COGNEX CORP 10-Q

ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three-months Ended March 31, 2024 April 2, 2023 (unaudited) Revenue $ 210,797 $ 201,124 Cost of revenue 68,860 57,384 Gross margin 141,937 143,740 Research, development, and engineering expenses 37,105 38,542 Selling, general, and administrative expenses 90,628 83,037 Operating income 14,204 22,161 Foreign currency gain (loss) 46 394 Investment income 3,120 3,587 Other income (expense) 196 73 Income before income tax expense 17,566 26,215 Income tax expense 5,544 600 Net income $ 12,022 $ 25,615 Net income per weighted-average common and common-equivalent share: Basic $ 0.07 $ 0.15 Diluted $ 0.07 $ 0.15 Weighted-average common and common-equivalent shares outstanding: Basic 171,692 172,624 Diluted 172,594 173,903 Cash dividends per common share $ 0.075 $ 0.070 The accompanying notes are an integral part of these consolidated financial statements. 3 COGNEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Three-months Ended March 31, 2024 April 2, 2023 (unaudited) Net income $ 12,022 $ 25,615 Other comprehensive income (loss), net of tax: Available-for-sale investments: Net unrealized gain (loss), net of tax of $ 117 and $ 1,858 in the three-month periods, respectively 359 5,426 Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations ( 2 ) — Net change related to available-for-sale investments 357 5,426 Foreign currency translation adjustments: Foreign currency translation adjustments ( 16,156 ) ( 359 ) Net change related to foreign currency translation adjustments ( 16,156 ) ( 359 ) Other comprehensive income (loss), net of tax ( 15,799 ) 5,067 Total comprehensive income (loss) $ ( 3,777 ) $ 30,682 The accompanying notes are an integral part of these consolidated financial statements. 4 COGNEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) March 31, 2024 December 31, 2023 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 138,859 $ 202,655 Current investments, amortized cost of $ 141,876 and $ 132,799 in 2024 and 2023, respectively, allowance for credit losses of $ 0 in 2024 and 2023 139,334 129,392 Accounts receivable, allowance for credit losses of $ 1,339 and $ 583 in 2024 and 2023, respectively 138,556 114,164 Unbilled revenue 2,737 2,402 Inventories 170,871 162,285 Prepaid expenses and other current assets 71,173 68,099 Total current assets 661,530 678,997 Non-current investments, amortized cost of $ 285,376 and $ 250,790 in 2024 and 2023, respectively, allowance for credit losses of $ 0 in 2024 and 2023 278,426 244,230 Property, plant, and equipment, net 104,111 105,849 Operating lease assets 74,113 75,115 Goodwill 386,157 393,181 Intangible assets, net 105,054 112,952 Deferred income taxes 397,563 400,400 Other assets 6,279 7,088 Total assets $ 2,013,233 $ 2,017,812 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 27,459 $ 21,454 Accrued expenses 70,429 72,374 Accrued income taxes 40,433 16,907 Deferred revenue and customer deposits 39,983 31,525 Operating lease liabilities 9,798 9,624 Total current liabilities 188,102 151,884 Non-current operating lease liabilities 67,367 68,977 Deferred income taxes 239,538 246,877 Reserve for income taxes 28,144 26,685 Non-current accrued income taxes — 18,338 Other liabilities 893 299 Total liabilities 524,044 513,060 Commitments and contingencies (Note 10) Shareholders’ equity: Preferred stock, $ .01 par value – Authorized: 400 shares in 2024 and 2023, respectively; no shares issued and outstanding — — Common stock, $ .002 par value – Authorized: 300,000 shares in 2024 and 2023, respectively; issued and outstanding: 171,662 and 171,599 shares in 2024 and 2023, respectively 343 343 Additional paid-in capital 1,047,643 1,037,202 Retained earnings 502,338 512,543 Accumulated other comprehensive loss, net of tax ( 61,135 ) ( 45,336 ) Total shareholders’ equity 1,489,189 1,504,752 Total liabilities and shareholders' equity $ 2,013,233 $ 2,017,812 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 March 31, 2024 April 2, 2023 (unaudited) Cash flows from operating activities: Net income $ 12,022 $ 25,615 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation expense 13,302 16,579 Depreciation of property, plant, and equipment 5,279 3,986 Amortization of intangible assets 2,813 942 Excess and obsolete inventory charges 471 788 Fair value adjustment on acquired inventories (Note 17) 1,224 — Amortization of discounts or premiums on investments 306 700 Realized (gain) loss on sale of investments ( 2 ) — Change in deferred income taxes ( 3,333 ) ( 10,656 ) Change in operating assets and