COGNEX CORP 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 33 Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021, and 2020 35 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020 36 Consolidated Balance Sheets as of December 31, 2022 and 2021 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 38 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020 39 Notes to the Consolidated Financial Statements 40 Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts for the Years Ended December 31, 2022, 2021, and 2020 70 32 Table of Content REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Cognex Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Cognex Corporation (a Massachusetts corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 16, 2023 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Application-Specific Customer Solutions As described further in Notes 1 and 14 to the consolidated financial statements, the Company recognizes revenue from application-specific customer solutions. For these transactions, revenue is recognized at the point in time when the solution is validated, which is when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligation in the contract. We identified revenue recognition related to application-specific customer solutions as a critical audit matter. The principal considerations for our determination that revenue recognition related to application-specific customer solutions is a critical audit matter are that evaluating the performance obligations and determining the timing of validation and that the agreed-upon specifications in the contract have been met relies on the use of management judgments and requires a higher degree of auditor judgment in designing, executing and evaluating the results of audit procedures. Accounting for application-specific customer solutions requires the Company to monitor and 33 Table of Content evaluate customer contracts on an ongoing basis to determine the point in time at which the solution is validated, the agreed-upon specifications in the contract have been met and revenue can be recognized. Our audit procedures related to the revenue recognition of application-specific customer solutions included the following, among others. • We tested the design and operating effectiveness of internal controls related to the monitoring of application-specific customer solutions contracts, determination of validation and the timing of revenue recognition. • We evaluated management’s significant accounting policies related to these customer contracts, including the determination of the performance obligation, for appropriate revenue recognition based on key terms and provisions. • For a sample of contracts, we inspected source documents, including the customer contract or purchase order, third-party shipping information, invoice, and evidence of validation or acceptance to evaluate the identification of performance obligations and timing of revenue recognition. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2007. Boston, Massachusetts February 16, 2023 34 Table of Content COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 2021 2020 (In thousands, except per share amounts) Revenue $ 1,006,090 $ 1,037,098 $ 811,020 Cost of revenue 284,185 277,271 206,421 Gross margin 721,905 759,827 604,599 Research, development, and engineering expenses 141,133 135,372 130,982 Selling, general, and administrative expenses 312,107 309,354 267,593 Loss from fire (Note 22) 20,779 — — Restructuring charges (Note 23) 1,657 — 15,924 Intangible asset impairment charges (Note 9) — — 19,571 Operating income 246,229 315,101 170,529 Foreign currency gain (loss) ( 1,837 ) ( 2,270 ) 3,697 Investment income 6,715 6,660 12,994 Other income (expense) ( 412 ) ( 591 ) ( 309 ) Income before income tax expense 250,695 318,900 186,911 Income tax expense 35,170 39,019 10,725 Net income $ 215,525 $ 279,881 $ 176,186 Net Income per weighted-average common and common-equivalent share: Basic $ 1.24 $ 1.59 $ 1.02 Diluted $ 1.23 $ 1.56 $ 1.00 Weighted-average common and common-equivalent shares outstanding: Basic 173,407 176,463 173,489 Diluted 174,869 179,916 176,592 Cash dividends per common share $ 0.265 $ 0.245 $ 2.225 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Content COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2022 2021 2020 (In thousands) Net income $ 215,525 $ 279,881 $ 176,186 Other comprehensive income (loss), net of tax: Available-for-sale investments: Net unrealized gain (loss), net of tax of $( 5,943 ), $( 2,206 ), and $ 981 in 2022, 2021, and 2020, respectively ( 17,152 ) ( 7,152 ) 6,478 Reclassification of net realized (gain) loss into current operations 182 ( 236 ) ( 4,119 ) Net change related to available-for-sale investments ( 16,970 ) ( 7,388 ) 2,359 Foreign currency translation adjustments: Foreign currency translation gain (loss) ( 4,385 ) ( 6,753 ) 1,115 Net change related to foreign currency translation adjustments ( 4,385 ) ( 6,753 ) 1,115 Other comprehensive income (loss), net of tax ( 21,355 ) ( 14,141 ) 3,474 Total comprehensive income $ 194,170 $ 265,740 $ 179,660 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Content COGNEX CORPORATION – CONSOLIDATED BALANCE SHEETS December 31, 2022 2021 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 181,374 $ 186,161 Current investments, amortized cost of $ 223,545 and $ 137,124 in 2022 and 2021, respectively, allowance for credit losses of $ 0 in 2022 and 2021 218,759 137,455 Accounts receivable, allowance for credit losses of $ 730 and $ 776 in 2022 and 2021, respectively 125,417 130,348 Unbilled revenue 2,179 3,990 Inventories 122,480 113,102 Prepaid expenses and other current assets 67,490 68,742 Total current assets 717,699 639,798 Non-current investments, amortized cost of $ 476,148 and $ 587,981 in 2022 and 2021, respectively, allowance for credit losses of $ 0 in 2022 and 2021 454,117 583,748 Property, plant, and equipment, net 79,714 77,546 Operating lease assets 37,682 23,157 Goodwill 242,630 241,713 Intangible assets, net 12,414 11,888 Deferred income taxes 407,241 418,570 Other assets 6,643 7,242 Total assets $ 1,958,140 $ 2,003,662 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 27,103 $ 44,051 Accrued expenses 93,235 92,432 Accrued income taxes 18,129 8,577 Deferred revenue and customer deposits 40,787 35,743 Operating lease liabilities 8,454 7,786 Total current liabilities 187,708 188,589 Non-current operating lease liabilities 31,298 17,795 Deferred income taxes 249,961 293,769 Reserve for income taxes 15,866 14,780 Non-current accrued income taxes 33,008 43,160 Other liabilities 1,905 15,476 Total liabilities 519,746 573,569 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred stock, $ 0.01 par value - Authorized: 400 shares in 2022 and 2021, respectively, no shares issued and outstanding — — Common stock, $ 0.002 par value – Authorized: 300,000 shares in 2022 and 2021, respectively, issued and outstanding: 172,631 and 175,481 shares in 2022 and 2021, respectively 345 351 Additional paid-in capital 979,167 914,802 Retained earnings 528,179 562,882 Accumulated other comprehensive loss, net of tax ( 69,297 ) ( 47,942 ) Total shareholders’ equity 1,438,394 1,430,093 Total liabilities and shareholders' equity $ 1,958,140 $ 2,003,662 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Content COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 2020 (In thousands) Cash flows from operating activities: Net income $ 215,525 $ 279,881 $ 176,186 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 54,505 43,774 42,661 Depreciation of property, plant, and equipment 16,347 16,616 22,139 Loss (gain) on disposal of property, plant, and equipment 19 33 1,817 Amortization of intangible assets 3,274 3,667 4,364 Intangible asset impairment charges — — 19,571 Non-cash impact of charges related to fire (Note 22) 46,372 — — Excess and obsolete inventory charges 3,084 2,573 9,908 Operating lease asset impairment charges — — 3,427 Amortization of discounts or premiums on investments 4,968 4,887 1,274 Realized (gain) loss on sale of investments 182 ( 236 ) ( 4,119 ) Revaluation of contingent consideration — — ( 114 ) Change in deferred income taxes ( 27,338 ) ( 3,118 ) ( 3,353 ) Changes in operating assets and liabilities: Accounts receivable 3,454 ( 4,503 ) ( 21,285 ) Unbilled revenue 1,806 1,637 ( 848 ) Inventories ( 48,934 ) ( 54,920 ) ( 10,319 ) Prepaid expenses and other current assets ( 6,998 ) ( 32,342 ) ( 9,909 ) Accounts payable ( 17,277 ) 27,828 ( 1,688 ) Accrued expenses 2,056 16,861 24,542 Accrued income taxes ( 444 ) ( 6,401 ) ( 22,973 ) Deferred revenue and customer deposits 4,886 14,417 6,571 Other ( 12,081 ) 3,411 4,548 Net cash provided by operating activities 243,406 314,065 242,400 Cash flows from investing activities: Purchases of investments ( 233,720 ) ( 668,053 ) ( 922,867 ) Maturities and sales of investments 253,983 430,969 1,104,605 Purchases of property, plant, and equipment ( 19,667 ) ( 15,455 ) ( 13,303 ) Net payments related to business acquisitions ( 5,050 ) — 1,004 Net cash provided by (used in) investing activities ( 4,454 ) ( 252,539 ) 169,439 Cash flows from financing activities: Net payments from issuance of common stock under stock plans 9,861 63,292 125,715 Repurchase of common stock ( 204,314 ) ( 161,652 ) ( 51,036 ) Payment of dividends ( 45,921 ) ( 43,263 ) ( 390,508 ) Payment of contingent consideration — — ( 1,039 ) Net cash used in financing activities ( 240,374 ) ( 141,623 ) ( 316,868 ) Effect of foreign exchange rate changes on cash and cash equivalents ( 3,365 ) ( 2,815 ) 2,671 Net change in cash and cash equivalents ( 4,787 ) ( 82,912 ) 97,642 Cash and cash equivalents at beginning of year 186,161 269,073 171,431 Cash and cash equivalents at end of year $ 181,374 $ 186,161 $ 269,073 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Content COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (In thousands) Shares Par Value Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ ( 37,275 ) $ 1,355,710 Net issuance of common stock under stock plans 4,565 9 125,706 — — 125,715 Repurchase of common stock ( 1,215 ) ( 2 ) — ( 51,034 ) — ( 51,036 ) Stock-based compensation expense — — 42,661 — — 42,661 Payment of dividends ($2.225 per common share) — — — ( 390,508 ) — ( 390,508 ) Net income — — — 176,186 — 176,186 Net unrealized gain (loss) on available-for-sale investments, net of tax of $981 — — — — 6,478 6,478 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 4,119 ) ( 4,119 ) Foreign currency translation adjustment, net of tax of $0 — — — — 1,115 1,115 Balance as of December 31, 2020 175,790 $ 352 $ 807,739 $ 487,912 $ ( 33,801 ) $ 1,262,202 Net issuance of common stock under stock plans 1,703 3 63,289 — — 63,292 Repurchase of common stock ( 2,012 ) ( 4 ) — ( 161,648 ) — ( 161,652 ) Stock-based compensation expense — — 43,774 — — 43,774 Payment of dividends ($0.245 per common share) — — — ( 43,263 ) — ( 43,263 ) Net income — — — 279,881 — 279,881 Net unrealized gain (loss) on available-for-sale investments, net of tax of ($2,206) — — — — ( 7,152 ) ( 7,152 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 236 ) ( 236 ) Foreign currency translation adjustment, net of tax of $0 — — — — ( 6,753 ) ( 6,753 ) Balance as of December 31, 2021 175,481 $ 351 $ 914,802 $ 562,882 $ ( 47,942 ) $ 1,430,093 Net issuance of common stock under stock plans 514 1 9,860 — — 9,861 Repurchase of common stock ( 3,364 ) ( 7 ) — ( 204,307 ) — ( 204,314 ) Stock-based compensation expense — — 54,505 — — 54,505 Payment of dividends ($0.265 per common share) — — — ( 45,921 ) — ( 45,921 ) Net income — — — 215,525 — 215,525 Net unrealized gain (loss) on available-for-sale investments, net of tax of $(5,943) — — — — ( 17,152 ) ( 17,152 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — 182 182 Foreign currency translation adjustment, net of tax of $0 — — — — ( 4,385 ) ( 4,385 ) Balance as of December 31, 2022 172,631 $ 345 $ 979,167 $ 528,179 $ ( 69,297 ) $ 1,438,394 The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of the significant accounting policies described below. Nature of Operations Cognex Corporation ("the Company" or "Cognex") is a leading global provider of machine vision products and solutions that improve efficiency and quality and address some of the most critical manufacturing and distribution challenges. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the balance sheet date, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Significant estimates and judgments include those related to revenue recognition, investments, stock-based compensation, and income taxes. Basis of Consolidation The consolidated financial statements include the accounts of Cognex Corporation and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated. Foreign Currency Translation The financial statements of the Company’s foreign subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at the end of the year for assets and liabilities and average exchange rates during the year for results of operations. The resulting foreign currency translation adjustment, net of tax, is included in shareholders’ equity as accumulated other comprehensive loss. Fair Value Measurements The Company applies a three-level valuation hierarchy for fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based on the lowest level of input that is significant to the measurement of fair value. Level 1 inputs to the valuation methodology utilize unadjusted quoted market prices in active markets for identical assets and liabilities. Level 2 inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 inputs to the valuation methodology are unobservable inputs based on management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. A change to the level of an asset or liability within the fair value hierarchy is determined at the end of a reporting period. Cash, Cash Equivalents, and Investments Money market instruments, as well as debt securities with original maturities of three months or less, are classified as cash equivalents and are stated at amortized cost. Debt securities with original maturities greater than three months and remaining maturities of one year or less are classified as current investments. Debt securities with remaining maturities greater than one year are classified as non-current investments. It is the Company’s policy to invest in investment-grade debt securities with effective maturities that do not exceed ten years . Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, included in shareholders’ equity as accumulated other comprehensive loss. Realized gains and losses are calculated using the specific identification method. Realized gains and losses, interest income, and the amortization of the discount or premium on debt securities arising at acquisition, are included in "Investment income" on the Consolidated Statements of Operations. Management monitors its debt securities to determine whether a loss exists related to the credit quality of the issuer. If the present value of the cash flows expected to be collected from the security is less than the amortized cost basis of the security, then a credit loss exists and an allowance against the security for credit losses is recorded. The allowance is limited to the amount by which fair value is below amortized cost, recognizing that the investment could be sold at fair value. Credit losses continue to be remeasured in subsequent reporting periods. Credit losses and 40 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recoveries related to debt securities are included in “Other income (expense)” on the Consolidated Statements of Operations. When developing an estimate of expected credit losses, management considers all relevant information including historical experience, current conditions, and reasonable forecasts of expected future cash flows. Accounts Receivable The Company extends credit with various payment terms to customers based on an evaluation of their financial condition. Accounts that are outstanding longer than the payment terms are considered to be past due. The Company establishes an allowance against accounts receivable for credit losses when it determines receivables are at risk for collection based on the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, and general economic and industry conditions, as well as various other factors. Receivables are written off against this allowance in the period they are determined to be uncollectible and payments subsequently received on previously written-off receivables are recorded as a recovery of the credit loss. Credit losses and recoveries related to accounts receivable are included in "Selling, general, and administrative expenses" on the Consolidated Statements of Operations. Inventories 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 reasonably predictable costs of completion, disposal, and transportation. Purchase price variances are incurred when actual costs are different than standard costs due to favorable or unfavorable market prices. Management applies judgment to recognize purchase price variances in the same period that the associated standard costs of the finished goods that consume these components are sold. The Company’s inventory is subject to technological change or obsolescence. The Company reviews inventory quantities on hand and estimates excess and obsolescence exposures based on assumptions about future demand, product transitions, general economic and industry conditions, and other circumstances, and records reserves to reduce the carrying value of inventories to their net realizable value. If actual future demand is less than estimated, additional inventory write-downs would be required. The Company generally disposes of obsolete inventory upon determination of obsolescence. The Company does not dispose of excess inventory immediately, due to the possibility that some of this inventory could be sold to customers as a result of differences between actual and forecasted demand. When inventory has been written down below cost, such reduced amount is considered the new cost basis for subsequent accounting purposes. As a result, the Company could recognize a higher than normal gross margin if the reserved inventory were subsequently sold. Property, Plant, and Equipment Property, plant, and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Buildings’ useful lives are 39 years, building improvements’ useful lives are ten years , and the useful lives of computer hardware and software, manufacturing test equipment, and furniture and fixtures range from two to ten years . Leasehold improvements are depreciated over the shorter of the estimated useful lives or the remaining terms of the leases. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. Upon retirement or disposition, the cost and related accumulated depreciation of the disposed assets are removed from the accounts, with any resulting gain or loss included in current operations. Internal-use Software Internal-use software is software acquired, internally developed, or modified solely to meet the Company's internal needs, and during the software's development, no substantive plan exists to sell the software. The accounting treatment for computer software developed for internal use depends on the nature of activities performed at each stage of development. The preliminary project stage includes conceptual formulation of design alternatives, determination of system requirements, vendor demonstrations, and final selection of vendors, and during this stage costs are expensed as incurred. The application development stage includes software configuration, coding, hardware installation, and testing. During this stage, certain costs are capitalized, including external direct costs of materials and services, as well as payroll and payroll-related costs for employees who are directly associated with the project, while certain costs are expensed as incurred, including training and data conversion costs. The post-implementation stage includes support and maintenance, and during this stage costs are expensed as incurred. 41 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitalization begins when both the preliminary project stage is completed and management commits to funding the project. Capitalization ceases at the point the project is substantially complete and ready for its intended use, that is, after all substantial testing is completed. Costs of specified upgrades and enhancements to internal-use software are capitalized if it is probable that those expenditures result in additional functionality. Capitalized costs are amortized on a straight-line basis over the estimated useful life. Leases At inception of a contract, the Company determines whether that contract is or contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. The Company has control of the asset if it has the right to direct the use of the asset and obtains substantially all of the economic benefits from the use of the asset throughout the period of use. As a practical expedient, the Company does not recognize a lease asset or lease liability for leases with a lease term of 12 months or less. In the determination of the lease term, the Company considers the existence of extension or termination options and the probability of those options being exercised. Lease contracts may include fixed lease components and non-lease components, such as common area maintenance and utilities for property leases. As a practical expedient, the Company accounts for the non-lease components together with the lease components as a single lease component for all of its leases. The Company classifies a lease as a finance lease when it meets any of the following criteria at the lease commencement date: (1) the lease transfers ownership of the underlying asset to the Company by the end of the lease term; (2) the lease grants the Company an option to purchase the underlying asset that the Company is reasonably certain to exercise; (3) the lease term is for the major part of the remaining economic life of the underlying asset (the Company considers a major part to be 75% or more of the remaining economic life of the underlying asset); (4) the present value of the sum of the lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset (the Company considers substantially all the fair value to be 90% or more of the fair value of the underlying asset amount); or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. When none of the criteria above are met, the Company classifies the lease as an operating lease. On the lease commencement date, the Company records a lease asset and lease liability on the balance sheet. The lease asset consists of: (1) the amount of the initial lease liability; (2) any lease payments made to the lessor at or before the lease commencement date, minus any lease incentives received; and (3) any initial direct cost incurred by the Company. Initial direct costs are incremental costs of a lease that would not have been incurred if the lease had not been obtained and are capitalized as part of the lease asset. The lease liability equals the present value of the future cash payments discounted using the Company's incremental borrowing rate. The Company’s incremental borrowing rate is the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments over a similar term, which, through year ended December 31, 2022, was estimated using the three-month London Interbank Offered Rate (LIBOR) plus a 2% credit risk spread. Operating lease expense equals the total cash payments recognized on a straight-line basis over the lease term. The amortization of the lease asset is calculated as the straight-line lease expense less the accretion of the interest on the lease liability each period. The lease liability is reduced by the cash payment less the interest each period. Goodwill Goodwill is stated at cost. The Company evaluates the potential impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of the goodwill may not be recoverable. The Company performs a qualitative assessment of goodwill to determine whether further impairment testing is necessary. Factors that management considers in this assessment include general economic and industry conditions, overall financial performance (both current and projected), changes in strategy, changes in the composition or carrying amount of net assets, and market capitalization. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company would proceed to perform a quantitative impairment test. Under this quantitative analysis, the fair value of the reporting unit is compared with its carrying value, including goodwill. If the carrying value exceeds the fair value of the reporting unit, the Company recognizes an impairment charge. The Company estimates the fair value of its reporting unit using the income approach based on a discounted cash flow model. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving 42 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS similar businesses, to support the conclusions based on the income approach. Intangible Assets Intangible assets are stated at cost and amortized over the assets’ estimated useful lives. Intangible assets are either amortized in relation to the relative cash flows anticipated from the intangible asset or using the straight-line method, depending on facts and circumstances. The useful lives of distribution networks range from eleven to twelve years , completed technologies from five to eight years , customer relationships from five to eight years , non-compete agreements from three to seven years , and trademarks two years . In-process technology is an indefinite-lived intangible asset until the technology is completed, at which point it is amortized over its estimated useful life. The Company evaluates the potential impairment of intangible assets whenever events or circumstances indicate the carrying value of the assets may not be recoverable. For finite-lived intangible assets that are subject to amortization, the Company follows a two-step process for impairment testing. In step one, known as the recoverability test, the carrying value of the asset is compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the sum of the undiscounted future cash flows is less than the carrying value, the asset is not recoverable and step two is performed. In step two, the impairment charge is measured as the amount by which the carrying value of the asset exceeds its fair value. For indefinite-lived intangible assets that are not subject to amortization, the fair value of the asset is measured and an impairment charge is recorded as the amount by which the carrying value of the asset exceeds its fair value. Warranty Obligations The Company warrants its products to be free from defects in material and workmanship for periods primarily ranging from one to three years from the time of sale based on the product being purchased and the terms of the customer arrangement. Warranty obligations are evaluated and recorded at the time of sale since it is probable that customers will make claims under warranties related to products that have been sold and the amount of these claims can be reasonably estimated based on historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or circumstances impacting product quality become known that would not have been taken into account using historical data. Contingencies Loss contingencies are accrued if the loss is probable and the amount of the loss can be reasonably estimated. Legal costs associated with potential loss contingencies are expensed as incurred. Derivative Instruments Derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Changes in the fair value of the Company’s economic hedges utilizing foreign currency forward contracts are included in "Foreign currency gain (loss)" on the Consolidated Statements of Operations. The Company recognizes all derivative instruments as either current assets or current liabilities at fair value on the Consolidated Balance Sheets. When the Company is engaged in more than one outstanding derivative contract with the same counterparty and also has a legally enforceable master netting agreement with that counterparty, the “net” mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty. The cash flows from derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the category for the cash flows from the hedged item. Generally, this accounting policy election results in cash flows related to derivative instruments being classified as an operating activity on the Consolidated Statements of Cash Flows. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The framework in support of this core principle includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied. 43 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Identifying the Contract with the Customer The Company identifies contracts with customers as agreements that create enforceable rights and obligations, which typically take the form of customer contracts or purchase orders. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Identifying the Performance Obligations in the Contract The Company identifies performance obligations as promises in contracts to transfer distinct goods or services. Standard products and services that the Company regularly sells separately, which customers can benefit from either on their own or with other readily available resources and are distinct within the context of the customer contract, are accounted for as distinct performance obligations. Application-specific customer solutions that are comprised of a combination of products and services are accounted for as one performance obligation to deliver a total solution to the customer. On-site support services that are provided to the customer after the solution is deployed are accounted for as a separate performance obligation. These solutions are provided to customers in a variety of industries, including the consumer electronics and logistics industries. Shipping and handling activities for which the Company is responsible under the terms and conditions of the sale are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized. The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. If revenue is recognized before immaterial promises have been completed, then the costs related to such immaterial promises are accrued at the time of sale. Determining the Transaction Price The Company determines the transaction price as the amount of consideration it expects to receive in exchange for transferring promised goods or services to the customer. Amounts collected from customers for sales taxes are excluded from the transaction price. If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending on the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances. The Company typically does not grant customers the explicit right to return product. However, from time to time, the Company may allow a customer to return a product. As a practical expedient, the Company estimates the transaction price using the expected value based on its history of return experience using a portfolio approach in which the Company’s total revenue is reduced by an estimate of total customer returns. Management reasonably expects that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately. Allocating the Transaction Price to the Performance Obligations The Company allocates the transaction price to each performance obligation at contract inception based on a relative stand-alone selling price basis, or the price at which the Company would sell the good or service separately to similar customers in similar circumstances. Recognizing Revenue When (or As) the Performance Obligations are Satisfied The Company recognizes revenue when it transfers the promised goods or services to the customer. Revenue for standard products is recognized at the point in time when the customer obtains control of the goods, which is typically upon delivery when the customer has legal title, physical possession, the risks and rewards of ownership, and an enforceable obligation to pay for the products. Revenue for services, which are not material, is typically recognized over the time the service is provided. Revenue for application-specific customer solutions is recognized at the point in time when the solution is validated, which is the point in time when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer 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 44 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 requirements. 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. For the Company’s standard products and services, revenue recognition and billing typically occur at the same time. For application-specific customer solutions, however, the agreement with the customer may provide for billing terms which differ from revenue recognition criteria, resulting in either deferred revenue or unbilled revenue. Credit assessments are performed to determine payment terms, which vary by region, industry, and customer. Prepayment terms result in contract liabilities for customer deposits. When credit is granted to customers, payment is typically due 30 to 90 days from billing. The Company's contracts have an original expected duration of less than one year, and therefore as a practical expedient, the Company has elected to ignore the impact of the time value of money on a contract and to expense sales commissions. The Company recognizes an asset for costs to fulfill a contract if the costs relate directly to the contract and to future performance, and the costs are expected to be recovered. Management exercises judgment when determining the amount of revenue to be recognized each period. Such judgments include, but are not limited to, assessing the customer’s ability and intention to pay substantially all of the contract consideration when due, determining when two or more contracts should be combined and accounted for as a single contract, determining whether a contract modification has occurred, assessing whether promises are immaterial in the context of the contract, determining whether material promises in a contract represent distinct performance obligations, estimating the transaction price for a contract that contains variable consideration, determining the stand-alone selling price of each performance obligation, determining whether control is transferred over time or at a point in time for performance obligations, and assessing whether formal customer acceptance provisions are substantive. Research and Development Research and development costs primarily include costs related to personnel, prototyping materials and equipment, and outside services. Research and development costs are expensed when incurred until technological feasibility has been established for the product. Thereafter, all software costs may be capitalized until the product is available for general release to customers. The Company determines technological feasibility at the time the product reaches beta in its stage of development. Historically, the time incurred between beta and general release to customers has been short, and therefore, the costs have been insignificant. Advertising Costs Advertising costs are expensed as incurred and totaled $ 1,257,000 in 2022, $ 1,965,000 in 2021, and $ 1,443,000 in 2020. Stock-Based Compensation The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units ("RSUs"), including performance restricted stock units ("PRSUs"). The Company has reserved a specific number of shares of its authorized but unissued shares for issuance upon the exercise of stock options or the settlement of RSUs. When a stock option is exercised or an RSU is settled, the Company issues new shares from this pool. 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. When determining the grant-date fair value of stock-based awards, management further considers whether an adjustment is required to the observable market price or volatility of the Company's common stock that is used in the valuation as a result of material non-public information, if that information is expected to result in a material increase in share price. 45 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recognizes compensation expense related to stock-based awards using the graded attribution method, in which expense is recognized on a straight-line basis over the service period for each separately vesting portion of the stock option or RSU as if the award was, in substance, multiple awards. The amount of compensation expense recognized at the end of the vesting period is based on the number of awards for which the requisite service has been completed. No compensation expense is recognized for awards that are forfeited for which the employee does not render the requisite service. The term “forfeitures” is distinct from “expirations” and represents only the unvested portion of the surrendered award. The Company applies estimated forfeiture rates to its unvested awards to arrive at the amount of compensation expense that is expected to be recognized over the requisite service period. At the end of each separately vesting portion of an award, the expense that was recognized by applying the estimated forfeiture rate is compared to the expense that should be recognized based on the employee’s service, and an increase or decrease to compensation expense is recorded to true up the final expense. Taxes The Company recognizes a tax position in its financial statements when that tax position, based solely upon its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statutes of limitations. Derecognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. Only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g., resolution due to the expiration of the statutes of limitations) or are not expected to be paid within one year are not classified as current. It is the Company’s policy to record estimated interest and penalties as income tax expense and tax credits as a reduction in income tax expense. