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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-03 · 142 added, 144 removed, 55 unchanged (84% of the section changed)

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

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

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

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

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

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

Such risks and uncertainties include:

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

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

(2) the expected impact of the fire at our primary contract manufacturer's plant and related recoveries;

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

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

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

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

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

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

(10) information security breaches;

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

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

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

(18) exposure to additional tax liabilities;

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

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

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

(22) economic, political, and other risks associated with international sales and operations, including the impact of the war in Ukraine;

and (23) our involvement in time-consuming and costly litigation.

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

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

(26) stock price volatility;

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

The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as updated by Part II - Item 1A of this Quarterly Report on Form 10-Q.

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Executive Overview

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

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

We are a leading global provider of machine vision products and solutions that improve efficiency and quality in high-growth potential businesses across attractive industrial end markets.

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

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

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

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

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

Machine vision is used in a variety of industries where technology is widely recognized as an important component

of automated production, distribution, and quality assurance.

Virtually every manufacturer or distributor can achieve better quality and efficiency by using machine vision;

thus, our applications have a broad base of customers across a variety of industries, including automotive, logistics, consumer electronics, medical-related, semiconductor, consumer products, food and beverage, and others.

Revenue for the first quarter of 2023 totaled $201,124,000, representing a decrease of 29% from the first quarter of 2022.

The decrease was driven by three primary factors:

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

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

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

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

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

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

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

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

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

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

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

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

(i) lower revenue from the logistics industry primarily as a result of the continued pause in investments by a few large e-commerce customers;

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

and (iii) slower spending trends across our broader factory automation business.

Gross margin as a percentage of revenue was 71% for the first quarter of 2023 compared to 72% for the first quarter of 2022.

The decrease in gross margin was due to reduced cost efficiencies from the lower sales volume, a less favorable revenue mix, and the unfavorable effect of foreign currency exchange rates on revenue, partially offset by lower inventory costs.

Operating expenses for the first quarter of 2023 totaled $121,579,000, representing an increase of 4% from the first quarter of 2022.

The increase was primarily driven by additional headcount to support our "Emerging Customer" sales initiative and annual merit increases provided to employees.

These higher expenses were offset by lower incentive compensation and the favorable impact of foreign currency exchange rate changes on expenses.

As a result of the lower revenue level, operating income declined to 11% of revenue for the first quarter of 2023 as compared to 31% of revenue for the first quarter of 2022.

Tax expense decreased from the first quarter of 2022 as a result of lower operating income and a more favorable impact from discrete tax items.

Net income declined to 13% of revenue, or $0.15 per diluted share, for the first quarter of 2023 from 24% of revenue, or $0.38 per diluted share, for the first quarter of 2022.

Results of Operations

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

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

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

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

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

Revenue for the first quarter of 2023 totaled $201,124,000, representing a decrease of $81,283,000, or 29%, from the first quarter of 2022.

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in the first quarter of 2023 as compared to the same quarter in 2022.

Excluding the impact of foreign currency exchange rate changes, revenue decreased 26%.

The largest factor contributing to the year-over-year decrease in total revenue was a decline in logistics revenue primarily as a result of the continued pause in investments by a few large e-commerce customers.

Slower spending trends across our broader factory automation business further contributed to the decrease in revenue, including in the consumer electronics, automotive, semiconductor, and medical-related industries.

Additionally, revenue for the first quarter of 2022 benefited from incremental revenue from backlog orders that were requested to ship in the fourth quarter of 2021, but were delayed into the first quarter of 2022 due to global supply chain conditions.

The following table sets forth our disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue.

Three-months Ended

April 2, 2023 April 3, 2022 $ Change % Change

Americas $ 80,442 $ 126,658 $ (46,216) (36)%

Percentage of total revenue 40 % 45 %

Europe $ 59,842 $ 62,792 $ (2,950) (5)%

Percentage of total revenue 30 % 22 %

Greater China $ 33,172 $ 48,406 $ (15,234) (31)%

Percentage of total revenue 16 % 17 %

Other Asia $ 27,668 $ 44,551 $ (16,883) (38)%

Percentage of total revenue 14 % 16 %

Total revenue $ 201,124 $ 282,407 $ (81,283) (29)%

Changes in revenue from a geographic perspective were as follows:

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

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

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

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

Dollars at a lower rate.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Revenue from customers based in the Americas decreased from the prior year comparable quarter by 36%.