liabilities: Accounts receivable ( 25,669 ) ( 18,455 ) Unbilled revenue ( 347 ) ( 173 ) Inventories ( 10,938 ) ( 5,338 ) Prepaid expenses and other current assets ( 3,395 ) 231 Accounts payable 7,398 ( 192 ) Accrued expenses ( 470 ) ( 9,942 ) Accrued income taxes 5,258 4,721 Deferred revenue and customer deposits 8,737 17,003 Other 987 1,744 Net cash provided by (used in) operating activities 13,643 27,553 Cash flows from investing activities: Purchases of investments ( 233,726 ) ( 46,480 ) Maturities and sales of investments 189,758 46,199 Purchases of property, plant, and equipment ( 4,061 ) ( 5,507 ) Net payments related to business acquisitions (Note 17) ( 994 ) — Net cash provided by (used in) investing activities ( 49,023 ) ( 5,788 ) Cash flows from financing activities: Net payments from issuance of common stock under stock plans ( 2,861 ) ( 3,055 ) Repurchase of common stock ( 9,339 ) ( 24,178 ) Payment of dividends ( 12,888 ) ( 12,091 ) Net cash provided by (used in) financing activities ( 25,088 ) ( 39,324 ) Effect of foreign exchange rate changes on cash and cash equivalents ( 3,328 ) 356 Net change in cash and cash equivalents ( 63,796 ) ( 17,203 ) Cash and cash equivalents at beginning of period 202,655 181,374 Cash and cash equivalents at end of period $ 138,859 $ 164,171 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, 2023 171,599 $ 343 $ 1,037,202 $ 512,543 $ ( 45,336 ) $ 1,504,752 Net issuance of common stock under stock plans 294 — ( 2,861 ) — — ( 2,861 ) Repurchase of common stock ( 231 ) — — ( 9,339 ) — ( 9,339 ) Stock-based compensation expense — — 13,302 — — 13,302 Payment of dividends ($ 0.075 per common share) — — — ( 12,888 ) — ( 12,888 ) Net income — — — 12,022 — 12,022 Net unrealized gain (loss) on available-for-sale investments, net of tax of $ 117 — — — — 359 359 Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — ( 2 ) ( 2 ) Foreign currency translation adjustment — — — — ( 16,156 ) ( 16,156 ) Balance as of March 31, 2024 (unaudited) 171,662 $ 343 $ 1,047,643 $ 502,338 $ ( 61,135 ) $ 1,489,189 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 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, 2023 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 March 31, 2024, and the results of its operations for the three-month periods ended March 31, 2024 and April 2, 2023, 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 periods ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year. NOTE 2: New Pronouncements Accounting Standards Update (ASU) 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" The amendments in this ASU apply to all entities that are subject to Topic 740, Income Taxes. The amendments require public business entities to disclose specific categories in their rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. They also require all entities to disclose income taxes paid, net of refunds received, disaggregated by federal, state, and foreign taxes and by individual jurisdictions in which income taxes paid, net of refunds received, is equal to or greater than five percent of total income taxes paid. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2024. The amendments in this ASU should be applied on a prospective basis. Management does not expect ASU 2023-09 to have a material impact on the Company's financial statements and disclosures. Accounting Standards Update (ASU) 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" The amendments in this ASU apply to all public entities, including public entities with a single reportable segment, that are required to report segment information in accordance with Topic 280, Segment Reporting. The amendments require public business entities to provide in interim and annual periods one or more measures of segment profit or loss used by the chief operating decision maker to allocate resources and assess performance. Additionally, the amendments require disclosure of significant segment expenses and other segment items, as well as incremental qualitative disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024. The amendments in the ASU should be applied on a retrospective basis. We did not early adopt ASU 2023-07. Management does not expect ASU 2023-07 to 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 March 31, 2024 (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 $ 667 $ — $ — Corporate bonds — 353,745 — Treasury notes — 45,053 — Asset-backed securities — 16,995 — Certificate of deposit — 6,429 — Treasury bills — 3,499 — Sovereign bonds — 1,967 — Economic hedge forward contracts — 22 — Liabilities: Economic hedge forward contracts — 221 — 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 March 31, 2024 or April 2, 2023. 