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. 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. The change is considered preferable, as it appropriately matches the Company’s current and deferred income tax implications. Sales tax in the United States and similar taxes in other jurisdictions that are collected from customers and remitted to government authorities are presented on a gross basis (i.e., a receivable from the customer with a corresponding payable to the government). Amounts collected from customers and retained by the Company during tax holidays are recognized as non-operating income when earned. Net Income Per Share Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period plus potential dilutive common shares. Dilutive common equivalent shares consist of stock options and restricted stock units and are calculated using the treasury stock method. Common equivalent shares do not qualify as participating securities. In periods where the Company records a net loss, potential common stock equivalents are not included in the calculation of diluted net loss per share as their effect would be anti-dilutive. Comprehensive Income Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive loss, net of tax, consists of foreign currency translation adjustment losses of $ 48,050,000 and $ 43,665,000 , as of December 31, 2022 and December 31, 2021, respectively; net unrealized losses on available-for-sale investments of $ 19,976,000 and $ 3,006,000 as of December 31, 2022 and December 31, 2021, respectively; and losses on currency swaps, net of gains on long-term intercompany loans of $ 1,271,000 46 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS at each year end. Amounts reclassified from accumulated other comprehensive loss, net of tax, to investment income on the Consolidated Statements of Operations were net realized gains (losses) of $( 182,000 ), $ 236,000 , and $ 4,119,000 for 2022, 2021, and 2020, respectively. Concentrations of Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and accounts receivable. The Company has certain domestic and foreign cash balances that exceed the insured limits set by the Federal Deposit Insurance Corporation (FDIC) in the United States and equivalent regulatory agencies in foreign countries. The Company primarily invests in investment-grade debt securities and has established guidelines relative to credit ratings, diversification, and maturities of its debt securities that maintain safety and liquidity. The Company has historically not experienced any significant realized losses on its debt securities. The Company has two large customers that each represented 11% of total revenue in 2022. These two customers combined represented 17% of total accounts receivable as of December 31, 2022. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company has historically not experienced any significant losses related to the collection of its accounts receivable. A significant portion of the Company's products is presently manufactured by a third-party contractor located in Indonesia. This contract manufacturer has agreed to provide the Company with termination notification periods and last-time-buy rights, if and when that may be applicable. Our contract manufacturer's challenges in obtaining components and maintaining production have resulted in delays, and may continue to result in delays, in meeting our delivery schedules that, as a result, delay deliveries to our customers past their requested delivery date. On June 7, 2022, this 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. Refer to Note 22 for further information on this event and the charges recorded in "Loss from Fire" Consolidated Statements of Operations. Certain key electronic and mechanical components, such as integrated circuit chips, are fundamental to the design of Cognex products. Due to the impact of global supply chain challenges or other factors, we have experienced, and may continue to experience, disruptions to the supply of components for our products that have resulted, and may continue to result, in higher purchase costs, delivery costs, and manufacturing delays. The Company sources components from preferred vendors that are selected based on price and performance considerations. In the event of a supply disruption from a preferred vendor, these components may typically be purchased from alternative vendors, which may result in higher purchase costs and manufacturing delays based on the time required to identify and obtain sufficient quantities from an alternative source. Certain of the Company’s products utilize components that are available from only one source. If we are unable to secure adequate supply from these sources, we may have to redesign our products, which may lead to higher costs, delays in manufacturing, and possible loss of sales. Business Acquisitions The Company determines whether a transaction qualifies as a business combination by applying the definition of a business, which requires the assets acquired and liabilities assumed to be inputs and processes that have the ability to contribute to the creation of outputs. The Company accounts for business combinations under the acquisition method of accounting, which requires the following steps: (1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring the identifiable assets acquired and the liabilities assumed, and (4) recognizing and measuring goodwill. The Company measures the identifiable assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. Management is responsible for determining the appropriate valuation model and estimated fair values, and in doing so, considers a number of factors, including information provided by an outside valuation advisor. Management primarily establishes fair value using the income approach based on a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors. Contingent consideration liabilities are reported at their estimated fair values based on probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement. The fair values of these contingent consideration liabilities are remeasured 47 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS each reporting period with changes in fair value included in "Other income (expense)" on the Consolidated Statements of Operations. Goodwill is recognized as of the acquisition date as the excess of the consideration transferred over the net amount of assets acquired and liabilities assumed. Transaction costs are expensed as incurred. Restructuring Charges One-time employee termination benefits associated with restructuring activities exist at the date the plan of termination has been communicated to employees (the “communication date”) and all of the following criteria are met: (1) management, having the authority to approve the action, has committed to the plan of termination, (2) the plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date, (3) the plan establishes the terms of the benefit arrangement in sufficient detail, and (4) actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made. If employees are not required to render service until they are terminated in order to receive the termination benefits or will not be retained to render service beyond a minimum retention period, a liability for the termination benefits is recognized and measured at fair value at the communication date. Otherwise, a liability is measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period. Changes to the fair value of the liability are recorded as restructuring adjustments. Closures of leased offices as part of a restructuring activity prior to the end of the contractual lease term are treated as abandoned right-to-use assets when the Company ceases to use the property for economic benefit and lacks either the intent or ability to sublease. The lease asset is written down to zero as of the abandonment date. Estimates of contract termination costs assume the Company will be obligated to pay the remaining rent over the contract period, and the lease liability continues to be recorded on the balance sheet. Subsequent negotiations that result in early contract terminations are recorded as favorable restructuring adjustments. Other associated costs as part of a restructuring activity include costs to consolidate facilities, costs to relocate employees, and legal fees incurred to research local statutory requirements and prepare termination agreements. These costs are recognized in the period in which the liability is incurred, which generally corresponds to the period in which the services are rendered. NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", (ASU) 2021-01, "Reference Rate Reform (Topic 848): Scope", and Accounting Standards Update (ASU) 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" The amendments in these ASUs apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Together, the ASUs provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024 that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in these ASUs are effective for all entities as of March 12, 2020 through December 31, 2024. Management adopted Topic 848 on January 1, 2023, and now uses the Secured Overnight Financing Rate (SOFR). The adoption did not have a material impact on the Company's financial statements and disclosures. Accounting Standards Update (ASU) 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" The amendments in this ASU primarily address the accounting for contract assets and contract liabilities related to revenue contracts with customers in a business combination. The ASU clarifies that an acquirer should account for the related revenue contracts in accordance with Accounting Standards Codification 606 as if the acquirer had originated the contracts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, although early adoption is permitted. The amendments in the ASU should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Management adopted this ASU on December 1, 2022 and the adoption did not have a material impact on the Company's financial statements and disclosures. 48 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Fair Value Measurements Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Money market instruments $ 415 $ — $ — Corporate bonds — 538,495 — Asset-backed securities — 60,429 — Treasury bills — 55,546 — Agency bonds — 15,858 — Sovereign bonds — 1,924 — Municipal bonds — 624 — Economic hedge forward contracts — 27 — Liabilities: Economic hedge forward contracts — 479 — The Company’s money market instruments are reported at fair value based on the daily market price for identical assets in active markets, and are therefore classified as Level 1. The Company’s debt securities and forward contracts are reported at fair value based on model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. Management is responsible for estimating the fair value of these financial assets and liabilities, and in doing so, considers valuations provided by a large, third-party pricing service. For debt securities, this service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the daily valuations. The Company's forward contracts are typically traded or executed in over-the-counter markets with a high degree of pricing transparency. The market participants are generally large commercial banks. The Company's contingent consideration liabilities are reported at fair value based on probability-adjusted present values of the consideration expected to be paid using significant inputs that are not observable in the market, and are therefore classified as Level 3. The fair value of the contingent consideration liability related to the Company's acquisition of GVi Ventures, Inc. in 2017 was written down to zero in 2019 resulting from a lower level of revenue in the Americas' automotive industry. The balance remained at zero through the remainder of the five-year assessment period which concluded during the second quarter of 2022. Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis Non-financial assets, such as property, plant and equipment, operating lease assets, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances, referred to as "triggering events," indicate the carrying value may not be recoverable. The adverse impact of the COVID-19 pandemic on our business in 2020 triggered a review of long-lived assets for potential impairment as of May 26, 2020, which resulted in operating lease asset impairment charges of $ 3,427,000 (refer to Notes 7 and 23) that were included in "Restructuring charges" on the Consolidated Statements of Operations, and intangible asset impairment charges of $ 19,571,000 (refer to Note 9) in the second quarter of 2020. These fair value measurements were based on the present values of future cash flows using significant inputs that are not observable in the market, and were therefore classified as Level 3. The Company did not record impairment charges related to non-financial assets in 2022 or 2021. 49 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of the following (in thousands): December 31, 2022 2021 Cash $ 180,959 $ 185,624 Money market instruments 415 537 Cash and cash equivalents 181,374 186,161 Corporate bonds 164,055 73,088 Asset-backed securities 26,890 37,655 Agency bonds 15,858 2,802 Treasury bills 11,332 18,912 Municipal bonds 624 4,998 Current investments 218,759 137,455 Corporate bonds 374,440 481,218 Treasury bills 44,214 39,753 Asset-backed securities 33,539 43,940 Sovereign bonds 1,924 2,119 Agency bonds — 16,077 Municipal bonds — 641 Non-current investments 454,117 583,748 $ 854,250 $ 907,364 The Company’s cash balance included foreign bank balances totaling $ 160,611,000 and $ 142,009,000 as of December 31, 2022 and 2021, respectively. Corporate bonds consist of debt securities issued by both domestic and foreign companies; asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement; agency bonds consist of domestic or foreign obligations of government agencies and government-sponsored enterprises that have government backing; treasury bills consist of debt securities issued by the U.S. government; municipal bonds consist of debt securities issued by state and local government entities; and sovereign bonds consist of direct debt issued by foreign governments. All of the Company's securities as of December 31, 2022 and 2021 were denominated in U.S. Dollars. Accrued interest receivable is included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheets and amounted to $ 3,620,000 and $ 3,037,000 as of December 31, 2022 and 2021, respectively. 50 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company’s available-for-sale investments as of December 31, 2022 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 167,558 $ — $ ( 3,503 ) $ 164,055 Asset-backed securities 27,607 — ( 717 ) 26,890 Agency bonds 16,143 — ( 285 ) 15,858 Treasury bills 11,602 — ( 270 ) 11,332 Municipal bonds 635 — ( 11 ) 624 Non-current: Corporate bonds 394,576 561 ( 20,697 ) 374,440 Treasury bills 44,333 79 ( 198 ) 44,214 Asset-backed securities 35,144 103 ( 1,708 ) 33,539 Sovereign bonds 2,095 — ( 171 ) 1,924 $ 699,693 $ 743 $ ( 27,560 ) $ 672,876 The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of December 31, 2022 (in thousands): Unrealized Loss Position For Less than 12 Months Unrealized Loss Position For Greater than 12 Months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Corporate bonds $ 285,087 $ ( 9,591 ) $ 187,153 $ ( 14,609 ) $ 472,240 $ ( 24,200 ) Asset-backed securities 47,582 ( 2,299 ) 2,495 ( 126 ) 50,077 ( 2,425 ) Treasury bills 32,614 ( 465 ) 102 ( 3 ) 32,716 ( 468 ) Agency Bonds 15,858 ( 285 ) — — 15,858 ( 285 ) Sovereign bonds 967 ( 67 ) 957 ( 104 ) 1,924 ( 171 ) Municipal bonds 624 ( 11 ) — — 624 ( 11 ) $ 382,732 $ ( 12,718 ) $ 190,707 $ ( 14,842 ) $ 573,439 $ ( 27,560 ) Management monitors debt securities that are in an unrealized loss position to determine whether a loss exists related to the credit quality of the issuer. When developing an estimate of expected credit losses, management considers all relevant information including historical experience, current conditions, and reasonable forecasts of expected future cash flows. Based on this evaluation, no allowance for credit losses on debt securities was recorded as of December 31, 2022, 2021 or 2020. Management currently intends to hold these securities to full value recovery at maturity. The Company recorded gross realized gains on the sale of debt securities totaling $ 133,000 in 2022, $ 246,000 in 2021, and $ 4,283,000 in 2020, and gross realized losses on the sale of debt securities totaling $ 315,000 in 2022, $ 10,000 in 2021, and $ 164,000 in 2020. Realized gains and losses are included in "Investment income" on the Consolidated Statements of Operations. Prior to the sale of these securities, unrealized gains and losses for these debt securities, net of tax, were recorded in shareholders’ equity as accumulated other comprehensive loss. 51 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the effective maturity dates of the Company’s available-for-sale investments as of December 31, 2022 (in thousands): <1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5-7 Years Total Corporate bonds $ 164,055 $ 167,661 $ 94,417 $ 63,101 $ 48,796 $ 465 $ 538,495 Asset-backed securities 26,890 12,755 12,587 8,197 — — 60,429 Treasury bills 11,332 2,429 6,384 17,758 17,643 — 55,546 Agency bonds 15,858 — — — — — 15,858 Sovereign bonds — 967 957 — — — 1,924 Municipal bonds 624 — — — — — 624 $ 218,759 $ 183,812 $ 114,345 $ 89,056 $ 66,439 $ 465 $ 672,876 NOTE 5: Inventories Inventories consisted of the following (in thousands): December 31, 2022 2021 Raw materials $ 71,720 $ 50,452 Work-in-process 906 5,293 Finished goods 49,854 57,357 $ 122,480 $ 113,102 The Company recorded provisions for excess and obsolete inventories of $ 3,084,000 and $ 2,573,000 in 2022 and 2021, respectively, which reduced the carrying value of the inventories to their net realizable value. Refer to Note 22 for information regarding losses incurred from the fire at the Company's primary contract manufacturer's plant in Indonesia on June 7, 2022, including the impact on inventories and incremental provisions for excess and obsolete inventories recorded as a result of this fire. NOTE 6: Property, Plant, and Equipment Property, plant, and equipment consisted of the following (in thousands): December 31, 2022 2021 Land $ 3,951 $ 3,951 Buildings 24,533 24,533 Building improvements 45,003 47,886 Leasehold improvements 14,491 10,436 Computer hardware and software 53,663 50,748 Manufacturing test equipment 27,176 30,562 Furniture and fixtures 6,378 6,449 175,195 174,565 Less: accumulated depreciation ( 95,481 ) ( 97,019 ) $ 79,714 $ 77,546 The Company disposed of property, plant, and equipment with a cost basis of $ 17,358,000 and accumulated depreciation of $ 16,604,000 in 2022, resulting in a loss of $ 754,000 . Of this loss, $ 735,000 relates to production equipment destroyed as a result of the fire at the Company's primary contract manufacturer's plant in Indonesia on June 7, 2022 (refer to Note 22) and is included in "Non-cash impact of charges related to fire (Note 22)" on the Consolidated Statements of Cash Flows. The Company disposed of property, plant, and equipment with a cost basis of $ 20,647,000 and accumulated depreciation of $ 20,614,000 in 2021, resulting in a loss of $ 33,000 . 52 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: Leases The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. Certain leases may contain options to extend or terminate the lease at the Company's sole discretion. As of December 31, 2022 , there were two options to terminate and fifteen options to extend that were accounted for in the determination of the lease term for the Company's outstanding leases. Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index. There were no restrictions or covenants for the outstanding leases as of December 31, 2022. The Company did not have any leases that had not yet commenced but that created significant rights and/or obligations as of December 31, 2022. The total operating lease expense was $ 8,939,000 in 2022, and $ 8,180,000 in both 2021 and 2020. The total operating lease cash payments were $ 8,548,000 , $ 8,225,000 , and $ 8,009,000 in 2022, 2021, and 2020, respectively. The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $ 144,000 , $ 154,000 , and $ 123,000 in 2022, 2021, and 2020, respectively. Future operating lease cash payments are as follows (in thousands): Year Ended December 31, Amount 2023 $ 9,473 2024 6,935 2025 4,975 2026 3,791 2027 3,353 Thereafter 15,809 $ 44,336 The discounted present value of the future lease cash payments resulted in a lease liability of $ 39,752,000 and $ 25,581,000 as of December 31, 2022 and 2021, respectively. In December 2021, the Company entered into a lease for a 65,000 square-foot building in Southborough, Massachusetts for a term of ten years to serve as a new distribution center for customers in the Americas. The Company has the right and option to extend the term of this lease for an additional period of five years , commencing upon the expiration of the original ten-year term. This lease commenced during the first quarter of 2022, and therefore the Company recorded approximately $ 9,271,000 within "Operating lease assets" and "Operating lease liabilities" on the Consolidated Balance Sheets on the commencement date. The weighted-average discount rate was 3.3 % and 3.4 % for the leases outstanding as of December 31, 2022 and December 31, 2021, respectively. The weighted-average remaining lease term was 7.8 years and 5.1 years for the leases outstanding as of December 31, 2022 and 2021, respectively. Management closed eleven leased offices in 2020, prior to the end of their lease terms, as a part of a restructuring plan (refer to Note 23). The carrying value of the lease assets associated with these offices was reduced to zero , resulting in operating lease asset impairment charges of $ 3,427,000 in 2020 that are included in "Restructuring charges" on the Consolidated Statements of Operations. Remaining lease liability obligations associated with the early contract terminations totaled $ 765,000 and $ 1,717,000 as of December 31, 2022 and 2021, respectively, and are included in "Operating lease liabilities" on the Consolidated Balance Sheets. The Company did not record impairment charges related to operating lease assets in 2022 or 2021. The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant during a portion of 2020. This lease terminated prior to the end of its lease term during the second quarter of 2020, and the Company is now fully occupying this building for its operations. Annual rental income related to this lease totaled $ 77,000 in 2020. 53 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Amount Balance as of December 31, 2020 $ 244,078 Foreign exchange rate changes ( 2,365 ) Balance as of December 31, 2021 241,713 Acquisition of SAC Sirius Advanced Cybernetics GmbH (refer to Note 21) 2,359 Foreign exchange rate changes ( 1,442 ) Balance as of December 31, 2022 $ 242,630 For its 2022 annual analysis of goodwill, management elected to perform a qualitative assessment. Based on this assessment, management believes it is more likely than not that the fair value of the reporting unit exceeds its carrying value. The Company did not record impairment charges related to goodwill in 2022, 2021, or 2020. NOTE 9: Intangible Assets Intangible assets consisted of the following (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value Completed technologies $ 28,017 $ ( 17,744 ) $ 10,273 Customer relationships 5,838 ( 3,860 ) 1,978 Non-compete agreements 340 ( 177 ) 163 Balance as of December 31, 2022 $ 34,195 $ ( 21,781 ) $ 12,414 Gross Carrying Value Accumulated Amortization Net Carrying Value Completed technologies $ 24,217 $ ( 15,234 ) $ 8,983 Customer relationships 10,578 ( 7,891 ) 2,687 Non-compete agreements 710 ( 492 ) 218 Distribution networks 38,060 ( 38,060 ) — Trademarks 110 ( 110 ) — Balance as of December 31, 2021 $ 73,675 $ ( 61,787 ) $ 11,888 In connection with the acquisition of SAC Sirius Advanced Cybernetics GmbH ("SAC") in the fourth quarter of 2022 (refer to Note 21), the Company acquired completed technologies valued at $ 3,800,000 with an estimated useful life of 7 years. In 2022, the Company retired approximately $ 43,280,000 of intangible assets primarily related to distribution networks and customer relationships that were fully amortized and had a net carrying value of zero on the Consolidated Balance Sheets. The adverse impact of the COVID-19 pandemic on our business in 2020 triggered a review of long-lived assets, including intangible assets, for potential impairment during the second quarter of 2020. Based on this assessment, management concluded that certain of the Company's finite-lived intangible assets failed the recoverability test, and recorded impairment charges for these assets equal to the amount by which their carrying value exceeded their fair value. The Company also measured the fair value and recorded an impairment charge for its indefinite-lived intangible asset related to in-process technologies. The fair values were established, with the assistance of an outside valuation advisor, using the income approach based on a discounted cash flow model that estimated future revenue streams and expenses attributable to those revenue streams provided by management. 