COGNEX CORP 10-Q

ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three-months Ended April 2, 2023 April 3, 2022 (unaudited) Revenue $ 201,124 $ 282,407 Cost of revenue 57,384 78,790 Gross margin 143,740 203,617 Research, development, and engineering expenses 38,542 36,054 Selling, general, and administrative expenses 83,037 80,835 Operating income 22,161 86,728 Foreign currency gain (loss) 394 ( 444 ) Investment income 3,587 1,468 Other income (expense) 73 ( 48 ) Income before income tax expense 26,215 87,704 Income tax expense 600 20,371 Net income $ 25,615 $ 67,333 Net income per weighted-average common and common-equivalent share: Basic $ 0.15 $ 0.39 Diluted $ 0.15 $ 0.38 Weighted-average common and common-equivalent shares outstanding: Basic 172,624 174,146 Diluted 173,903 176,668 Cash dividends per common share $ 0.070 $ 0.065 The accompanying notes are an integral part of these consolidated financial statements. 3 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Three-months Ended April 2, 2023 April 3, 2022 (unaudited) Net income $ 25,615 $ 67,333 Other comprehensive income (loss), net of tax: Available-for-sale investments: Net unrealized gain (loss), net of tax of $ 1,858 and $( 4,036 ) in the three-month periods, respectively 5,426 ( 13,548 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations — 36 Net change related to available-for-sale investments 5,426 ( 13,512 ) Foreign currency translation adjustments: Foreign currency translation adjustments ( 359 ) ( 2,111 ) Net change related to foreign currency translation adjustments ( 359 ) ( 2,111 ) Other comprehensive income (loss), net of tax 5,067 ( 15,623 ) Total comprehensive income $ 30,682 $ 51,710 The accompanying notes are an integral part of these consolidated financial statements. 4 COGNEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) April 2, 2023 December 31, 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 164,171 $ 181,374 Current investments, amortized cost of $ 220,943 and $ 223,545 in 2023 and 2022, respectively, allowance for credit losses of $ 0 in 2023 and 2022 216,703 218,759 Accounts receivable, allowance for credit losses of $ 1,001 and $ 730 in 2023 and 2022, respectively 144,154 125,417 Unbilled revenue 2,354 2,179 Inventories 127,147 122,480 Prepaid expenses and other current assets 67,634 67,490 Total current assets 722,163 717,699 Non-current investments, amortized cost of $ 478,329 and $ 476,148 in 2023 and 2022, respectively, allowance for credit losses of $ 0 in 2023 and 2022 463,039 454,117 Property, plant, and equipment, net 81,274 79,714 Operating lease assets 37,769 37,682 Goodwill 242,041 242,630 Intangible assets, net 11,472 12,414 Deferred income taxes 409,583 407,241 Other assets 6,725 6,643 Total assets $ 1,974,066 $ 1,958,140 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 26,939 $ 27,103 Accrued expenses 83,527 93,235 Accrued income taxes 37,529 18,129 Deferred revenue and customer deposits 57,805 40,787 Operating lease liabilities 8,177 8,454 Total current liabilities 213,977 187,708 Non-current operating lease liabilities 31,389 31,298 Deferred income taxes 243,557 249,961 Reserve for income taxes 20,030 15,866 Non-current accrued income taxes 18,338 33,008 Other liabilities 444 1,905 Total liabilities 527,735 519,746 Commitments and contingencies (Note 10) Shareholders’ equity: Preferred stock, $ .01 par value – Authorized: 400 shares in 2023 and 2022, respectively; no shares issued and outstanding — — Common stock, $ .002 par value – Authorized: 300,000 shares in 2023 and 2022, respectively; issued and outstanding: 172,601 and 172,631 shares in 2023 and 2022, respectively 345 345 Additional paid-in capital 992,690 979,167 Retained earnings 517,526 528,179 Accumulated other comprehensive loss, net of tax ( 64,230 ) ( 69,297 ) Total shareholders’ equity 1,446,331 1,438,394 Total liabilities and shareholders' equity $ 1,974,066 $ 1,958,140 The accompanying notes are an integral part of these consolidated financial statements. 5 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three-months Ended April 2, 2023 April 3, 2022 (unaudited) Cash flows from operating activities: Net income $ 25,615 $ 67,333 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense 16,579 15,056 Depreciation of property, plant, and equipment 3,986 4,117 Amortization of intangible assets 942 840 Excess and obsolete inventory charges 788 379 Amortization of discounts or premiums on investments 700 1,402 Realized loss (gain) on sale of investments — 36 Change in deferred income taxes ( 10,656 ) ( 3,891 ) Change in operating assets and liabilities: Accounts receivable ( 18,455 ) ( 24,700 ) Unbilled revenue ( 173 ) 2,144 Inventories ( 5,338 ) ( 23,900 ) Prepaid expenses and other current assets 231 4,212 Accounts payable ( 192 ) 708 Accrued