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): March 31, 2024 December 31, 2023 Cash $ 128,264 $ 183,242 Certificate of deposit 6,429 — Treasury bills 3,499 — Money market instruments 667 19,413 Cash and cash equivalents 138,859 202,655 Corporate bonds 134,032 124,851 Asset-backed securities 4,309 3,551 Sovereign bonds 993 990 Current investments 139,334 129,392 Corporate bonds 219,713 183,965 Treasury notes 45,053 43,523 Asset-backed securities 12,686 15,763 Sovereign bonds 974 979 Non-current investments 278,426 244,230 $ 556,619 $ 576,277 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; sovereign bonds consist of direct debt issued by foreign governments; and treasury notes consist of debt securities issued by the U.S. government. All of the Company's securities as of March 31, 2024 and December 31, 2023 were denominated in U.S. Dollars. Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheets and amounted to $ 4,119,000 and $ 3,169,000 as of March 31, 2024 and December 31, 2023, respectively. The following table summarizes the Company’s available-for-sale investments as of March 31, 2024 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 136,479 $ — $ ( 2,447 ) $ 134,032 Asset-backed securities 4,391 — ( 82 ) 4,309 Sovereign bonds 1,006 — ( 13 ) 993 Non-current: Corporate bonds 225,074 175 ( 5,536 ) 219,713 Treasury notes 45,760 — ( 707 ) 45,053 Asset-backed securities 13,512 — ( 826 ) 12,686 Sovereign bonds 1,030 — ( 56 ) 974 $ 427,252 $ 175 $ ( 9,667 ) $ 417,760 10 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the Company’s available-for-sale investments as of December 31, 2023 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Current: Corporate bonds $ 128,150 $ — $ ( 3,299 ) $ 124,851 Asset-backed securities 3,637 — ( 86 ) 3,551 Sovereign bonds 1,012 — ( 22 ) 990 Non-current: Corporate bonds 189,326 506 ( 5,867 ) 183,965 Treasury notes 43,654 82 ( 213 ) 43,523 Asset-backed securities 16,773 — ( 1,010 ) 15,763 Sovereign bonds 1,037 — ( 58 ) 979 $ 383,589 $ 588 $ ( 10,555 ) $ 373,622 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 March 31, 2024 (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 $ 95,052 $ ( 1,087 ) $ 222,979 $ ( 6,896 ) $ 318,031 $ ( 7,983 ) Treasury notes 42,612 ( 647 ) 2,441 ( 60 ) 45,053 ( 707 ) Asset-backed securities 14,742 ( 860 ) 2,252 ( 48 ) 16,994 ( 908 ) Sovereign bonds — — 1,968 ( 69 ) 1,968 ( 69 ) $ 152,406 $ ( 2,594 ) $ 229,640 $ ( 7,073 ) $ 382,046 $ ( 9,667 ) The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of December 31, 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 $ 30,770 $ ( 359 ) $ 226,643 $ ( 8,807 ) $ 257,413 $ ( 9,166 ) Treasury notes 20,725 ( 153 ) 2,441 ( 60 ) 23,166 ( 213 ) Asset-backed securities 17,062 ( 1,049 ) 2,252 ( 47 ) 19,314 ( 1,096 ) Sovereign bonds — — 1,968 ( 80 ) 1,968 ( 80 ) $ 68,557 $ ( 1,561 ) $ 233,304 $ ( 8,994 ) $ 301,861 $ ( 10,555 ) 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 March 31, 2024 or December 31, 2023. Management currently intends to hold these securities to full value recovery at maturity. 11 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table summarizes the Company's gross realized gains and losses on the sale of debt securities for the three-month periods ended March 31, 2024 and April 2, 2023 (in thousands): Three-months Ended March 31, 2024 April 2, 2023 Gross realized gains $ 2 $ — Gross realized losses — — Net realized gains (losses) $ 2 $ — 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 income (loss). The following table presents the effective maturity dates of the Company’s available-for-sale investments as of March 31, 2024 (in thousands): <1 year 1-2 Years 2-3 Years 3-4 Years 4-5 Years 5-8 Years Total Corporate bonds $ 134,032 $ 57,463 $ 59,120 $ 58,225 $ 44,905 $ — $ 353,745 Treasury notes — 3,429 14,097 22,829 4,698 — 45,053 Asset-backed securities 4,309 6,486 — — — 6,200 16,995 Sovereign bonds 993 974 — — — — 1,967 $ 139,334 $ 68,352 $ 73,217 $ 81,054 $ 49,603 $ 6,200 $ 417,760 NOTE 5: Inventories Inventories consisted of the following (in thousands): March 31, 2024 December 31, 2023 Raw materials $ 106,506 $ 93,201 Work-in-process 3,241 5,747 Finished goods 61,124 63,337 $ 170,871 $ 162,285 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 March 31, 2024, there were no options to terminate and twenty-eight options to extend that were accounted for in the determination of the lease term for the Company's outstanding leases. Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index. There were no restrictions or covenants for outstanding leases as of March 31, 2024. The total operating lease expense for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 3,563,000 and $ 2,392,000 , respectively. The total operating lease cash payments for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 3,208,000 and $ 2,404,000 , 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 March 31, 2024 and April 2, 2023 were $ 82,000 and $ 24,000 , respectively. 12 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Future operating lease cash payments are as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2024 $ 10,392 2025 12,093 2026 10,031 2027 9,171 2028 8,721 2029 8,137 Thereafter 44,658 $ 103,203 The discounted present value of the future lease cash payments resulted in a total lease liability of $ 77,165,000 and $ 78,601,000 as of March 31, 2024 and December 31, 2023, respectively. The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of March 31, 2024. The Company leases a building in Singapore that serves as a distribution center for customers in Asia. The lease contains two components: an 88,000 square-foot premises that had a commencement date in June of 2023 and a second 27,000 square-foot premises that does not commence until the fourth quarter of 2025. Accordingly, the second component of the lease has not yet been recorded on the Consolidated Balance Sheets, nor has it created any significant rights and obligations as of March 31, 2024. This second lease component has an original term of eight years and the Company has the right and option to extend this term by an additional five years , commencing upon the expiration of the original term. Future payment obligations associated with this lease component total $ 13,231,000 , none of which is payable in 2024 and which reflects the estimated extension period of five years . Future payment obligations related to this lease component are not included in the future operating lease cash payments table above. The weighted-average discount rate was 5.7 % for the leases outstanding as of both March 31, 2024 and December 31, 2023. The weighted-average remaining lease term was 10.3 and 10.5 years for the leases outstanding as of March 31, 2024 and December 31, 2023, respectively. NOTE 7: Goodwill The changes in the carrying value of goodwill were as follows (in thousands): Balance as of December 31, 2023 $ 393,181 Foreign exchange rate changes ( 7,024 ) Balance as of March 31, 2024 $ 386,157 13 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 Customer relationships $ 72,775 $ ( 6,587 ) $ 66,188 Completed technologies 60,160 ( 22,112 ) 38,048 Trademarks 842 ( 117 ) 725 Non-compete agreements 340 ( 247 ) 93 Balance as of March 31, 2024 $ 134,117 $ ( 29,063 ) $ 105,054 Gross Carrying Value Accumulated Amortization Net Carrying Value Customer relationships $ 75,965 $ ( 5,352 ) $ 70,613 Completed technologies 62,123 ( 20,745 ) 41,378 Trademarks 903 ( 50 ) 853 Non-compete agreements 340 ( 232 ) 108 Balance as of December 31, 2023 $ 139,331 $ ( 26,379 ) $ 112,952 As of March 31, 2024, estimated future amortization expense related to intangible assets was as follows (in thousands): Year Ended December 31, Amount Remainder of fiscal 2024 $ 8,179 2025 10,615 2026 10,310 2027 9,587 2028 8,857 2029 8,857 Thereafter 48,649 $ 105,054 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, 2023 $ 4,244 Provisions for warranties issued during the period 1,157 Fulfillment of warranty obligations ( 939 ) Foreign exchange rate changes ( 9 ) Balance as of March 31, 2024 $ 4,453 14 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10: Commitments and Contingencies As of March 31, 2024, the Company had outstanding purchase orders totaling $ 40,843,000 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 March 31, 2024, 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): March 31, 2024 December 31, 2023 Currency Notional Value USD Equivalent Notional Value USD Equivalent Derivatives Not Designated as Hedging Instruments: Singapore Dollar 39,950 $ 29,652 39,700 $ 30,136 Euro 18,500 19,940 40,000 44,302 Mexican Peso 205,000 12,273 145,000 8,505 Chinese Renminbi 50,000 6,886 50,000 7,025 Hungarian Forint 2,250,000 6,152 2,240,000 6,466 British Pound 3,330 4,229 3,345 4,258 Japanese Yen 600,000 3,980 600,000 4,255 Swiss Franc 2,400 2,673 — — Canadian Dollar 1,720 1,270 1,470 1,112 15 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 March 31, 2024 December 31, 2023 Sheet Location March 31, 