The decrease was primarily driven by lower revenue from customers in the logistics industry.

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

Changes in foreign currency exchange rates resulted in a lower level of reported revenue in the first quarter of 2023.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Europe was flat with the first quarter of 2022.

On both a U.S.

GAAP and constant-currency basis, decreases in logistics revenue were largely offset by revenue increases in other industries, most notably automotive.

• Revenue from customers based in Greater China decreased from the prior year comparable quarter by 31%.

Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Greater China decreased by 25% from the first quarter of 2022.

On both a U.S.

GAAP and constant-currency basis, the decline was primarily driven by a decrease in revenue from customers in the consumer electronics industry.

• Revenue from customers based in other countries in Asia decreased from the prior year comparable quarter by 38%.

Excluding the impact of foreign currency exchange rate changes, revenue decreased by 32%.

On both a U.S.

GAAP and constant-currency basis, the decrease resulted from broad-based declines in revenue from customers across multiple industries.

The following table sets forth our gross margin (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue.

Three-months Ended

April 2, 2023 April 3, 2022 $ Change % Change

Gross margin $ 143,740 $ 203,617 $ (59,877) (29) %

Percentage of total revenue 71 % 72 %

Gross margin as a percentage of revenue was 71% for the first quarter of 2023 compared to 72% for the first quarter of 2022.

The decrease in gross margin was due to reduced cost efficiencies from the lower sales volume, a less favorable revenue mix, and the unfavorable effect of foreign currency exchange rates on revenue.

This decrease was partially offset by lower inventory costs due to a reduction in premiums paid to brokers for the purchase of components in response to global supply chain constraints.

Operating Expenses

The following table sets forth our operating expenses (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue.

Three-months Ended

April 2, 2023 April 3, 2022 $ Change % Change

Research, development, and engineering expenses $ 38,542 $ 36,054 $ 2,488 7 %

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

Three-month period Nine-month period

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

Personnel-related costs 2,535 6,117

Stock-based compensation expense 1,282 2,776

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

Foreign currency exchange rate changes (1,905) (4,063)

Other 186 3,283

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

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

Stock-based compensation expense was

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

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

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

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

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

Percentage of total revenue 19 % 13 %

Selling, general, and administrative expenses $ 83,037 $ 80,835 $ 2,202 3 %

Percentage of total revenue 41 % 29 %

Total operating expenses $ 121,579 $ 116,889 $ 4,690 4 %

Percentage of total revenue 60 % 41 %

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses increased $2,488,000, or 7%, from the first quarter of 2022.

This increase was primarily driven by personnel-related costs as a result of headcount additions to support new product initiatives and compensation increases provided to employees as part of our annual merit process, as well as increases in stock-based compensation expense.

These increases were partially offset by lower incentive compensation expenses than the prior year, primarily due to lower revenue and a timing difference in bonus expense recognition.

Foreign currency exchange rate changes further offset increases to total RD&E expenses, as costs denominated in foreign currencies were translated into U.S.

Dollars at a lower rate.

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

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

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

RD&E expenses as a percentage of revenue were 19% for the first quarter of 2023, compared to 13% for the first quarter of 2022.

The increase in RD&E as a percentage of revenue was primarily a result of lower revenue in the first quarter of 2023 as compared to the first quarter of 2022.

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

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

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

Selling, General, and Administrative Expenses

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

Three-month period Nine-month period

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

Personnel-related costs 5,977 19,814

Stock-based compensation expense 1,708 5,574

Travel expenses 1,675 4,631

Sales demonstration equipment (429) 637

Incentive compensation (6,977) (16,041)

Foreign currency exchange rate changes (4,275) (9,512)

Other 579 4,673

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

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

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

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

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

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

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

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

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

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

Selling, general, and administrative (SG&A) expenses increased $2,202,000, or 3%, from the first quarter of 2022.

SG&A expenses increased due to costs related to our “Emerging Customer” sales initiative, including primarily compensation for additional headcount, travel expenses, and sales demonstration equipment.

We launched this initiative towards the end of 2022 to broaden the reach of our sales force to customers who are relatively new to factory automation and have not fully realized the advantages of machine vision.