expenses ( 9,942 ) ( 28,718 ) Accrued income taxes 4,721 16,745 Deferred revenue and customer deposits 17,003 18,712 Other 1,744 ( 958 ) Net cash provided by operating activities 27,553 49,517 Cash flows from investing activities: Purchases of investments ( 46,480 ) ( 39,155 ) Maturities and sales of investments 46,199 112,976 Purchases of property, plant, and equipment ( 5,507 ) ( 4,585 ) Net cash provided by (used in) investing activities ( 5,788 ) 69,236 Cash flows from financing activities: Net payments from issuance of common stock under stock plans ( 3,055 ) 3,594 Repurchase of common stock ( 24,178 ) ( 130,405 ) Payment of dividends ( 12,091 ) ( 11,303 ) Net cash provided by (used in) financing activities ( 39,324 ) ( 138,114 ) Effect of foreign exchange rate changes on cash and cash equivalents 356 ( 1,031 ) Net change in cash and cash equivalents ( 17,203 ) ( 20,392 ) Cash and cash equivalents at beginning of period 181,374 186,161 Cash and cash equivalents at end of period $ 164,171 $ 165,769 The accompanying notes are an integral part of these consolidated financial statements. 6 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of December 31, 2022 172,631 $ 345 $ 979,167 $ 528,179 $ ( 69,297 ) $ 1,438,394 Net issuance of common stock under stock plans 449 1 ( 3,056 ) — — ( 3,055 ) Repurchase of common stock ( 479 ) ( 1 ) — ( 24,177 ) — ( 24,178 ) Stock-based compensation expense — — 16,579 — — 16,579 Payment of dividends ($ 0.070 per common share) — — — ( 12,091 ) — ( 12,091 ) Net income — — — 25,615 — 25,615 Net unrealized gain (loss) on available-for-sale investments, net of tax of $ 1,858 — — — — 5,426 5,426 Foreign currency translation adjustment — — — — ( 359 ) ( 359 ) Balance as of April 2, 2023 (unaudited) 172,601 $ 345 $ 992,690 $ 517,526 $ ( 64,230 ) $ 1,446,331 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Par Value Balance as of December 31, 2021 175,481 $ 351 $ 914,802 $ 562,882 $ ( 47,942 ) $ 1,430,093 Net issuance of common stock under stock plans 136 — 3,594 — — 3,594 Repurchase of common stock ( 1,879 ) ( 4 ) — ( 130,401 ) — ( 130,405 ) Stock-based compensation expense — — 15,056 — — 15,056 Payment of dividends ($ 0.065 per common share) — — — ( 11,303 ) — ( 11,303 ) Net income — — — 67,333 — 67,333 Net unrealized gain (loss) on available-for-sale investments, net of tax of $( 4,036 ) — — — — ( 13,548 ) ( 13,548 ) Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — 36 36 Foreign currency translation adjustment — — — — ( 2,111 ) ( 2,111 ) Balance as of April 3, 2022 (unaudited) 173,738 $ 347 $ 933,452 $ 488,511 $ ( 63,565 ) $ 1,358,745 The accompanying notes are an integral part of these consolidated financial statements. 7 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: Summary of Significant Accounting Policies As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles (GAAP). Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a full description of other significant accounting policies. In the opinion of the management of Cognex Corporation (the "Company"), the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, and financial statement reclassifications necessary to present fairly the Company’s financial position as of April 2, 2023, and the results of its operations for the three-month periods ended April 2, 2023 and April 3, 2022, and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented. The results disclosed in the Consolidated Statements of Operations for the three-month period ended April 2, 2023 are not necessarily indicative of the results to be expected for the full year. NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", (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. 8 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3: Fair Value Measurements Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of April 2, 2023 (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Money market instruments $ 3,618 $ — $ — Corporate bonds — 545,863 — Treasury bills — 61,112 — Asset-backed securities — 54,146 — Agency bonds — 16,038 — Sovereign bonds — 1,954 — Municipal bonds — 629 — Economic hedge forward contracts — 154 — Liabilities: Economic hedge forward contracts — 74 — The Company’s money market instruments are reported at fair value based upon the daily market price for identical assets in active markets, and are therefore classified as Level 1. The Company’s debt securities and forward contracts are reported at fair value based on model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. Management is responsible for estimating the fair value of these financial assets and liabilities, and in doing so, considers valuations provided by a large, third-party pricing service. For debt securities, this service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the daily valuations. The Company's forward contracts are typically traded or executed in over-the-counter markets with a high degree of pricing transparency. The market participants are generally large commercial banks. Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis Non-financial assets, such as property, plant and equipment, operating lease assets, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. The Company did not record impairment charges related to non-financial assets during the three-month periods ended April 2, 2023 or April 3, 2022. 9 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of the following (in thousands): April 2, 2023 December 31, 2022 Cash $ 160,553 $ 180,959 Money market instruments 3,618 415 Cash and cash equivalents 164,171 181,374 Corporate bonds 160,320 164,055 Asset-backed securities 31,265 26,890 Agency bonds 16,038 15,858 Treasury bills 8,451 11,332 Municipal bonds 629 624 Current investments 216,703 218,759 Corporate bonds 385,543 374,440 Treasury bills 52,661 44,214 Asset-backed securities 22,881 33,539 Sovereign bonds 1,954 1,924 Non-current investments 463,039 454,117 $ 843,913 $ 854,250 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 April 2, 2023 and December 31, 2022 were denominated in U.S. Dollars. Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 4,559,000 and $ 3,620,000 as of April 2, 2023 and December 31, 2022, respectively. The following table summarizes the Company’s available-for-sale investments as of April 2, 2023 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 163,537 $ 3 $ ( 3,220 ) $ 160,320 Asset-backed securities 32,016 — ( 751 ) 31,265 Agency bonds 16,148 — ( 110 ) 16,038 Treasury bills 8,607 — ( 156 ) 8,451 Municipal bonds 635 — ( 6 ) 629 Non-current: Corporate bonds 400,051 1,623 ( 16,131 ) 385,543 Treasury bills 52,290 489 ( 118 ) 52,661 Asset-backed securities 23,905 117 ( 1,141 ) 22,881 Sovereign bonds 2,083 — ( 129 ) 1,954 $ 699,272 $ 2,232 $ ( 21,762 ) $ 679,742 10 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 April 2, 2023 (in thousands): Unrealized Loss Position For: Less than 12 Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Corporate bonds $ 81,931 $ ( 1,098 ) $ 350,244 $ ( 18,253 ) $ 432,175 $ ( 19,351 ) Asset-backed securities 10,998 ( 213 ) 32,783 ( 1,679 ) 43,781 ( 1,892 ) Agency bonds — — 16,037 ( 110 ) 16,037 ( 110 ) Treasury bills 4,878 ( 117 ) 8,451 ( 157 ) 13,329 ( 274 ) Sovereign bonds — — 1,954 ( 129 ) 1,954 ( 129 ) Municipal bonds 629 ( 6 ) — — 629 ( 6 ) $ 98,436 $ ( 1,434 ) $ 409,469 $ ( 20,328 ) $ 507,905 $ ( 21,762 ) 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 April 2, 2023 or December 31, 2022. There was no activity recorded in the allowance for credit losses during the three-month periods ended April 2, 2023 or April 3, 2022. Management currently intends to hold these securities to full value recovery at maturity. The Company recorded no gross realized gains or gross realized losses on the sale of debt securities for the three-month period ended April 2, 2023. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $ 118,000 and $ 154,000 , respectively, for the three-month period ended April 3, 2022. 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. The following table presents the effective maturity dates of the Company’s available-for-sale investments as of April 2, 2023 (in thousands): <1 year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5-8 Years Total Corporate bonds $ 160,320 $ 166,170 $ 87,347 $ 63,241 $ 66,558 $ 2,227 $ 545,863 Treasury bills 8,451 3,414 15,156 17,837 16,254 — 61,112 Asset-backed securities 31,265 2,579 12,599 7,703 — — 54,146 Agency bonds 16,038 — — — — — 16,038 Sovereign bonds — 978 976 — — — 1,954 Municipal bonds 629 — — — — — 629 $ 216,703 $ 173,141 $ 116,078 $ 88,781 $ 82,812 $ 2,227 $ 679,742 NOTE 5: Inventories Inventories consisted of the following (in thousands): April 2, 2023 December 31, 2022 Raw materials $ 77,520 $ 71,720 Work-in-process 1,489 906 Finished goods 48,138 49,854 $ 127,147 $ 122,480 11 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6: Leases The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. Certain leases may contain options to extend or terminate the lease at the Company's sole discretion. As of April 2, 2023, there was one option to terminate and eighteen options to extend that were accounted for in the determination of the lease term for outstanding leases. Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index. There were no restrictions or covenants for outstanding leases as of April 2, 2023. The total operating lease expense for the three-month periods ended April 2, 2023 and April 3, 2022 were $ 2,392,000 and $ 2,229,000 , respectively. The total operating lease cash payments for the three-month periods ended April 2, 2023 and April 3, 2022 were $ 2,404,000 and $ 2,079,000 , respectively. The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability for the three-month periods ended April 2, 2023 and April 3, 2022 was $ 24,000 and $ 38,000 , respectively. Future operating lease cash payments are as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2023 $ 7,284 2024 7,530 2025 5,477 2026 4,221 2027 3,716 2028 3,448 Thereafter 12,769 $ 44,445 The discounted present value of the future lease cash payments resulted in a total lease liability of $ 39,566,000 and $ 39,752,000 as of April 2, 2023 and December 31, 2022, respectively. The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of April 2, 2023. 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 % for the leases outstanding as of both April 2, 2023 and December 31, 2022. The weighted-average remaining lease term was 7.6 and 7.8 years for the leases outstanding as of April 2, 2023 and December 31, 2022, respectively. NOTE 7: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Balance as of December 31, 2022 $ 242,630 Foreign exchange rate changes ( 589 ) Balance as of April 2, 2023 $ 242,041 12 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8: Intangible Assets Amortized intangible assets consisted of the following (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value Completed technologies $ 28,017 $ ( 18,492 ) $ 9,525 Customer relationships 5,838 ( 4,040 ) 1,798 Non-compete agreements 340 ( 191 ) 149 Balance as of April 2, 2023 $ 34,195 $ ( 22,723 ) $ 11,472 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 As of April 2, 2023, estimated future amortization expense related to intangible assets was as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2023 $ 2,195 2024 2,623 2025 2,300 2026 1,995 2027 1,273 2028 543 Thereafter 543 $ 11,472 NOTE 9: Warranty Obligations The Company records the estimated cost of fulfilling product warranties at the time of sale based upon historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or changes in circumstances impacting product quality become known that would not have been taken into account using historical data. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. An adverse change in any of these factors may result in the need for additional warranty provisions. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets. The changes in the warranty obligation were as follows (in thousands): Balance as of December 31, 2022 $ 4,375 Provisions for warranties issued during the period 527 Fulfillment of warranty obligations ( 828 ) Balance as of April 2, 2023 $ 4,074 13 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10: Commitments and Contingencies As of April 2, 2023, the Company had outstanding purchase orders totaling $ 47,486,000 to procure inventory from various vendors. Certain of these purchase orders may be canceled by the Company, subject to cancellation penalties. These purchase commitments relate primarily to expected sales in the next twelve months. A significant portion of the Company's outstanding inventory purchase orders as of April 2, 2023, as well as additional preauthorized commitments to procure strategic components based on the Company's expected customer demand, are placed with the Company's primary contract manufacturer for the Company's assembled products. The Company has the obligation to purchase any non-cancelable and non-returnable components that have been purchased by 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 11: Derivative Instruments The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates. The Company enters into economic hedges utilizing foreign currency forward contracts with maturities that do not exceed approximately three months to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables. The gains and losses on these derivatives are intended to be offset by the changes in the fair value of the assets and liabilities being hedged. These economic hedges are not designated as hedging instruments for hedge accounting treatment. The Company had the following outstanding forward contracts (in thousands): April 2, 2023 December 31, 2022 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Euro 32,500 $ 35,529 60,000 $ 64,174 Mexican Peso 155,000 8,498 185,000 9,480 Hungarian Forint 1,890,000 5,381 1,590,000 4,238 Japanese Yen 600,000 4,536 700,000 5,281 British Pound 3,485 4,313 3,445 4,161 Canadian Dollar 1,705 1,261 1,730 1,278 Chinese Renminbi — — 55,000 7,619 Swiss Franc — — 1,120 1,218 14 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Information regarding the fair value of the outstanding forward contracts was as follows (in thousands): Asset Derivatives Liability Derivatives Balance Fair Value Balance Fair Value Sheet Location April 2, 2023 December 31, 2022 Sheet Location April 2, 2023 December 31, 2022 