2024 December 31, 2023 Derivatives Not Designated as Hedging Instruments: Economic hedge forward contracts Prepaid expenses and other current assets $ 22 $ 151 Accrued expenses $ 221 $ 106 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 March 31, 2024 December 31, 2023 March 31, 2024 December 31, 2023 Gross amounts of recognized assets $ 22 $ 151 Gross amounts of recognized liabilities $ 221 $ 106 Gross amounts offset — — Gross amounts offset — — Net amount of assets presented $ 22 $ 151 Net amount of liabilities presented $ 221 $ 106 Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands): Location in Financial Statements Three-months Ended March 31, 2024 April 2, 2023 Derivatives Not Designated as Hedging Instruments: Gains (losses) recognized in current operations Foreign currency gain (loss) $ ( 245 ) $ ( 1,471 ) 16 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 March 31, 2024 April 2, 2023 Americas $ 83,135 $ 80,442 Europe 52,354 59,842 Greater China 30,049 33,172 Other Asia 45,259 27,668 $ 210,797 $ 201,124 The following table summarizes disaggregated revenue information by revenue type (in thousands): Three-months Ended March 31, 2024 April 2, 2023 Standard products and services $ 187,632 $ 190,783 Application-specific customer solutions 23,165 10,341 $ 210,797 $ 201,124 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 $ 11,783,000 and $ 13,265,000 as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 (in thousands): Balance as of December 31, 2023 $ 583 Write-offs, net of recoveries 17 Foreign exchange rate changes 1 Balance as of March 31, 2024 $ 601 17 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 March 31, 2024 (in thousands): Balance as of December 31, 2023 $ 31,525 Deferral of revenue billed in the current period, net of recognition 24,921 Recognition of revenue deferred in prior period ( 16,184 ) Foreign exchange rate changes ( 279 ) Balance as of March 31, 2024 $ 39,983 As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations for our contracts that have an original expected duration of less than one year. The remaining unsatisfied performance obligations for our contracts that have an original expected duration of more than one year, primarily related to extended warranties, are not material. 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"). In May 2023, the shareholders of the Company approved the Cognex Corporation 2023 Stock Option and Incentive Plan (the “2023 Plan”). The 2023 Plan permits awards of stock options (both incentive and non-qualified options), stock appreciation rights, RSUs, and PRSUs. Up to 8,100,000 shares of common stock (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 2023 Plan. In connection with the approval of the 2023 Plan, no further awards will be made under the Cognex Corporation 2001 General Stock Option Plan, as amended and restated (the “2001 Plan”), and the Cognex Corporation 2007 Stock Option and Incentive Plan, as amended and restated (the “2007 Plan”). With the approval of the 2023 Plan, the 10,610,800 shares of common stock subject to awards granted under the 2001 Plan and the 2007 Plan that were outstanding as of May 3, 2023 may become eligible for issuance under the 2023 Plan if such awards are forfeited, cancelled or otherwise terminated (other than by exercise) (the “Carryover Shares”). As of March 31, 2024, forfeitures, cancellations, and other terminations from the 2001 Plan and the 2007 Plan have resulted in 707,900 Carryover Shares, raising the authorized total shares that may be issued under the 2023 Plan to 8,807,900 . As of March 31, 2024, the Company had 6,001,000 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. 18 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Stock Options The following table summarizes the Company’s stock option activity for the three-month period ended March 31, 2024: Shares (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2023 9,008 $ 50.87 Granted 1,523 39.44 Exercised ( 56 ) 19.87 Forfeited or expired ( 330 ) 57.58 Outstanding as of March 31, 2024 10,145 $ 49.11 6.30 $ 21,531 Exercisable as of March 31, 2024 5,973 $ 49.04 4.56 $ 15,941 Options vested or expected to vest as of March 31, 2024 (1) 9,405 $ 49.28 6.09 $ 20,336 (1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options. The total cash received as a result of stock option exercises for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 1,121,000 and $ 3,976,000 , respectively. In connection with these exercises, the tax benefit (expense) realized by the Company for the three-month periods ended March 31, 2024 and April 2, 2023 was $( 29,000 ) and $( 1,466,000 ), respectively. The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions: Three-months Ended March 31, 2024 April 2, 2023 Risk-free rate 4.3 % 4.0 % Expected dividend yield 0.76 % 0.59 % Expected volatility 39 % 39 % Expected term (in years) 4.7 4.3 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 The current dividend yield was 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. 