This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Federal Securities Laws.federal securities laws. Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense. Our future results may differ materially from current results and from those projected in the forward-looking statements as a result of known and unknown risks and uncertainties. Readers should pay particular attention to considerations described in the section captioned “Risk Factors,” appearing in Part I - Item 1A of this Annual Report on Form 10-K. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We disclaim any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.

Cognex Corporation was incorporated in Massachusetts in 1981. Our corporate headquarters are located at One Vision Drive, Natick, Massachusetts 01760 and our telephone number is (508) 650-3000.

Cognex is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes,and distribution tasks where vision is required. Machine vision is the technology that gives computers and automation equipment the ability to see. Machine vision products are used to automate the manufacturemanufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires, by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Machine vision is important for applications in which human vision is inadequate to meet requirements for size, accuracy, or speed, or in instances where substantial cost savings are obtained through the reduction of labor or improved product quality. Today, many

Cognex operates in one segment, machine vision technology. We offer a variety of machine vision products that have similar economic characteristics, have the same production processes, and are distributed by the same sales channels to the same types of manufacturing equipment require machine vision becausecustomers. Although Cognex sells to customers in a variety of the increasing demands for speedindustries, our largest industries are logistics, automotive, and accuracyconsumer electronics, which combined represented approximately 70% of our total revenue in manufacturing processes, as well as the decreasing size of items being manufactured.

Cognex machine vision is primarily used to automate manufacturing and distribution processes in the manufacturing sector,a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance. In this sector, the Company’s customers are primarily in the factory automation market. Factory automation customers purchase Cognex vision products and incorporate them into their manufacturing processes. Virtually every manufacturer or distributor can achieve better quality and manufacturing efficiency by using machine vision, and therefore, this market includesCognex products are used by a broad base of customers across a variety of industries, including logistics, automotive, consumer electronics, automotive,medical-related, semiconductor, consumer products, and food and beverage, medical devices, and pharmaceuticals. Factory automation customers also purchasebeverage.

Although we consider Cognex products for use outsideto be one of the assembly process, such as using ID products in logistics automation for package sorting and distribution. A small percentage of our customers areleading machine vision companies in the semiconductorworld, reliable estimates of the machine vision market and electronics capital equipment market. Thesethe number and relative size of competitors are not readily available. Our competitors include other vendors of machine vision systems, controllers, and components; manufacturers of image processing systems, sensors, and components; and system integrators. We also compete with internal engineering departments of current or prospective customers, purchase Cognex visionas well as open-source tools available for free from various companies.

Cognex’s ability to compete depends on our ability to design, manufacture, and sell high-quality products, as well as our ability to develop new products and integrate them intofunctionality that meet evolving customer requirements. The primary competitive factors affecting the automation equipment that they manufacturechoice of a machine vision system include product functionality and then sell to their customers to either make semiconductor chips or assemble printed circuit boards.performance, ease of use, vendor reputation, price, and post-sales support. The importance of each of these factors varies depending on the specific customer’s needs.

Our goal is to expand our position as a leading worldwide provider of machine vision products.products for industrial customers. We are selective in choosing growth opportunities that we believe will maintain our historically high gross margin percentages, which have ranged frombeen in the mid-to-high 70smid 70 percent range for the past several years and reflect the value our customers place on our innovative products. Our high gross margins have the potential to provide us with strong operating leverage in our financial model, as any incremental revenue at such margins falls through to operating income at a high ratio. Our strong and unique corporate culture reinforces our values of customer first and innovation, and enables us to attract and retain smart, highly-educated, experiencedenergetic, and creative talent who are motivated to solve the most challenging vision tasks.

We invest heavily in research and development in order to maintain our position as a technology leader in machine vision. We invest in technology that makes vision easier to use and more affordable, and therefore, available to a broader base of customers, such as our vision sensor products that enable customers with a lower budget to use machine vision without the help of sophisticated engineers. We also invest in technology that addresses the most challenging vision applications, such as our 3D vision products that solve applications where a height or volume measurement is required.required and our deep learning vision software that solves complex applications with unpredictable defects and deviations. We identify large customers with high-volume applicationsinvest through internal development, as well as the acquisition of businesses and offer them collaborative development to deliver solutions to solve their complex vision problems.technologies.