54 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This review resulted in intangible asset impairment charges totaling $ 19,571,000 in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab Co. Ltd. ("Sualab") as a result of the deteriorating global economic conditions from the COVID-19 pandemic. Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $ 10,070,000 , $ 5,900,000 , and $ 3,382,000 , respectively. In addition, customer relationships acquired from EnShape GmbH that had a gross carrying value of $ 447,000 and accumulated amortization of $ 228,000 on the measurement date were reduced to zero , resulting in an impairment charge of $ 219,000 . The Company did not record impairment charges related to intangible assets in 2022 or 2021. Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows (in thousands): Year Ended December 31, Amount 2023 $ 3,137 2024 2,623 2025 2,300 2026 1,995 2027 1,273 Thereafter 1,086 $ 12,414 NOTE 10: Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2022 2021 Deferred payments related to Sualab Co., Ltd. acquisition (1) $ 19,282 $ — Incentive compensation 18,554 37,917 Salaries and payroll taxes 8,121 8,519 Foreign retirement obligations 7,191 7,572 Vacation 5,847 4,686 Warranty obligations 4,375 5,427 Other 29,865 28,311 $ 93,235 $ 92,432 (1) The total consideration for the Company's 2019 acquisition of Sualab Co., Ltd. included deferred payments of $ 24,040,000 that may become payable in October 2023, contingent upon the continued employment of key talent. The deferred payments are being recorded as compensation expense over the four-year period, and the accrued balance was reclassified from "Other Liabilities" to "Accrued expenses" on the Consolidated Balance Sheets in the fourth quarter of 2022 when the liability became current. The changes in the warranty obligation were as follows (in thousands): Balance as of December 31, 2020 $ 5,406 Provisions for warranties issued during the period 3,256 Fulfillment of warranty obligations ( 3,235 ) Balance as of December 31, 2021 5,427 Provisions for warranties issued during the period 1,876 Fulfillment of warranty obligations ( 2,928 ) Balance as of December 31, 2022 $ 4,375 55 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Commitments and Contingencies As of December 31, 2022, the Company had outstanding purchase orders totaling $ 50,942,000 to procure inventory from various vendors, due in part to higher inventory purchases in response to global supply chain constraints. Certain of these purchase orders may be canceled by the Company, subject to cancellation penalties. These purchase commitments relate primarily to expected sales in 2023. A significant portion of the Company's outstanding inventory purchase orders as of December 31, 2022, as well as additional preauthorized commitments to procure strategic components based on the Company's expected customer demand, are placed with the Company's primary contract manufacturer for the Company's assembled products. The Company purchased $ 5,269,000 , $ 547,000 , and $ 1,311,000 in 2022, 2021, and 2020, respectively, of inventories as a result of the Company's obligation to purchase any non-cancelable and non-returnable components that have been purchased by the contract manufacturer with the Company's preauthorization, when these components have not been consumed within the period defined in the terms of the Company's agreement with this contract manufacturer. While the Company typically expects such purchased components to be used in future production of Cognex finished goods, these components are considered in the Company's reserve estimate for excess and obsolete inventory. Furthermore, the Company accrues for losses on commitments for the future purchase of non-cancelable and non-returnable components from this contract manufacturer at the time that circumstances, such as changes in demand, indicate that the value of the components may not be recoverable, the loss is probable, and management has the ability to reasonably estimate the amount of the loss. Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations. NOTE 12: Indemnification Provisions Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. The maximum potential amount of future payments the Company could be required to make under these provisions is unlimited. The Company has never incurred significant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is not material. In the ordinary course of business, the Company may accept standard limited indemnification provisions in connection with the sale of its products, whereby it indemnifies its customers for certain direct damages incurred in connection with third-party patent or other intellectual property infringement claims with respect to the use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these provisions is, in many, but not all instances, subject to fixed monetary limits. The Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is not material. In the ordinary course of business, the Company also accepts limited indemnification provisions from time to time, whereby it indemnifies customers for certain direct damages incurred in connection with bodily injury and property damage arising from the use of the Company’s products. Future payments the Company could be required to make under these provisions is generally recoverable under the Company’s insurance policies. As a result of this coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions, the Company believes the estimated fair value of these provisions is not material. NOTE 13: Derivative Instruments The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates. The Company enters into economic hedges utilizing foreign currency forward contracts with maturities that do not exceed approximately three months to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables. The gains and losses on these derivatives are intended to be offset by the changes in the fair value of the 56 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assets and liabilities being hedged. These economic hedges are not designated as hedging instruments for hedge accounting treatment. The Company had the following outstanding forward contracts (in thousands): December 31, 2022 December 31, 2021 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Euro 60,000 $ 64,174 65,000 $ 73,748 Mexican Peso 185,000 9,480 140,000 6,842 Chinese Renminbi 55,000 7,619 54,374 8,500 Japanese Yen 700,000 5,281 600,000 5,213 Hungarian Forint 1,590,000 4,238 1,355,000 4,155 British Pound 3,445 4,161 3,370 4,552 Canadian Dollar 1,730 1,278 1,480 1,167 Swiss Franc 1,120 1,218 — — Information regarding the fair value of the outstanding forward contracts was as follows (in thousands): Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Derivatives Not Designated as Hedging Instruments: Economic hedge forward contracts Prepaid expenses and other current assets $ 27 $ 39 Accrued expenses $ 479 $ 230 The following table summarizes the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands): Asset Derivatives Liability Derivatives December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Gross amounts of recognized assets $ 27 $ 39 Gross amounts of recognized liabilities $ 479 $ 230 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 27 $ 39 Net amount of liabilities presented $ 479 $ 230 Information regarding the effect of derivative instruments, net of the underlying exposure, on the consolidated financial statements was as follows (in thousands): Location in Financial Statements Year Ended December 31, 2022 2021 2020 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ 9,823 $ 4,262 $ ( 12,308 ) 57 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: Revenue Recognition The following table summarizes disaggregated revenue information by geographic area based on the customer's country of domicile (in thousands): Year Ended December 31, 2022 2021 2020 Americas $ 390,573 $ 435,220 $ 310,027 Europe 234,643 247,744 208,787 Greater China 227,447 200,135 168,287 Other Asia 153,427 153,999 123,919 $ 1,006,090 $ 1,037,098 $ 811,020 The following table summarizes disaggregated revenue information by revenue type (in thousands): Year Ended December 31, 2022 2021 2020 Standard products and services $ 848,153 $ 889,253 $ 674,830 Application-specific customer solutions 157,937 147,845 136,190 $ 1,006,090 $ 1,037,098 $ 811,020 Costs to Fulfill a Contract Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheets and amounted to $ 14,578,000 and $ 10,854,000 as of December 31, 2022 and 2021, respectively. Accounts Receivable, Contract Assets, and Contract Liabilities Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value. The Company maintains an allowance against its accounts receivable for credit losses. Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for primarily certain application-specific customer solutions contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition. The following table summarizes changes in the allowance for credit losses (in thousands): Amount Balance as of December 31, 2020 $ 831 Increases to the allowance for credit losses — Write-offs, net of recoveries ( 55 ) Foreign exchange rate changes — Balance as of December 31, 2021 776 Increases to the allowance for credit losses 191 Write-offs, net of recoveries ( 237 ) Foreign exchange rate changes — Balance as of December 31, 2022 $ 730 58 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the deferred revenue and customer deposits activity (in thousands): Amount Balance as of December 31, 2020 $ 21,274 Deferral of revenue billed in the current period, net of recognition 31,907 Recognition of revenue deferred in prior period ( 17,403 ) Foreign exchange rate changes ( 35 ) Balance as of December 31, 2021 35,743 Deferral of revenue billed in the current period, net of recognition 39,076 Recognition of revenue deferred in prior period ( 31,520 ) Foreign exchange rate changes ( 2,512 ) Balance as of December 31, 2022 $ 40,787 As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year. NOTE 15: Shareholders’ Equity Preferred Stock The Company has 400,000 shares of authorized but unissued $ .01 par value preferred stock. Common Stock On April 25, 2018, the Company's shareholders approved an amendment to the Company's Articles of Organization to increase the authorized number of shares of $ .002 par value common stock from 200,000,000 to 300,000,000 . In addition, on April 25, 2018, the Company's shareholders approved an amendment and restatement of the Company's 2001 General Stock Option Plan which provides for an increase in the number of available shares by 10,000,000 . Each outstanding share of common stock entitles the record holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are also entitled to dividends when and if declared by the Company’s Board of Directors. Stock Repurchases 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, 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, 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. 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. 