19 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The weighted-average grant-date fair values of stock options granted during the three-month periods ended March 31, 2024 and April 2, 2023 were $ 14.66 and $ 17.79 , respectively. The total intrinsic values of stock options exercised for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 1,055,000 and $ 3,439,000 , respectively. The total fair values of stock options vested for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 25,807,000 and $ 31,181,000 , respectively. Restricted Stock Units (RSUs) The following table summarizes the Company's RSUs activity for the three-month period ended March 31, 2024: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2023 1,429 $ 54.22 Granted 765 38.82 Vested ( 339 ) 65.45 Forfeited or expired ( 36 ) 52.43 Nonvested as of March 31, 2024 1,819 $ 45.68 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 March 31, 2024 and April 2, 2023 were $ 38.82 and $ 46.61 , respectively. There were 339,000 and 453,000 RSUs that vested during the three-month periods ended March 31, 2024 and April 2, 2023, respectively. Tax obligations for vested RSUs are settled by withholding a portion of the shares prior to distribution to the shareholder. The total cash used by the Company to fund the tax payments for the three-month periods ended March 31, 2024 and April 2, 2023 were $ 3,981,000 and $ 7,032,000 , respectively. In connection with these vested RSUs, the tax benefit (expense) realized by the Company for the three-month periods ended March 31, 2024 and April 2, 2023 was $( 4,793,000 ) and $( 2,718,000 ), respectively. Performance Restricted Stock Units (PRSUs) The following table summarizes the Company's PRSUs activity for the three-month period ended March 31, 2024: Shares (in thousands) Weighted-Average Grant Date Fair Value Nonvested as of December 31, 2023 79 $ 52.23 Granted 55 39.05 Vested — — Forfeited or expired — — Nonvested as of March 31, 2024 134 $ 46.82 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 55,000 and 46,000 PRSUs granted during the three-month periods ended March 31, 2024 and April 2, 2023, respectively. No PRSUs vested during the three-month periods ended March 31, 2024 and April 2, 2023. 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, 9 % 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 $ 1,832,000 and $ 234,000 during the three-month periods ended March 31, 2024 and April 2, 2023, 20 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) respectively. As of March 31, 2024, total unrecognized compensation expense, net of estimated forfeitures, related to non-vested equity awards, including stock options, RSUs, and PRSUs, was $ 86,273,000 , which is expected to be recognized over a weighted-average period of 2.1 years. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended March 31, 2024 were $ 13,302,000 and $ 1,745,000 , respectively. 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. No compensation expense was capitalized as of March 31, 2024 or December 31, 2023. 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 March 31, 2024 April 2, 2023 Cost of revenue $ 605 $ 621 Research, development, and engineering 4,389 5,890 Selling, general, and administrative 8,308 10,068 $ 13,302 $ 16,579 NOTE 14: Stock Repurchase Program In March 2022, the Company's Board of Directors authorized the repurchase of $ 500,000,000 of the Company's common stock. Under this March 2022 program, the Company repurchased 479,000 shares at a total cost of $ 24,178,000 during the three-month period ended April 2, 2023 and 231,000 shares at a total cost of $ 9,339,000 during the three-month period ended March 31, 2024, leaving a remaining balance of $ 323,553,000 as of March 31, 2024. 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. 