We continue to invest in our core markets, such as automotive and consumer electronics, and automotive, where we are a leading provider of vision and ID products for factory automation, while making significant investments in the logistics market, where we seek opportunities to expandare moving beyond barcode reading into adjacent markets for vision, such as logistics, airport baggage handling, mobile terminals, life sciences,more complex applications in e-commerce and collaborative robotics. We invest through internal development,omni-channel retail distribution centers, as well as the acquisition of businessesparcel and technologies.post warehouses.

We reach a broad base of customers through our worldwide direct sales force that sells to large, strategic customers, as well as through our network of distributors and integrators that sell primarily to smaller customers who may be more geographically remote.remote or may require supplemental technical support or integration assistance. We invest in emerging, high-growth regions where many manufacturers can benefit from

Our business strategy includes selective expansion into new machine vision applications and markets through the acquisition of businesses and technologies. In 2017, 2016, and 2015, we completed seven small business acquisitions, which were not significant individually or in the aggregate. The purchase price for each business ranged from $2.5 million to $23 million. In addition to completed technology and customer relationships, these acquisitions included engineering talent expected to help accelerate the development of future products. Management considersWe consider business acquisitions to be an important part of our growth strategy, and although we continue to actively seek out acquisition opportunities, we are selective in choosing businesses that we believe will enhance our long-term growth rate and profitability.profitability, as well as fit within our corporate culture. We plan to continue to seek opportunities to expand our product lines, customer base, distribution network, and technical talent through acquisitions in the machine vision industry.

Cognex offers a full range of machine vision systems and ID productssensors, vision software, and industrial image-based barcode readers designed to meet customer needs at different performance and price points. Our products range from low-cost vision sensors that are easily integrated,conduct simple presence/absence inspections, to PC-based systems for usersdeep learning solutions that solve complex applications with more experience or more complex requirements.unpredictable defects and deviations. Our products also have a variety of physical forms, depending uponon the user's needs. For example, customers can purchase vision software to use with their own camera and processor, or they can purchase a standalone unit that combines camera, processor, and software into a single package.

Cognex engages in research, development, and engineering (RD&E) to enhance our existing products and to develop new products and functionality to address market opportunities. In addition to internal research and development efforts, we intend to continue our strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate.

As of December 31, 2017, Cognex employed 445 professionals in RD&E, many of whom are software developers. Cognex’s RD&E expenses totaled $99,205,000 in 2017, and $78,269,000 in 2016, and $69,791,000 in 2015, or approximately 13%, 15%, and 15%as a percentage of revenue respectively.were 13% in 2021, 16% in 2020, and 16% in 2019. We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers. In addition, we consider our ability to accelerate time-to-markettime to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant RD&E investments in the future.future, and intend to continue our product development plans during periods of lower revenue levels. At any point in time, we have numerous research and development projects underway. Although we target our annual RD&E spending to be between 10% and 15% of total revenue, this percentage is impacted by revenue levels and investing cycles.

We rely on the technical expertise, creativity, and knowledge of our personnel, and therefore, we utilize patent, trademark, copyright, and trade secret protection to maintain our competitive position and protect our proprietary rights in our products and technology. While our intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on any particular patent, trademark, copyright, or other intellectual property right.

Cognex’s capital expenditures, earnings, and competitive position are not materially affected by compliance with federal, state, and local environmental provisions which have been enacted or adopted to regulate the distribution of materials into the environment.

Cognex maintains a website on the World Wide Web at www.cognex.com. We make available, free of charge, on our website in the “Company” section under the caption “Investor Information” followed by “Financial Information”Reports” and then “SEC FiIings,” our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Cognex’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. Information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K.

The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect our company in the future. If any of these risks were to occur, our business, financial condition, or results of operations could be materially and adversely affected. This section includes or refers to certain forward-looking statements. We refer you to the explanation of the qualifications and limitations on such forward-looking statements, appearing under the heading "Forward-Looking Statements" in Part II - Item 7 of this Annual Report on Form 10-K.

Revenue fromIn 2021, we had a singlelarge customer accounted for 21%, 19%, and 18%in the logistics industry that represented approximately 17% of our total revenue in 2017, 2016, and 2015, respectively.revenue. Large customers may divert management’s attention from other operational matters and pull resources from other areas of the business, resulting in potential loss of revenuesales from other customers. In addition, large customers may receive preferred pricing and a higher level of post-sale support, which may lower our gross margin percentage. Furthermore, we typically extend credit terms to large customers, resulting in large accounts receivable balances, and in certain instances due to long supplier lead times, we may purchase inventory in advance of receipt of a customer purchase order, which exposes us to an increased risk of excess or obsolete inventory and resulting charges.

In 2017,We rely on our information technology systems, including third-party services, to effectively run our business. We may be subject to information security failures or breaches caused by hacking, malicious software, acts of vandalism or terrorism, or other events. Our security measures or those of our third-party service providers may not detect or prevent such breaches. Any such compromise to our information security could result in theft of our intellectual property, including software source code, a misappropriation of our cash or other assets, an interruption in our operations, the largest industries thatunauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, and the exposure to litigation or regulatory penalties, any of which could harm our business and operating results. We have experienced cybersecurity incidents in the

We rely on our proprietary software technology and hardware designs, as well as the product design cyclestechnical expertise, creativity, and knowledge of our majorpersonnel to maintain our position as a leading provider of machine vision products. Software piracy and reverse engineering may result in counterfeit products that are misrepresented in the market as Cognex products or pirated products that contain stolen technology such as software. Although we use a variety of methods to protect our intellectual property, we rely most heavily on patent, trademark, copyright, and trade secret protection, as well as non-disclosure agreements with customers, suppliers, employees, and consultants. We also attempt to protect our intellectual property by restricting access to our proprietary information by a combination of technical and internal security measures. These measures, however, may not be adequate to:

Our pending and future patent applications may not issue as patents or, if issued, may not issue in these industries. The market leadersa form that will provide us with any meaningful protection or any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from developing and marketing similar products, increase costs, or limit the length of patent protection we may have for our products. Furthermore, other companies may design around technologies we have patented, licensed, or developed. Moreover, changes in these industries are ablepatent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to exert purchasing power over their vendors' supply chains, and our large customers in these industries may decide to purchase fewer products from Cognex or stop purchasing from Cognex altogether.the same extent as the laws of the United States. As a result, our operating results could be materially and adversely affected by declining sales in these industries.

We face exposure to foreign currency exchange rate fluctuations, as a significant portion of our revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of our subsidiaries or the reporting currency of our company, which is the U.S. Dollar. In certain instances, we utilize forward contracts to hedge against foreign currency fluctuations. These contracts are used to minimize foreign currency gains or losses, as the gains or losses on the derivative are intended to offset the losses or gains on the underlying exposure. We do not engage in foreign currency speculation. If the counterparty to any of our hedging arrangements experiences financial difficulties, or is otherwise unable to honor the terms of the contract, we may experience material losses.

AIn addition to the U.S. Dollar, a significant portion of our revenues and expenses are denominated in the Euro and Chinese Renminbi, and to a lesser extent the Japanese Yen, Korean Won, and the Chinese Yuan, also known as Renminbi. Our predominant currency of sale is the U.S. Dollar in the Americas, the Euro and U.S. Dollar in Europe, the Yuan in Mainland China, the Yen in Japan, and the U.S. Dollar in other regions.Mexican Peso. We estimate that approximately 39%49% of our sales in 20172021 were invoiced in currencies other than the U.S. Dollar, and we expect sales denominated in foreign currencies to continue to represent a significant portion of our total revenue. While we also have expenses denominated in these same foreign currencies, the impact on revenues has historically been, and is expected to continue to be, greater than the offsetting impact on expenses. Therefore, in times when the U.S. Dollar strengthens in relation to these foreign currencies, we would expect to report a net decrease in operating income. Conversely, in times when the U.S. Dollar weakens in relation to these foreign currencies, we would expect to report a net increase in operating income. Thus, changes in the relative strength of the U.S. Dollar may have a material impact on our operating results.

Our revenue levels are impacted by global economic conditions, as we have a significant business presence in many countries throughout the world. Unfavorable economic conditions, such as inflation, slower growth or recession, higher interest rates, and tighter credit, may cause industrial companies to delay or reduce spending for automation projects, including those with machine vision, amid weaker general manufacturing confidence and heightened uncertainty around global trade. When global economic conditions are unfavorable, our revenue and our ability to generate operating profits could be materially adversely affected.

As a result of global economic conditions, our business systemis subject to the following risks, among others:

Disruptions withOur business, and the businesses of our management information systemscustomers, suppliers, and third-party service providers, could be disrupted by natural disasters, public health crises, such as pandemics and epidemics, man-made disasters, such as cyber-attacks and terrorism, or other events outside of our control. Certain of the Company’s business operations, such as our third-party contractor manufacturer in Indonesia, are in locations that may cause significant business disruption. In 2017, we began workbe more prone to replace our Enterprise Resource Planning (ERP) system, which is the management information system that integrates our manufacturing, order fulfillment,natural disasters, and financial activities. We expect the new system to be placed into service in the second quarter of 2018. Replacing an ERP system is a significant investment in terms of both time and money, and may divert management's attention from other operational matters. The conversion from the old system to the new systemglobal climate change may result in significantcertain types of natural disasters occurring more frequently or with more intense effects. Following a business disruption, including our abilitythe Company could be subject to process orders, ship products, invoice customers, process payments,production downtimes, operational delays, substantial recovery time, significant expenditures to resume operations, the diversion of management’s attention and otherwise run our business. Any disruption occurring with our ERP system,resources, or loss of business, any of our other management information systems, may have a material adverse effect on our operating results.

Additionally, the growth and expansionIn 2021, approximately 62% of our business and product offerings place significant demand on our employees and, in particular, our management team. The growthrevenue was derived from customers located outside of our business may require significant additional resourcesthe United States. We anticipate that international sales will continue to meet these daily requirements, which may not scale inaccount for a cost-effective manner or may negatively impact our customers’ experience. Effective management information systems, including our new Enterprise Resource Planning (ERP) system to be implemented in 2018, and strong internal controls are also necessary to support our growth. If we are unable to manage the growth of our organization and business effectively, our operating results may be materially and adversely affected.

Any of the Dodd-Frank Wall Street Reform and Consumer Protection Act that obligates companies to inquire into the origin of conflict minerals in their supply chains. We are working with our supply chain partners to take reasonable steps to assure conflict minerals are not sourced by Cognex or our supply chain partners. These steps may include purchasing supply from alternative vendors. If we are unable to secure adequate supply from alternative vendors, we may have to redesign our products, which may lead to a delay in manufacturing and a possible loss of sales. Although we are taking certain actions to mitigate supply risk, an interruption in, termination of, or material change in the purchase terms of any key componentsthese factors could have a material adverse effect on our operating results. In recent years, trade tariffs imposed by the United States on certain components imported from Chinese suppliers resulted in higher costs for

Because the market for our products, is characterized by rapid technological advances, we frequently introduce new products with improved ease-of-use, improved hardware performance, additional software features and functionality,which, to date, have been immaterial to our total cost of goods. However, cost increases as a result of these or lower cost that may replace existing products. Amongother trade tariffs could be material in the risks associated withfuture.

Trade tariffs have also had an indirect impact on the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product.

Our failureAdditionally, we are subject to introduce new productsapplicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, and similar anti-corruption and anti-kickback laws in the jurisdictions in which we operate. These laws generally prohibit offering, promising, giving, or authorizing others to provide anything of value, either directly or indirectly, to a successfulgovernment official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. Particularly as a result of our global operations, including in developing countries, and timely mannerour growing international sales force, our relationships with our customers and resellers could expose us to liability under these laws. Violations of anti-corruption laws may result in the loss ofsevere civil and criminal penalties for noncompliance. Even an unsuccessful challenge or investigation into our market sharepractices is costly to defend, and a decrease in our revenuescould cause adverse publicity, and profits.

From time to time, we may be subject to various claims and lawsuits by competitors, shareholders, customers, distributors, patent trolls, former employees, or other parties arising in the ordinary course of business, including lawsuits charging patent infringement, or claims and lawsuits instituted by us to protect our intellectual property and confidential information or for other reasons. We may be a party to actions that are described in the section captioned “Legal Proceedings,” appearing in Part I - Item 3 of this Annual Report on Form 10-K. These matters can be time-consuming,time consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our operating results.

None

In 1994, Cognex purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts that serves as our corporate headquarters and is occupied by employees primarily in research, development, and engineering, manufacturing and quality assurance, and information technology, finance and administration functions. In 1997, Cognex completed construction of a 50,000 square-foot addition to this building.

In 1995, Cognex purchased an 83,000 square-foot office building adjacent to our corporate headquarters that is partially occupied by employees primarily in research, development, and engineering, sales, marketing, service, finance, and information technology functions. The remainder of this building is occupied by a tenant who has a lease agreement that expires in 2021.

In 1997, Cognex purchased a three and one-half acre parcel of land adjacent to our corporate headquarters. This land is being held for future expansion.expansion and is currently used as an Ultimate Frisbee Field for our Cognoids.

In 2007, Cognex purchased a 19,000 square-foot building adjacent to our corporate headquarters. A portion of thisThis facility serves as the distribution center for customers in the Americas. The remainder of this building is occupied by a tenant who hasIn December 2021, Cognex entered into a lease agreement that expiresfor a 65,000 square-foot building in Southborough, Massachusetts for a term of 10 years to serve as a new distribution center for customers in the Americas. The transition of the distribution center to the new facility is expected to take place during the first half of 2022. Once the transition is complete, the 19,000 square-foot building adjacent to our corporate headquarters is expected to be held for future expansion.

In 2014, Cognex purchased thea 50,000 square footsquare-foot building in Cork, Ireland where we had previously leased space for several years.Ireland. This facility serves as the distribution center for customers outside of the Americas.

Cognex conducts certain of its operations in other leased facilities.facilities, predominantly research, development, and engineering, sales, and administration functions. These lease agreements expire at various dates through 2024.2032. Certain of these leases contain renewal options, retirement obligations, escalation clauses, rent holidays, and leasehold improvement incentives.

Not applicable.

The following table sets forth the names, ages, and titles of Cognex’s executive officers as of December 31, 2017:

Dr. Shillman and Mr. Willett, havewho is a member of the Company's Board of Directors, has been employed by Cognex in theirhis current positionsposition for no less than the past five years.

Ms. DiPalma joined Cognex in 1992 as Senior Reporting Accountant.1992. She has served for more than 2025 years in a series of increasingly responsible roles in the Finance Department,finance function, including six years as Cognex Treasurer, before transitioning to Corporate Employee Services in 2016. Ms. DiPalma was promoted to Senior Vice President of Employee Services and became a named executive officer in 2017. Prior to joining Cognex, Ms. DiPalma was a member of the audit firm PricewaterhouseCoopers. She holds a Bachelor of Science degree in Accounting from Boston College, a Master of Science degree in Taxation from Bentley College, and is a Certified Public Accountant.

The Company’s common stock is traded on The NASDAQ Stock Market LLC, under the symbol CGNX. As of January 28, 2018,30, 2022, there were approximately 700650 shareholders of record of the Company’s common stock. The Company believes the number of beneficial owners of the Company’s common stock on that date was substantially greater.

In October 2017,2018, the Company's Board of Directors declared a two-for-one stock split of the Company's common stock, which was effected through a stock dividend distributed on December 1, 2017. All references made to share or per share amounts in the tables and narratives below have been restated to reflect the effect of this two-for-one stock split.

The following table sets forth information with respect to purchases by the Company of shares of its common stock during each fiscal month of the fourth quarter of 2017:2021:

Total dividends paid were $43,263,000 in 2021, $390,508,000 in 2020, which included $351,428,000 paid for the special cash dividend, and $35,124,000 in 2019. Future dividends will be declared at the discretion of the Company's Board of Directors authorized the repurchase of an additional $150,000,000 of common stock, which repurchases may commence once the Company completes the existing program and will be subjectdepend on such factors as the Board deems relevant, including, among other things, the Company's ability to market conditions and other relevant factors.generate positive cash flow from operations.

Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense. These statements are based uponon our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer demand and order rates expected areasand timing of growth, emerging markets,related revenue, managing supply shortages, delivery lead times, future product mix, research and development activities, sales and marketing activities, new product offerings, capital expenditures, investments, liquidity, dividends and stock repurchases, strategic and growth plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the loss of a large customer; (2) current and future conditions in the global economy; (3) the reliance on revenue from the consumer electronics or automotive industries; (4) the inability to penetrate new markets; (5) the inability to achieve significant international revenue; (6) fluctuations in foreign currency exchange rates and the use of derivative instruments; (7) information security breaches or business system disruptions; (8) the inability to attract and retain skilled employees; (9) the failure to effectively manage our growth; (10) the reliance upon key suppliers to manufacture and deliver criticalquality products; (2) the inability to obtain components for our products; (11)(3) the failure to effectively manage product transitions or accurately forecast customer demand; (12)(4) the ability to manage disruptions to our distribution centers; (5) the inability to design and manufacture high-quality products; (13)(6) the impact, duration, and severity of the COVID-19 pandemic, including the availability and effectiveness of vaccines; (7) the loss of, or curtailment of purchases by, large customers in the logistics industry; (8) information security breaches; (9) the inability to protect our proprietary technology and intellectual property; (10) the inability to attract and retain skilled employees and maintain our unique corporate culture; (11) the technological obsolescence of current products and the inability to develop new products; (14)(12) the failure to properly manage the distribution of products and services; (15) the inability to protect our proprietary technology and intellectual property; (16) our involvement in time-consuming and costly litigation; (17)(13) the impact of competitive pressures; (18)(14) the challenges in integrating and achieving expected results from acquired businesses; (19)(15) potential disruptions in our business systems; (16) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; and (20)assets; (17) exposure to additional tax liabilities.liabilities; (18) fluctuations in foreign currency exchange rates and the use of derivative instruments; (19) unfavorable global economic conditions; (20) business disruptions from natural or man-made disasters or public health issues; (21) economic, political, and other risks associated with international sales and operations; and (22) our involvement in time-consuming and costly litigation. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of this Annual Report on Form 10-K. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.

Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes,and distribution tasks where vision is required. On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD) that specialized in machine vision products that inspect the surfaces of materials processed in a continuous fashion. The financial results of SISD are reported as a discontinued operation for all periods presented.

The Company’s customers are predominantlyCognex machine vision is used to automate manufacturing and distribution processes in a variety of industries, where the factory automation market. Factory automation customers purchase Cognex productstechnology is widely recognized as an important component of automated production and incorporate them into their manufacturing processes. Customers in the consumer electronics and automotive industries contribute the largest percentage to the Company's factory automation revenue.quality assurance. Virtually every manufacturer or distributor can achieve better quality and manufacturing efficiency by using machine vision, and therefore, this market also includesCognex products are used by a broad base of customers across a variety of other industries, including logistics, automotive, consumer electronics, medical-related, semiconductor, consumer products, and food and beverage, medical devices, and pharmaceuticals. Factory automation customers also purchase Cognex products for use outside of the manufacturing process, such as using ID products in logistics automation for package sorting and distribution. A small percentage of the Company’s customers are in the semiconductor and electronics capital equipment market. These customers purchase Cognex products and integrate them into the automation equipment that they manufacture and then sell to their customers to either make semiconductor chips or assemble printed circuit boards.beverage.

Revenue for the year ended December 31, 20172021 totaled $747,950,000,$1,037,098,000, representing an increase of 44% over 2016. Revenue28% from 2020. The increase was due in part to significantly higher revenue from the logistics industry, which was our largest market in 2021, as well as the impact of a broader recovery in industries that were adversely affected by the COVID-19 pandemic in 2020, most notably the automotive industry.

Operating expenses increased by $10,656,000, or 2%, from the prior year in all major regions across a varietyas higher incentive compensation costs, the impact of industries, including the consumer electronics, automotive,foreign currency exchange rate changes, and logistics industries. Gross margin was 77%costs of additional headcount to support our future growth plans, were partially offset by savings from 2020 cost-cutting measures and one-time restructuring and intangible asset impairment charges of $35,495,000. Excluding these one-time restructuring and intangible asset impairment charges, operating expenses increased by $46,151,000, or 12%.

Operating income expanded to 30% of revenue in 20172021 compared to 78%21% of revenue in 2016 due primarily to2020. This higher revenue from a material customer with preferred pricing. Operating expenses increased by 31% from the prior year due principally to higher personnel-related costs from headcount additions,

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

As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. We also use results on a constant-currency basis as one measure to evaluate our performance. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange rate changes. Results on a constant-currency basis are not in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S. GAAP.

Gross margin as a percentage of revenue was 77%decreased to 73% in 20172021 compared to 78%75% in 2016.2020. The decrease in gross margin percentage was primarily due primarily to higher revenue from a material customerprices paid to purchase inventories in the consumer electronics industry under a preferred pricing arrangement,2021, including higher costs for components and freight, due largely to global supply chain constraints. The decrease was also due to a lesser extent, an increased levelgreater percentage of projects intotal revenue coming from the logistics industry, that require installation services withwhich has relatively lower margins. These decreases weregross margins and included some comparatively lower margins from strategic logistics projects in 2021.

The unfavorable impact of higher inventory purchase prices and a higher percentage of logistics revenue was partially offset by the favorable impact of material cost reductions and volume purchasing, as well as manufacturing efficiencies achieved from arelated to the higher revenue level and lower provisions for excess and obsolete inventories as fixed manufacturing costs were spread overcompared to the prior year. The higher provisions for excess and obsolete inventories in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

As of the date of this report, we expect gross margin as a largerpercentage of revenue base.for the first quarter of 2022 to be in the low-70% range. The expected gross margin percentage reflects our expectations that higher inventory purchase prices will continue throughout and beyond the first quarter of 2022. Our estimates also reflect a significant percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

Research, development, and engineering (RD&E) expenses in 20172021 increased by $20,936,000,$4,390,000, or 27%3%, from the prior year as detailed in the table below (in thousands).

RD&E expenses increased due to foreign currency exchange rate changes, as costs denominated in foreign currencies were translated into U.S. Dollars at a higher personnel-related costs resulting primarily from headcount additions, which included engineering talent from six business acquisitions completed since August 2016. The Company also incurred higherrate. Higher spending on outsourced engineering services due to the timing of product development activities, including engineering prototypes for large sales opportunities, also contributed to the increase. These increases were partially offset by lower personnel-related costs due to a workforce reduction in the second quarter of 2020. Higher costs from annual salary increases and fringe benefits provided to employees, as well as headcount additions to support new product initiatives. Stock-based compensation expense was higher thaninitiatives, partially offset the prior year due to a higher valuationlower costs from the workforce reduction.

RD&E expenses as a percentage of revenue was 13% in 20172021 compared to 15%16% in 2016.2020. We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers. In addition, we consider our ability to accelerate the time to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant RD&E investments in the future, and we target our annual RD&E spending to be between 10% and 15% of revenue. This quarterly percentage is impacted by revenue levels and investing cycles.

Selling, general, and administrative (SG&A) expenses increased in 2017 increased2021 by $54,618,000,$41,761, or 33%16%, from the prior year as detailed in the table below (in thousands).

SG&A expenses increased due to higher personnel-related and recruiting costs resulting from headcount additions, principally sales personnel. In addition, higherexpenses related to annual incentive compensation plan expenses, includingplans, which include sales commissioncommissions and Company bonusincentive bonuses. Relevant performance goals for these plans, were recorded in 2017 as a resultwell as any changes to employee eligibility, are set at the beginning of each year, with the additional headcount and higher achievement levels based uponability to earn upside if the Company's performance. Travel expenses and sales demonstration equipment costsgoals are exceeded. Sales commissions were also higher in 2017 due to additional sales personnel and the higher business level. Stock-based compensation expense was higher than the prior year primarily due to the higher business levels, which resulted in a greater portion of our sales team exceeding the performance goals set in their commission plans in 2021 versus 2020. Likewise, the performance goal set for 2021 incentive bonuses was exceeded based on the Company's operating income margin, with the same being true in 2020. However, incentive bonus accruals in 2021 were higher valuationthan the prior year primarily due to the impact of stock options granted early in 2017.

Personnel-related costs increased due to higher costs from annual salary increases and fringe benefits provided to employees, as well as sales headcount additions in strategic growth areas of the business, partially offset by the impact of the workforce reduction that took place in the second quarter of 2018.2020. Changes in foreign currency exchange rates also resulted in a higher level of expenses, as costs denominated in foreign currencies were translated into U.S. Dollars at a higher rate. Expenses were also higher due to investments the Company is making in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities. A portion of these costs was expensed as incurred, while the majority of these investments were accounted for as a capital asset that was placed into service in the first quarter of 2022. The Company also increased spending on marketing programs in an effort to generate future sales opportunities, particularly related to new product introductions, and incurred higher travel expenses as restrictions related to COVID-19 eased in certain regions.