Unrelated to our "Emerging Customer" sales initiative, we also had higher personnel-related costs resulting from headcount additions and compensation increases provided to employees as part of our annual merit process.

Travel expenses also increased due to both the number of sales personnel added and a higher level of travel activity now that restrictions related to the COVID-19 pandemic have eased or been eliminated.

These increases were partially offset by lower incentive compensation expenses than the prior year, which included sales commissions and incentive bonuses, primarily due to lower revenue and a timing difference in bonus expense recognition.

Foreign currency exchange rate changes further offset increases to total SG&A expenses, as costs denominated in foreign currencies were translated into U.S.

Dollars at a lower rate.

Loss from Fire

On June 7, 2022, the Company’s primary contract manufacturer experienced a fire at its plant in Indonesia.

The fire destroyed a significant amount of Cognex-owned consigned inventories, as well as component inventories owned by the contract manufacturer that were designated for Cognex products.

There was no significant damage to the Company's production equipment.

Since the date of the fire and continuing through the date of this report, the Company has worked with the contract manufacturer to assess the damage, resume production, and replenish inventories destroyed by the fire.

Additionally, beginning last year, the Company has been working to ramp up an additional contract manufacturer to further mitigate risk, diversify supply chain, and expand production capacity.

We expect this additional contract manufacturer to commence production later in the year.

As a result of the fire, the

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

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

Based on the provisions of the Company's insurance policies, the gross losses have been reduced by the estimated insurance proceeds expected to be received from the Company’s insurance carrier.

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

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

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

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

As of October 2, 2022 and through the date of financial statement issuance, management cannot yet estimate additional recoveries that could be available from the contract manufacturer.

Any future, additional recoveries in excess of recognized losses will be treated as gain contingencies and will be recognized when the gain is realized or realizable.

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

Non-operating Income (Expense)

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

The following table sets forth our non-operating income (expense) (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods.

Three-months Ended

April 2, 2023 April 3, 2022 $ Change % Change

Foreign currency gain (loss) $ 394 $ (444) $ 838 (189) %

Investment income $ 3,587 $ 1,468 $ 2,119 144 %

Other income (expense) $ 73 $ (48) $ 121 (252) %

Total non-operating income (expense) $ 4,054 $ 976 $ 3,078 315 %

The Company recorded foreign currency gains of $394,000 for the first quarter of 2023, and foreign currency losses of $444,000 for the first quarter of 2022.

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

Dollar, or its subsidiaries.

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

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

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

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

Income Tax Expense (Benefit)

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

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

Discrete tax items for the three-month and nine-month periods ended October 2, 2022 included (1) a decrease in tax expense during the three-month and nine-month periods ended October 2, 2022 of $928,000 and $3,368,000, respectively, arising from the impact of the loss from fire recorded (refer to Note 17), (2) an increase in tax expense of $1,417,000 arising from an Internal Revenue Service (IRS) audit recorded during the three-month period ended April 3, 2022, which was offset by a decrease in tax expense of $2,519,000 related to releases of reserves for income taxes due to the closure of this Internal Revenue Service (IRS) audit during the three-month period ended July 3, 2022, (3) an increase in tax expense of $1,734,000 to establish a full valuation allowance against deferred tax assets related to foreign tax credits during the three-month period ended April 3, 2022, (4) an increase in tax expense of $883,000 and $4,236,000 during the three-month and nine-month periods ended October 2, 2022, respectively, primarily consisting of transfer pricing and return-to-provision adjustments, and (5) a decrease in tax expense of $884,000 during both the three-month and nine-month periods ended October 2, 2022 related to the release of tax reserves due to closed periods.

Discrete tax items for the three-month and nine-month periods ended October 3, 2021 included a decrease in tax expense of $3,250,000 and $9,888,000, respectively, related to stock-based compensation, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost

recognized for financial reporting purposes from stock option exercises.

This impact was not material for the three-month and nine-month periods ended October 2, 2022.

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

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

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

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

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

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

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

Investment income for the first quarter of 2023 totaled $3,587,000, representing an increase of $2,119,000 from the first quarter of 2022.

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

The Company recorded other income of $73,000 for the first quarter of 2023 compared to other expense of $48,000 for the first quarter of 2022.