21 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 15: Income Taxes The Company's effective tax rate was 32 % and 2 % for the three-month periods ended March 31, 2024 and April 2, 2023, respectively. The Company has defined its major tax jurisdictions as the United States, Ireland, China, Japan, and Korea, and within the United States, Massachusetts. The statutory tax rate is 12.5 % in Ireland, 25 % in China, 34.6 % in Japan, and 21 % in Korea, compared to the U.S. federal statutory corporate tax rate of 21 %. These foreign tax rate differences resulted in a favorable impact to the effective tax rate for both the three-month periods ended March 31, 2024 and April 2, 2023. The Company recorded a net discrete tax expense totaling $ 3,085,000 for the three-month period ended March 31, 2024, and a net discrete tax benefit totaling $ 3,594,000 for the same period in 2023. Discrete tax items for the three-month period ended March 31, 2024 included (1) an increase in tax expense of $ 1,123,000 related to stock-based compensation; (2) an increase in tax expense of $ 458,000 related to state tax matters; (3) an increase in tax expense of $ 458,000 for interest expense related to tax reserves; and (4) a net increase in tax expense of $ 1,046,000 for other tax matters. 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. The Company’s reserve for income taxes, including gross interest and penalties, was $ 30,511,000 as of March 31, 2024, of which $ 28,144,000 was classified as a non-current liability and $ 2,367,000 was classified as an offset to deferred tax assets. 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 2020 through 2022 remain open to examination by the IRS, and 2019 through 2022 remain open to examination by various state tax authorities. The tax years 2017 through 2023 remain open to examination by various international taxing authorities in other jurisdictions in which the Company operates. In October 2021, more than 135 countries and jurisdictions agreed to participate in a "two-pillar" international tax approach developed by the Organisation for Economic Co-operation and Development (OECD), which includes establishing a global minimum corporate tax rate of 15%. The OECD published "Tax Challenges Arising from the Digitalisation of the Economy — Global Anti-Base Erosion Model Rules (Pillar Two)" in December 2021 and subsequently issued additional commentary and administrative guidance clarifying several aspects of the model rules. Since the model rules have been released, many countries have now enacted Pillar Two-related laws, some of which became effective January 1, 2024, and it is anticipated that more countries will follow suit throughout 2024. As of March 31, 2024, the Company does not expect Pillar Two taxes to have a significant impact on its 2024 financial statements. NOTE 16: Weighted-Average Shares Weighted-average shares were calculated as follows (in thousands): Three-months Ended March 31, 2024 April 2, 2023 Basic weighted-average common shares outstanding 171,692 172,624 Effect of dilutive equity awards 902 1,279 Weighted-average common and common-equivalent shares outstanding 172,594 173,903 Stock options to purchase 8,176,000 and 6,515,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month periods ended March 31, 2024 and April 2, 2023, respectively, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Restricted stock units totaling 1,000 and 10,000 shares of common stock, on a weighted-average basis, were outstanding during the 22 COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) three-month periods ended March 31, 2024 and April 2, 2023, 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 March 31, 2024 and April 2, 2023, as PRSUs were not anti-dilutive on a weighted-average basis. NOTE 17: Business Combinations On October 18, 2023, the Company acquired all the outstanding shares of Moritex Corporation ("Moritex"), a global provider of premium optical components based in Japan, for an enterprise value of ¥ 40 billion Japanese Yen, or approximately $ 270 million U.S. Dollars based on the closing date foreign exchange rate. The cash-free, debt-free enterprise value was adjusted by cash acquired, debt assumed, and final working capital balances to arrive at total consideration to be allocated to assets acquired and liabilities assumed of ¥ 44,376,245,000 ($ 296,138,000 based on the closing date foreign exchange rate), of which ¥ 44,227,414,000 ($ 295,144,000 ) was paid in cash on the closing date and ¥ 148,831,000 ($ 994,000 ) was paid during the three-month period ended March 31, 2024 as a final purchase price adjustment based on the closing balance sheet. NOTE 18: Subsequent Events On May 2, 2024, the Company’s Board of Directors declared a cash dividend of $ 0.075 per share. The dividend is payable on May 30, 2024 to all shareholders of record as of the close of business on May 16, 2024. 23