59 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dividends The Company’s Board of Directors declared and paid cash dividends of $ 0.055 per share in the first, second, and third quarters of 2020, $ 0.060 per share in the fourth quarter of 2020 and in the first, second, and third quarters of 2021, and $ 0.065 per share in the fourth quarter of 2021 and in the first, second, and third quarters of 2022. The dividend was increased to $ 0.070 per share in the fourth quarter of 2022. Also, in the fourth quarter of 2020, an additional special cash dividend of $ 2.00 per share was declared and paid. 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 such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations. NOTE 16: Stock-Based Compensation Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options, restricted stock units ("RSUs"), and performance restricted stock units ("PRSUs"). As of December 31, 2022, the Company had 13,746,000 shares available for grant under its stock plans. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four or five years based on continuous employment and expire ten years from the grant date. RSUs generally vest upon three or four years of continuous employment or incrementally over such three or four year periods. PRSUs generally vest upon three years of continuous employment and achievement of performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Participants are not entitled to dividends on stock options, RSUs, or PRSUs. Stock Options The following table summarizes the Company’s stock option activity: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 7,610 $ 49.38 Granted 1,418 59.63 Exercised ( 365 ) 33.58 Forfeited or expired ( 196 ) 58.90 Outstanding as of December 31, 2022 8,467 $ 51.56 6.13 $ 31,327 Exercisable as of December 31, 2022 4,596 $ 44.71 4.94 $ 31,025 Options vested or expected to vest as of December 31, 2022 (1) 8,038 $ 51.10 6.01 $ 31,224 (1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options. The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Year Ended December 31, 2022 2021 2020 Risk-free rate 2.2 % 1.3 % 1.4 % Expected dividend yield 0.44 % 0.27 % 0.41 % Expected volatility 37 % 39 % 37 % Expected term (in years) 5.5 6.0 6.0 60 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Risk-free rate The risk-free rate was based on a treasury instrument whose term was consistent with the contractual term of the option. Expected dividend yield Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date. Expected volatility The expected volatility was based on a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock. Expected term The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. The weighted-average grant-date fair value of stock options granted was $ 21.39 in 2022, $ 33.79 in 2021, and $ 19.62 in 2020. The total intrinsic value of stock options exercised was $ 8,424,000 in 2022, $ 80,369,000 in 2021, and $ 166,796,000 in 2020. The total fair value of stock options vested was $ 41,497,000 in 2022, $ 45,328,000 in 2021, and $ 45,998,000 in 2020. Restricted Stock Units (RSUs) The following table summarizes the Company's RSUs activity: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2021 823 $ 65.26 Granted 715 58.06 Vested ( 192 ) 61.96 Forfeited or expired ( 77 ) 64.65 Nonvested as of December 31, 2022 1,269 $ 61.74 The fair value of RSUs is determined based on the observable market price of the Company's stock on the grant date less the present value of expected future dividends. The weighted-average grant-date fair value of RSUs granted was $ 58.06 in 2022, $ 87.03 in 2021, and $ 52.09 in 2020. There were 192,000 RSUs that vested in 2022, 16,000 RSUs that vested in 2021, and no RSUs that vested in 2020. Performance Restricted Stock Units (PRSUs) The following table summarizes the Company's PRSUs activity: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2021 — $ — Granted 33 62.49 Vested — — Forfeited or expired — — Nonvested as of December 31, 2022 33 $ 62.49 No PRSUs were granted or vested during the years ended December 31, 2021 and December 31, 2020. The fair value of PRSUs is calculated using a Monte Carlo simulation model to estimate the probability of satisfying the service and market conditions stipulated in the award grant. 61 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation Expense The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently applies an estimated annual forfeiture rate of 7 % to stock-based awards for senior management and a rate of 12 % for all other employees. Each year during the first quarter, the Company revises its forfeiture rate based on updated estimates of employee turnover. This resulted in an increase to compensation expense of $ 1,536,000 in 2022, a decrease to compensation expense of $ 255,000 in 2021, and an increase to compensation expense of $ 1,787,000 in 2020. As of December 31, 2022, total unrecognized compensation expense, net of estimated forfeitures, related to non-vested stock-based awards, including stock options, RSUs, and PRSUs, was $ 56,694,000 , which is expected to be recognized over a weighted-average period of 1.51 years. The total stock-based compensation expense and the related income tax benefit recognized was $ 54,505,000 and $ 9,540,000 , respectively, in 2022, $ 43,774,000 and $ 6,764,000 , respectively, in 2021, and $ 42,661,000 and $ 6,569,000 , respectively, in 2020. Stock-based compensation expense recognized in 2020 included credits of $ 1,401,000 relating to grants cancelled as a result of the Company's workforce reduction in the second quarter of 2020. No compensation expense was capitalized in 2022, 2021, or 2020. The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands): Year Ended December 31, 2022 2021 2020 Cost of revenue $ 2,016 $ 1,345 $ 1,365 Research, development, and engineering 17,693 13,535 13,387 Selling, general, and administrative 34,796 28,894 27,909 $ 54,505 $ 43,774 $ 42,661 NOTE 17: Employee Savings Plan Under the Company's Employee Savings Plan, a defined contribution plan, all U.S. employees who have attained age 21 may contribute up to 100 % of their pay on a pre-tax basis under the Company's Employee Savings Plan, subject to the annual dollar limitations established by the Internal Revenue Service ("IRS"). The Company matches 50 % of the first 6 % of pay an employee contributes. Company contributions vest 25 %, 50 %, 75 %, and 100 % after one, two, three, and four years of continuous employment with the Company, respectively. Company contributions totaled $ 3,284,000 in 2022, $ 2,898,000 in 2021, and $ 2,636,000 in 2020. Cognex stock is not an investment alternative and Company contributions are not made in the form of Cognex stock. NOTE 18: Income Taxes Domestic income before taxes was $ 48,546,000 in 2022, $ 121,729,000 in 2021, and $ 39,425,000 in 2020. Foreign income before taxes was $ 202,149,000 in 2022, $ 197,171,000 in 2021, and $ 147,486,000 in 2020. Income tax expense consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Current: Federal $ 48,355 $ 27,870 $ 160 State 5,689 5,372 921 Foreign 10,243 8,406 13,197 64,287 41,648 14,278 Deferred: Federal ( 40,772 ) ( 19,266 ) ( 18,266 ) State ( 8,354 ) ( 769 ) ( 556 ) Foreign 20,009 17,406 15,269 ( 29,117 ) ( 2,629 ) ( 3,553 ) $ 35,170 $ 39,019 $ 10,725 62 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the U.S. federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows: Year Ended December 31, 2022 2021 2020 Income tax expense at U.S. federal statutory corporate tax rate 21 % 21 % 21 % State income taxes, net of federal benefit 2 1 1 Foreign tax rate differential ( 7 ) ( 5 ) ( 6 ) Tax credit ( 1 ) ( 2 ) ( 1 ) Discrete tax benefit related to employee stock options — ( 3 ) ( 7 ) Discrete tax expense related to tax return filings 2 ( 1 ) ( 5 ) Discrete tax benefit related to a rate revaluation on state tax assets ( 2 ) — — Discrete tax benefit related to GILTI adjustments ( 3 ) — — Discrete tax expense related to international tax reserves 1 — 1 Discrete tax benefit for audit settlements ( 1 ) — — Discrete tax benefit for release of valuation allowance ( 1 ) — — Limitation on executive compensation 1 — 1 Other 2 1 1 Income tax expense 14 % 12 % 6 % Tax Reserves The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands): Balance of reserve for income taxes as of December 31, 2020 $ 13,952 Gross amounts of decreases in unrecognized tax benefits as a result of tax positions taken in prior periods ( 280 ) Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods 100 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period 525 Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations ( 485 ) Balance of reserve for income taxes as of December 31, 2021 13,812 Gross amounts of decreases in unrecognized tax benefits as a result of tax positions taken in prior periods ( 119 ) Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods 2,850 Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period 505 Gross amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities ( 2,329 ) Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations ( 1,072 ) Balance of reserve for income taxes as of December 31, 2022 $ 13,647 The Company’s reserve for income taxes, including gross interest and penalties, was $ 15,866,000 and as of December 31, 2022, which is classified as a non-current liability. The Company's reserve for income taxes, including interest and penalties, was $ 15,808,000 as of December 31, 2021, which included $ 14,780,000 classified as a non-current liability and $ 1,028,000 recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was $ 2,219,000 and $ 1,996,000 as of December 31, 2022 and 2021, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $ 1,000,000 to $ 1,500,000 over the next twelve months. 63 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Korea and within the United States, Massachusetts. The statutory tax rate is 12.5 % in Ireland, 25 % in China, and 21.5 % in Korea, compared to the U.S. federal statutory corporate tax rate of 21 %. These differences resulted in a favorable impact to the effective tax rate of 7 percentage points for 2022, 5 percentage points for 2021, and 6 percentage points for 2020. Management has determined that earnings from its legal entity in China will be indefinitely reinvested to provide local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested. Within the United States, the tax years 2019 through 2021 remain open to examination by the Internal Revenue Service ("IRS") and various state taxing authorities. The tax years 2017 through 2021 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. During 2022 the Company settled IRS audits for the tax years 2017 and 2018 which resulted in a net discrete tax benefit. Additionally, the Company is under audit by the Commonwealth of Massachusetts for the amended returns filed for tax years 2017 and 2018. Management believes the Company is adequately reserved for these audits. The final determination of tax audits could result in favorable or unfavorable changes in our estimates. Any reserves associated with this audit period will not be released until the issue is settled or the audit is concluded. Interest and penalties included in income tax expense were $ 229,000 , $ 281,000 , and $ 340,000 in 2022, 2021, and 2020, respectively. Cash paid for income taxes totaled $ 57,016,000 in 2022, $ 49,435,000 in 2021, and $ 33,695,000 in 2020. Deferred Tax Assets and Liabilities The tax effects of temporary differences and attributes that give rise to deferred income tax assets and liabilities as of December 31, 2022 and December 31, 2021 were as follows (in thousands): December 31, 2022 2021 Deferred tax assets: Intangible asset in connection with change in tax structure 386,221 $ 404,526 Stock-based compensation expense 21,962 15,279 Federal and state tax credit carryforwards 8,284 11,051 Inventory and revenue related 8,117 7,426 Bonuses, commissions, and other compensation 5,116 7,263 Depreciation 2,119 5,395 Foreign net operating losses 53 751 Capitalization of R&D expenses 16,889 — Other 15,102 9,023 Total deferred tax assets 463,863 460,714 Valuation allowance ( 7,661 ) ( 8,188 ) $ 456,202 $ 452,526 Deferred tax liabilities: GILTI tax basis differences in connection with change in tax structure $ ( 298,922 ) $ ( 327,725 ) Net deferred taxes $ 157,280 $ 124,801 Change in Tax Structure and Global Intangible Low-Taxed Income Tax In 2019, the Company made changes to its international tax structure due to legislation by the European Union regarding low tax structures that resulted in an intercompany sale of intellectual property. As a result, the Company recorded an associated deferred tax asset of $ 437,500,000 in Ireland based on the fair value of the intellectual property that is being realized over 15 years as future tax deductions. From a United States perspective, the sale was disregarded, and any future deductions claimed in Ireland are added back to taxable income as part of Global Intangible Low-Taxed Income ("GILTI") minimum tax. The Company recorded an associated deferred tax liability of $ 350,000,000 , representing the GILTI minimum tax related to the fair value of the intellectual property. Management 64 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expects an immaterial impact on its current effective tax rate excluding discrete items in future years as a result of this change. Other Deferred Tax Assets and Liabilities At December 31, 2022, the Company recorded a deferred tax asset resulting from the capitalization of research and development expenditures. Beginning in 2022, the Tax Cuts and Jobs Act eliminates the option to currently deduct research and development expenditures in the period incurred and requires taxpayers to capitalize and amortize such expenditures over five or fifteen years, as applicable, pursuant to Section 174 of the Internal Revenue Code. At December 31, 2022, the Company had foreign net operating loss carryforwards of $ 180,000 , state tax credit carryforwards of $ 6,050,000 , and foreign tax credit carryforwards of $ 2,234,000 . At December 31, 2022, the Company had a valuation allowance for state research and development tax credits of $ 6,869,000 that was not considered to be realizable. Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future state income tax liabilities. As of December 31, 2022, the Company had state research and development tax credit carryforwards of $ 7,658,000 , which will begin to expire for the 2032 tax return. While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to current operations in the period of determination. NOTE 19: Weighted Average Shares Weighted-average shares were calculated as follows (in thousands): Year Ended December 31, 2022 2021 2020 Basic weighted-average common shares outstanding 173,407 176,463 173,489 Effect of dilutive stock awards 1,462 3,453 3,103 Diluted weighted-average common and common-equivalent shares outstanding 174,869 179,916 176,592 Stock options to purchase 4,715,104 , 497,504 , and 4,371,194 shares of common stock, on a weighted-average basis, were outstanding in 2022, 2021, and 2020, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Restricted stock units totaling 26,079 , 605 , and 3,826 shares of common stock, on a weighted-average basis, were outstanding in 2022, 2021, and 2020, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. No PRSUs were excluded in the calculation of dilutive net income per share in 2022, 2021, and 2020 as PRSUs were not anti-dilutive on a weighted-average basis. 65 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20: Segment and Geographic Information The Company operates in one segment, machine vision technology. The Company has a single, company-wide management team that administers operations as a whole rather than as discrete operating segments. The Company’s chief operating decision maker is the chief executive officer, who makes decisions to allocate resources and assesses performance at the corporate level, without regard to geography, legal entity, or end market. The Company offers a variety of machine vision products that have similar economic characteristics, have the same production processes, and are distributed by the same sales channels to the same types of customers. The following table summarizes information about geographic areas (in thousands): United States Europe Greater China Other Total Year Ended December 31, 2022 Revenue $ 343,835 $ 234,643 $ 227,447 $ 200,165 $ 1,006,090 Long-lived assets 66,928 14,725 1,334 3,370 $ 86,357 Year Ended December 31, 2021 Revenue $ 393,690 $ 247,744 $ 200,135 $ 195,529 $ 1,037,098 Long-lived assets 63,141 16,982 960 3,705 $ 84,788 Year Ended December 31, 2020 Revenue $ 280,205 $ 208,787 $ 168,287 $ 153,741 $ 811,020 Long-lived assets 60,911 20,014 1,278 4,764 $ 86,967 Revenue is presented geographically based on the customer’s country of domicile. Revenue from a single customer accounted for 11 %, 17 %, and 14 % of total revenue in 2022, 2021, and 2020, respectively. Accounts receivable from this same customer accounted for 15 % of total accounts receivable as of December 31, 2021. Accounts receivable from this customer was not greater than 10% of total accounts receivable as of December 31, 2022. Revenue from a second customer accounted for 11 % and 13 % of total revenue in 2022 and 2020. Revenue from this customer was not greater than 10% of total revenue in 2021. Accounts receivable from this same customer accounted for 11 % of total accounts receivable as of December 31, 2021. Accounts receivable from this customer was not greater than 10% of total accounts receivable as of December 31, 2022. NOTE 21: Business Acquisitions SAC Sirius Advanced Cybernetics GmbH 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 its growth trajectory with electric vehicle battery manufacturers. The purchase price of the acquisition was not material to the Company's consolidated financial statements. Sualab Co., Ltd. On October 16, 2019, the Company acquired all the outstanding shares of Sualab Co., Ltd. ("Sualab"), a provider of deep learning-based vision software for industrial image analysis based in Korea. The total consideration of $ 193,638,000 included cash payments of $ 170,602,000 upon closing. In the fourth quarter of 2020, the Company recorded a credit to goodwill in the amount of $ 1,004,000 representing a purchase price adjustment. The remaining consideration consists of deferred payments of $ 24,040,000 that may become payable in October 2023, contingent upon the continued employment of key talent, and is being recorded as compensation expense over the four-year period. Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of long-lived assets for potential impairment in the second quarter of 2020. This review resulted in intangible asset impairment charges totaling $ 19,571,000 in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab. Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $ 10,070,000 , $ 5,900,000 , and $ 3,382,000 , respectively. 66 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22: 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 primarily Cognex-owned inventory that was destroyed or deemed to have a net realizable value of zero, $ 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. After considering all the relevant events and circumstances resulting from the fire, management does not believe that the carrying value of the Company exceeds its fair value, or that the carrying amount of the Company’s intangible assets may not be recoverable. As such, no goodwill or intangible asset impairment charges were recorded during 2022 as a result of the fire. NOTE 23: Restructuring Charges December 2022 Restructuring In December 2022, following its acquisition of SAC (refer to Note 21), 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 included a workforce reduction of 18 employees and the termination of certain operating lease contracts, and resulted in charges of $ 1,657,000 in 2022. These charges are included in “Restructuring charges” on the Consolidated Statements of Operations. 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. The following table summarizes the restructuring charges for the year ended December 31, 2022 (in thousands): Amount One-time termination benefits $ 1,584 Contract termination costs 73 $ 1,657 67 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the activity in the Company’s restructuring reserve related to the December 2022 Restructuring, which is included in “Accrued expenses” on the Consolidated Balance Sheets (in thousands): One-time Termination Benefits Contract Termination Costs Total Balance as of December 31, 2021 $ — $ — $ — Restructuring charges 1,584 73 1,657 Cash payments ( 646 ) — ( 646 ) Foreign exchange rate changes 26 2 28 Balance as of December 31, 2022 $ 964 $ 75 $ 1,039 May 2020 Restructuring On May 26, 2020, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs, optimize its business model, and address the impact of the COVID-19 pandemic. The restructuring plan included a global workforce reduction of approximately 8 % and office closures. The Company recorded restructuring charges from these actions totaling $ 15,924,000 in 2020 which are included in “Restructuring charges” on the Consolidated Statements of Operations. As of December 31, 2020, the majority of these actions were completed and no additional charges are expected to be incurred in future periods in relation to this restructuring plan. There were no restructuring charges recognized in 2022 or 2021 related to this restructuring plan. The following table summarizes the restructuring charges for the year ended December 31, 2020 (in thousands): Amount One-time termination benefits $ 10,159 Contract termination costs 5,207 Other associated costs 558 $ 15,924 One-time termination benefits included severance, health insurance, and outplacement services for 181 employees who were either terminated during the second quarter of 2020, or were notified during the second quarter of 2020 that they would be terminated at a future date. For employees not required to render service beyond a minimum retention period, the one-time termination benefits were recognized in the second quarter of 2020. Otherwise, these benefits, including retention bonuses for selected employees, were recognized over the remaining service period which was completed by December 31, 2020. Contract termination costs included operating lease asset impairment charges for eleven offices closed prior to the end of the contractual lease term. These costs also included the write-off of leasehold improvements and other equipment related to these abandoned offices that had no alternative use, as well as other associated operating costs, such as utilities, that the Company is obligated to pay for the remainder of the lease term. These contract termination costs were primarily recognized in the second quarter of 2020 when the Company ceased using the property for economic benefit. Other associated costs primarily included legal fees related to the employee termination actions, which were recognized when the services were performed. 68 Table of Contents COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the activity in the Company’s restructuring reserve related to the May 2020 Restructuring, which is included in “Accrued expenses” on the Consolidated Balance Sheets (in thousands): One-time Termination Benefits Contract Termination Costs Other Associated Costs Total Balance as of December 31, 2020 $ 1,624 $ 750 $ 15 $ 2,389 Cash payments ( 1,142 ) ( 227 ) ( 15 ) ( 1,384 ) Foreign exchange rate changes — ( 7 ) — ( 7 ) Balance as of December 31, 2021 482 516 — 998 Cash payments ( 482 ) ( 265 ) — ( 747 ) Foreign exchange rate changes — ( 6 ) — ( 6 ) Balance as of December 31, 2022 $ — $ 245 $ — $ 245 NOTE 24: Subsequent Events On February 16, 2023, the Company's Board of Directors declared a cash dividend of $ 0.070 per share. The dividend is payable March 17, 2023 to all shareholders of record as of the close of business on March 3, 2023. 69 Table of Contents COGNEX CORPORATION – SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS Additions Description Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions Other Balance at End of Period (In thousands) Allowance for Credit Losses on Accounts Receivable: 2022 $ 776 $ 191 $ — $ ( 237 ) (1) $ — (2) $ 730 2021 $ 831 $ — $ — $ ( 55 ) (1) $ — (2) $ 776 2020 $ 530 $ 600 $ — $ ( 300 ) (1) $ 1 (2) $ 831 Reserve for Sales Returns: 2022 $ 1,518 $ — $ — $ — (1) $ — (2) $ 1,518 2021 $ 1,291 $ — $ 227 $ — (1) $ — (2) $ 1,518 2020 $ 1,291 $ — $ — $ — (1) $ — (2) $ 1,291 Deferred Tax Valuation Allowance: 2022 $ 8,188 $ 2,234 $ 3,889 $ ( 6,650 ) $ — $ 7,661 2021 $ 8,568 $ 1,420 $ — $ ( 1,800 ) $ — $ 8,188 2020 $ 7,312 $ 1,256 $ — $ — $ — $ 8,568 (1) Specific write-offs (2) Foreign currency exchange rate changes 70 Table of Contents ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on accounting or financial disclosure during 2022 or 2021.