Income Tax Expense

The following table sets forth our effective income tax rate reconciliation (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods.

Three-months Ended

April 2, 2023 April 3, 2022 $ Change % Change

Income before income tax expense $ 26,215 $ 87,704 $(61,489) (70)%

Income tax expense $ 600 $ 20,371 $(19,771) (97)%

Effective income tax rate 2 % 23 %

The Company’s effective tax rate was 2% of pre-tax income in the first quarter of 2023, compared to 23% in the first quarter of 2022.

The decrease in effective tax rate primarily resulted from the impact of discrete tax items, including a decrease in tax reserves and a decrease in tax expense for adjustments to certain deferred tax assets, partially offset by an increase in tax expense related to stock-based compensation.

Excluding the impact of all discrete tax items, the Company’s effective tax rate was 16% of pre-tax income for both the first quarter of 2023 and 2022.

Liquidity and Capital Resources

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $817,632,000 as of October 2, 2022.

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

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

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

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

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

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

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

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

The Company expects to continue to make investments in its business systems intended to improve productivity or provide competitive advantages, although these investments are not expected to be material over the long term.

The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments to maintain the liquidity and safety of the investment portfolio.

As of April 2, 2023, the Company's portfolio of debt securities was in a net unrealized loss position of $19,530,000.

The Company currently does not intend to sell debt securities in an unrealized loss position to meet current liquidity needs as it has the ability and intention to hold these investments until full value recovery at maturity.

However, if the Company is required to sell these debt securities to meet future liquidity needs, for example, to acquire new businesses or technologies, it is prepared to sell these investments at a loss.

Three-months Ended

April 2, 2023 April 3, 2022

Net cash provided by (used in) operating activities $ 27,553 $ 49,517

Net cash provided by (used in) investing activities $ (5,788) $ 69,236

Net cash provided by (used in) financing activities $ (39,324) $ (138,114)

The Company’s cash requirements for the first quarter of 2023 consisted of operating activities, repurchases of common stock, dividend payments, capital expenditures, purchases of investments, and net payments from the issuance of common stock under stock plans.

Cash flows from operating activities totaled $27,553,000 for the three-month period ended April 2, 2023 compared to $49,517,000 for the three-month period ended April 3, 2022.

This decrease was primarily driven by lower net income resulting from the decrease in revenue year-over-year.

Cash outlays from operating activities in the first quarter of 2023 also consisted of incentive compensation payments that were earned and accrued in 2022.

Capital expenditures for the first quarter of 2023 totaled $5,507,000 and consisted primarily of continued investments in business systems related to the Company's sales process, manufacturing test equipment related to new product introductions, and leasehold improvements related to one of the Company's offices in Shanghai, China.

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

As of April 2, 2023, the Company had inventory purchase commitments of $47,486,000, with the majority payable during 2023, and lease payment obligations of $44,445,000, with $7,284,000 payable during 2023.

During 2023, we also expect significant cash outlays related to the Company's "Emerging Customer" sales initiative as we continue to grow our sales force in order to reach customers who may not be utilizing machine vision to its full potential.

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

Stock Repurchases

On March 3, 2022, the Company's Board of Directors authorized the repurchase of $500,000,000 of the Company's common stock.

As of October 2, 2022, the Company repurchased 2,737,000 shares at a cost of $200,000,000 under this program, including 1,677,000 shares at a cost of $117,000,000 during the first quarter of 2022, which completed purchases under this program.

On March 3, 2022, the Company's Board of Directors authorized the repurchase of an additional $500,000,000 of the Company's common stock.

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

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

During the three-month period ended April 2, 2023, the Company repurchased 479,000 shares at a total cost of $24,178,000 leaving a remaining balance of $388,508,000 under this March 2022 program as of April 2, 2023.

The Company may repurchase shares under stock repurchase programs as authorized by its Board of Directors in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock awards, stock price, share availability, and cash requirements.

The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions.

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

Dividend Payments

The Company’s Board of Directors declared and paid cash dividends of $0.070 per share in the first quarter of 2023.

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.

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

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

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

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

We believe that our balance sheet condition has put us in a strong position with respect to anticipated longer-term liquidity needs.

New Pronouncements

3 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis