed by the fire on June 7, 2022 at the Company's primary contract manufacturer.

Cash outlays in the first quarter of 2023 are planned to include incentive compensation payments that were earned and accrued in 2022.

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

Capital expenditures in 2022 totaled $19,677,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and improvements made to primarily the Company's distribution center in Southborough, Massachusetts.

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

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

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

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

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

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

Under this October 2018 program, in addition to repurchases made in prior years, the Company repurchased 1,215,000 shares at a cost of $51,036,000 in 2020, and 957,000 shares at a cost of $78,652,000 in 2021, which completed purchases under the October 2018 program.

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

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

Under this March 2020 program, the Company repurchased 1,060,000 shares, including 5,000 shares that were repurchased in 2021 and settled in 2022, at a cost of $83,000,000 in 2021, and 1,677,000 shares at a cost of $117,000,000 in 2022, which completed purchases under the March 2020 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.

Under this March 2022 program, the Company repurchased 1,682,000 shares at a total cost of $87,314,000 in 2022, leaving a remaining balance of $412,686,000.

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

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

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

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

Total dividends paid were $45,921,000 in 2022, $43,263,000 in 2021, and $390,508,000 in 2020, which included $351,428,000 paid for the special cash dividend.

Future dividends will be declared at the discretion of the Company's Board of Directors and will depend on

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such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations.

Business Acquisitions

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

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

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

The Tax Cuts and Jobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax.

During 2022, the Company paid $6,319,000 related to this one-time transition tax.

As of December 31, 2022, the Company had a remaining balance payable of $44,010,000 and expects to continue making payments through 2024.

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

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

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.

CRITICAL ACCOUNTING ESTIMATES

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

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

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

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

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

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

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

Although the customer may have taken legal title and physical possession of the goods when they arrived at the customer’s designated site, the significant risks and rewards of ownership transfer to the customer only upon validation.

Revenue for on-site support services related to these solutions is recognized over the time the service is provided.

In certain instances, an arrangement may include customer-specified acceptance provisions or performance guarantees that allow the customer to accept or reject delivered products that do not meet the customer’s specifications.

If the Company can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, then customer acceptance is a formality.

If acceptance provisions are presumed to be substantive, then revenue is deferred until customer acceptance.

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If the Company can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon requirements in the contract, then customer acceptance is a formality.

If acceptance provisions are presumed to be substantive, then revenue is deferred until customer acceptance.

As of December 31, 2022, the Company’s investment portfolio of debt securities totaled $672,876,000.

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Included in this net loss, were gross unrealized losses totaling $27,560,000, of which $12,718,000 were in a loss position for less than twelve months and $14,842,000 were in a loss position for greater than twelve months.

Management currently intends to hold these securities to full value recovery at maturity.

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

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Credit losses on debt securities were not material in 2022, 2021, or 2020.

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

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

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

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

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

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

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

Intangible Assets

The Company's intangible assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances.

The Company evaluates the potential impairment of intangible assets whenever events or circumstances indicate the carrying value may not be recoverable.

Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an acquired asset, a change in the Company’s business strategy or its use of an acquired asset, or negative economic or industry trends.

If an event or circumstance indicates the carrying value of intangible assets may not be recoverable, the Company assesses the recoverability of the assets by comparing the carrying value of the assets to the sum of the undiscounted future cash flows that the assets are expected to generate over their remaining economic lives.

If the carrying value exceeds the sum of the undiscounted future cash flows, the Company compares the fair value of the intangible assets to the carrying value and records an impairment loss for the difference.

The Company generally estimates the fair value of its intangible assets using the income approach based on a discounted cash flow model.

The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows, and assets’ economic lives.

Volatility in the global economy makes these assumptions and estimates more judgmental.

Actual future operating results and the remaining economic lives of our intangible assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of intangible assets in future periods.

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

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

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

Stock-Based Compensation

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

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

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

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

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application of judgment.

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

The Company recognizes compensation expense for grants of stock options and restricted stock units ("RSUs"), including performance restricted stock units ("PRSUs").

Management is responsible for determining the appropriate valuation model and estimating the fair value of stock-based awards, and in doing so, considers a number of factors, including information provided by an outside valuation advisor and the observable market price of the Company's common stock on the grant date.

The fair value of RSUs is determined based on the observable market price of the Company's common stock on the grant date less the present value of expected future dividends.

The fair value of PRSUs where the performance goal includes service and market conditions is calculated using a Monte Carlo simulation model to estimate the probability of satisfying the service and market conditions stipulated in the award grant.

The use of valuation models requires us to make estimates of key assumptions such as expected volatility, expected term, risk-free interest rate, expected dividend yield, forfeiture rate and others.

The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.

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

Significant judgment is required in determining worldwide income tax expense based on tax laws in the various jurisdictions in which the Company operates.

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

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

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

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

We classify interest and penalties related to uncertain tax positions in "Income tax expense" on the Consolidated Statements of Operations.

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

This process involves estimating the current tax liability, as well as assessing temporary differences arising from the different treatment of items for financial statement and tax purposes.

These differences result in deferred tax assets and liabilities, which are recorded on the Consolidated Balance Sheets.

These estimates occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of certain expenses for tax and financial statement purposes.

We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain federal, state, and international tax credit carryovers.

The Tax Cuts and Jobs Act of 2017 imposed a minimum tax on foreign earnings related to intangible assets, known as the Global Intangible Low-Taxed Income (GILTI) tax.

In 2019, the Company elected to account for the impact of the GILTI minimum tax in deferred taxes, a change from the Company’s initial election made in 2018 whereby the GILTI minimum tax was included in income tax expense as incurred on an annual basis.

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

Management has

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

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

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Item 7. Management’s Discussion and Analysis