Derivatives Not Designated as Hedging Instruments: Economic hedge forward contracts Prepaid expenses and other current assets $ 154 $ 27 Accrued expenses $ 74 $ 479 The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands): Asset Derivatives Liability Derivatives April 2, 2023 December 31, 2022 April 2, 2023 December 31, 2022 Gross amounts of recognized assets $ 154 $ 27 Gross amounts of recognized liabilities $ 74 $ 479 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 154 $ 27 Net amount of liabilities presented $ 74 $ 479 Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands): Location in Financial Statements Three-months Ended April 2, 2023 April 3, 2022 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ ( 1,471 ) $ 1,739 15 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 12: Revenue Recognition The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands): Three-months Ended April 2, 2023 April 3, 2022 Americas $ 80,442 $ 126,658 Europe 59,842 62,792 Greater China 33,172 48,406 Other Asia 27,668 44,551 $ 201,124 $ 282,407 The following table summarizes disaggregated revenue information by revenue type (in thousands): Three-months Ended April 2, 2023 April 3, 2022 Standard products and services $ 190,783 $ 257,880 Application-specific customer solutions 10,341 24,527 $ 201,124 $ 282,407 Costs to Fulfill a Contract Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to $ 20,219,000 and $ 14,578,000 as of April 2, 2023 and December 31, 2022, respectively. Accounts Receivable, Contract Assets, and Contract Liabilities Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value. The Company maintains an allowance against its accounts receivable for credit losses. Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition. The following table summarizes the allowance for credit losses activity for the three-month period ended April 2, 2023 (in thousands): Balance as of December 31, 2022 $ 730 Increases to the allowance for credit losses 350 Write-offs, net of recoveries ( 78 ) Foreign exchange rate changes ( 1 ) Balance as of April 2, 2023 $ 1,001 16 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the deferred revenue and customer deposits activity for the three-month period ended April 2, 2023 (in thousands): Balance as of December 31, 2022 $ 40,787 Deferral of revenue billed in the current period, net of recognition 34,786 Recognition of revenue deferred in prior period ( 8,578 ) Returned customer deposit ( 9,205 ) Foreign exchange rate changes 15 Balance as of April 2, 2023 $ 57,805 As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year. NOTE 13: Stock-Based Compensation Expense Stock Plans The Company’s stock-based awards that result in compensation expense consist of stock options, restricted stock units ("RSUs"), and performance restricted stock units ("PRSUs"). As of April 2, 2023, the Company had 12,116,000 shares available for grant under its stock plans. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four or five years based upon continuous service and expire ten years from the grant date. RSUs generally vest upon three or four years of continuous employment or incrementally over such three or four-year 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 for the three-month period ended April 2, 2023: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2022 8,467 $ 51.56 Granted 1,228 47.21 Exercised ( 140 ) 28.36 Forfeited or expired ( 247 ) 58.05 Outstanding as of April 2, 2023 9,308 $ 51.16 6.53 $ 37,312 Exercisable as of April 2, 2023 5,433 $ 47.45 5.12 $ 33,531 Options vested or expected to vest as of April 2, 2023 (1) 8,735 $ 50.90 6.37 $ 36,643 (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. 17 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Three-months Ended April 2, 2023 April 3, 2022 Risk-free rate 4.0 % 1.9 % Expected dividend yield 0.59 % 0.40 % Expected volatility 39 % 37 % Expected term (in years) 4.3 5.2 Risk-free rate The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option. Expected dividend yield Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date. Expected volatility The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock. Expected term The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. The weighted-average grant-date fair values of stock options granted during the three-month periods ended April 2, 2023 and April 3, 2022 were $ 17.79 and $ 22.45 , respectively. The total intrinsic values of stock options exercised for the three-month periods ended April 2, 2023 and April 3, 2022 were $ 3,439,000 and $ 2,615,000 , respectively. The total fair values of stock options vested for the three-month periods ended April 2, 2023 and April 3, 2022 were $ 31,181,000 and $ 25,535,000 , respectively. Restricted Stock Units (RSUs) The following table summarizes the Company's RSUs activity for the three-month period ended April 2, 2023: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2022 1,269 $ 61.74 Granted 635 46.61 Vested ( 453 ) 59.11 Forfeited or expired ( 32 ) 66.98 Nonvested as of April 2, 2023 1,419 $ 55.69 The fair value of RSUs is determined based on the observable market price of the Company's stock on the grant date less the present value of expected future dividends. The weighted-average grant-date fair values of RSUs granted during the three-month periods ended April 2, 2023 and April 3, 2022 were $ 46.61 and $ 63.96 , respectively. There were 453,000 and 54,000 RSUs that vested during the three-month periods ended April 2, 2023 and April 3, 2022, respectively. 18 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Performance Restricted Stock Units (PRSUs) The following table summarizes the Company's PRSUs activity for the three-month period ended April 2, 2023: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2022 33 $ 62.49 Granted 46 44.86 Vested — — Forfeited or expired — — Nonvested as of April 2, 2023 79 $ 52.23 The fair value of PRSUs is calculated using the Monte Carlo simulation model to estimate the probability of satisfying the service and market conditions stipulated in the award grant. There were 46,000 and 33,000 PRSUs granted during the three-month periods ended April 2, 2023 and April 3, 2022, respectively. No PRSUs vested during the three-month periods ended April 2, 2023 and April 3, 2022. Stock-Based Compensation Expense The Company stratifies its employee population into three groups: one consisting of the CEO, one consisting of senior management, and another consisting of all other employees. The Company currently applies an estimated annual forfeiture rate of 0 % to all stock-based awards for the CEO, 8 % to all stock-based awards for senior management, and a rate of 13 % 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 a decrease to compensation expense of $ 234,000 in 2023 and an increase to compensation expense of $ 1,536,000 in 2022. As of April 2, 2023, total unrecognized compensation expense, net of estimated forfeitures, related to non-vested equity awards, including stock options, RSUs, and PRSUs, was $ 86,841,000 , which is expected to be recognized over a weighted-average period of 2.4 years. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended April 2, 2023 were $ 16,579,000 and $ 2,308,000 , respectively. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended April 3, 2022 were $ 15,056,000 and $ 2,319,000 , respectively. No compensation expense was capitalized as of April 2, 2023 or December 31, 2022. The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands): Three-months Ended April 2, 2023 April 3, 2022 Cost of revenue $ 621 $ 563 Research, development, and engineering 5,890 4,448 Selling, general, and administrative 10,068 10,045 $ 16,579 $ 15,056 19 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 14: Stock Repurchase Program On March 12, 2020, the Company's Board of Directors authorized the repurchase of $ 200,000,000 of the Company's common stock. Under this March 2020 program, in addition to repurchases made in prior years, the Company repurchased 1,677,000 shares at a cost of $ 117,000,000 during the three-month period ended April 3, 2022, which completed purchases under this program. On March 3, 2022, the Company's Board of Directors authorized the repurchase of an additional $ 500,000,000 of the Company's common stock. Under this March 2022 program, the Company repurchased 202,000 shares at a cost of $ 13,405,000 during the three-month period ended April 3, 2022. Under this same March 2022 program, in addition to purchases made during the prior year, the Company repurchased 479,000 shares at a total cost of $ 24,178,000 during the three-month period ended April 2, 2023 leaving a remaining balance of $ 388,508,000 as of April 2, 2023. The Company may repurchase shares under this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions. NOTE 15: Income Taxes The Company's effective tax rate was 2 % for the three-month period ended April 2, 2023, and 23 % for the three-month period ended April 3, 2022. The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Korea, and within the United States, Massachusetts. The statutory tax rate is 12.5 % in Ireland, 25 % in China, and 22 % in Korea compared to the U.S. federal statutory corporate tax rate of 21 %. These foreign tax rate differences resulted in a net decrease to the effective tax rate for both the three-month periods ended April 2, 2023 and April 3, 2022. The Company recorded a net discrete tax benefit totaling $ 3,594,000 for the three-month period ended April 2, 2023, and a net discrete tax expense totaling $ 6,338,000 for the same period in 2022. Discrete tax items for the three-month period ended April 2, 2023 included (1) an increase in tax expense of $ 1,068,000 related to stock-based compensation; (2) a decrease in tax expense of $ 2,292,000 for releasing tax reserves on state tax credits; (3) a decrease in tax expense of $ 2,198,000 for adjustments to certain deferred tax assets; and (4) a decrease in tax expense of $ 172,000 for return-to-provision adjustments. Discrete tax items for the three-month period ended April 3, 2022 included (1) an increase in tax expense of $ 1,417,000 arising from an Internal Revenue Service (IRS) audit; (2) an increase in tax expense of $ 1,734,000 to establish a full valuation allowance against deferred tax assets related to foreign tax credits; and (3) an increase in tax expense of $ 3,187,000 consisting primarily of transfer pricing and return-to-provision adjustments. Excluding the impact of these discrete tax items, the Company’s effective tax rate was 16 % for both the three-month periods ended April 2, 2023 and April 3, 2022. The Company’s reserve for income taxes, including gross interest and penalties, was $ 20,030,000 as of April 2, 2023, which was classified as a non-current liability. 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. Within the United States, the tax years 2019 through 2022 remain open to examination by the IRS, and 2018 through 2021 remain open to examination by various state tax authorities. The Company is currently under audit by the state of Massachusetts for the years 2020 and 2021. The tax years 2017 through 2022 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. 20 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 16: Weighted-Average Shares Weighted-average shares were calculated as follows (in thousands): Three-months Ended April 2, 2023 April 3, 2022 Basic weighted-average common shares outstanding 172,624 174,146 Effect of dilutive equity awards 1,279 2,522 Weighted-average common and common-equivalent shares outstanding 173,903 176,668 Stock options to purchase 6,515,000 and 1,282,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month periods ended April 2, 2023 and April 3, 2022, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Restricted stock units totaling 10,000 and 20,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month periods ended April 2, 2023 and April 3, 2022, 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 for the three-month periods ended April 2, 2023 and April 3, 2022, as PRSUs were not anti-dilutive on a weighted-average basis. NOTE 17: Loss (Recovery) 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. As a result of the fire, the Company recorded $ 48,339,000 in gross losses in 2022, primarily related to Cognex-owned inventory that was destroyed or deemed to have a net realizable value of zero, and prepayments related to Cognex-designated components that were owned by the contract manufacturer . Gross losses were reduced by insurance proceeds received from the Company’s insurance carrier of $ 27,560,000 in the fourth quarter of 2022. Subsequent to the April 2, 2023 balance sheet date, but prior to the date of financial statement issuance, the Company received insurance proceeds of $ 2,500,000 related to a business interruption claim associated with the fire from the Company's insurance carrier. In the second quarter of 2023, this recovery amount will be presented in the caption “Loss (recovery) from fire” on the Consolidated Statements of Operations. As of April 2, 2023 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. NOTE 18: Restructuring Charges On December 7, 2022, the Company acquired all of the outstanding shares of SAC Sirius Advanced Cybernetics GmbH ("SAC"), a leader in computational lighting technology based in Germany. Following its acquisition of SAC, the Company performed restructuring activities to align the cost and operating structure of the acquired business with the Company's business strategy. As of December 31, 2022, the majority of these restructuring actions were completed. No additional charges were recorded during the three-month period ended April 2, 2023, or are expected to be incurred in future periods in relation to this restructuring plan. The following table summarizes the activity in the Company’s restructuring reserve related to these restructuring activities, 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, 2022 $ 964 $ 75 $ 1,039 Cash payments ( 143 ) ( 20 ) ( 163 ) Foreign exchange rate changes 17 1 18 Balance as of April 2, 2023 $ 838 $ 56 $ 894 21 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 19: Subsequent Events On May 4, 2023, the Company’s Board of Directors declared a cash dividend of $ 0.07 per share. The dividend is payable on June 2, 2023 to all shareholders of record as of the close of business on May 19, 2023. 22