The Company recorded foreign currency losses of $1,601,000$2,270,000 in 20172021 and foreign currency gains of $101,000$3,697,000 in 2016. The foreign2020. Foreign currency gains and losses in 2017 resultedresult primarily from the revaluation and settlement of accounts receivableassets and liabilities that are denominated in U.S. Dollars recorded on the books of the Company's Irish subsidiary, for whichcurrencies other than the functional currencies of our subsidiaries or the reporting currency of our company, which is the Euro. During the period of time that these receivables were outstanding, the U.S. Dollar weakened versus the Euro resulting in foreign currency losses.Dollar.

Investment income increaseddecreased by $2,503,000,$6,334,000, or 36%49%, from the prior year. The increasedecrease was due primarily to higherlower yields as well as additional funds available for investment on the Company's portfolio of debt securities.securities, partially offset by higher invested balances.

The Company recorded other expense of $338,000$591,000 in 20172021 and other income of $871,000$309,000 in 2016.2020. Other income (expense) included a benefit of $28,000 in 2017 and a benefit of $463,000 in 2016 resulting from the revaluationincludes fair value adjustments of contingent consideration liabilities arising from business acquisitions. In addition, the Company received a foreign

The Company’s effective tax rate was 34%12% of the Company’s pre-tax income in 20172021, compared to 11%6% in 2016.

Gross margin as a percentage of revenue was 78%improved to 75% in 20162020 compared to 77%74% in 2015.2019. The increase in the gross margin percentage was primarily due primarily to the favorable impact of material cost reductions and volume purchasing,the higher revenue on fixed manufacturing costs, as well as manufacturing efficiencies achievedfavorable product mix. In 2020, revenue from customers in the consumer electronics and logistics industries each represented a highergreater percentage of our total revenue level as fixed manufacturing costs were spread overthan the prior year. Although our logistics margins are lower relative to our total gross margin, these margins improved from 2019 and the impact of logistics on our gross margin was more than offset by a larger revenue base. These increases weregreater contribution of relatively higher-margin consumer electronics revenue.

The favorable impact of sales volume and product mix was partially offset by a trend toward higher hardware contentprovisions for excess and obsolete inventories, which totaled $9,908,000 in our product sales as we

Research, development, and engineering (RD&E) expenses in 20162020 increased by $8,478,000,$11,555,000, or 12%10%, from the prior year as detailed in the table below (in thousands).

RD&E expenses also increased due to help accelerate the development of future products. In addition, higher expenses for annual incentive compensation plan accrualsplans. Relevant performance goals for these plans are set at the beginning of each year, with the ability to earn upside if the goals are exceeded. The Company did not achieve its performance goal to earn a company bonus in 2019, while the goal set for 2020 was exceeded based on the Company's operating income margin. Expenses for the fourth quarter of 2020 included a true-up of the annual liability to reflect the upside achievement based on our strong operating results for the quarter that exceeded our prior estimates.

These increases were recorded in 2016partially offset by lower stock-based compensation expense as a result of higher achievement levels based upona lower total value of awards granted in 2020 as compared to 2019, as well as the Company's performance. Stock-basedimpact on the timing of expense recognition due to changes in restricted stock unit vesting schedules. In addition, credits were recorded to stock-based compensation expense wasin the second quarter of 2020 for awards canceled as a result of a workforce reduction. The Company also higher than the prior year.incurred lower travel expenses resulting from COVID-19 restrictions.

Selling, general, and administrative (SG&A) expenses decreased in 2016 increased2020 by $9,436,000,$6,249,000, or 6%2%, from the prior year as detailed in the table below (in thousands).

These decreases were partially offset by higher expenses for annual incentive compensation plan accruals, includingplans. Relevant performance goals for these plans are set at the beginning of each year, with the ability to earn upside if the goals are exceeded. The Company did not achieve its performance goal to earn a company bonus in 2019, while the goal set for 2020 was exceeded based on the Company's operating income margin. Expenses for the fourth quarter of 2020 included a true-up of the annual liability to reflect the upside achievement based on our strong operating results for the quarter that exceeded our prior estimates. Likewise, sales commissions were higher than the prior year due to a greater portion of our sales team exceeding the performance goals set in their commission plans and bonus plans as a result of higher achievement levels based upon the Company's performance. In addition,in 2020 versus 2019.

SG&A personnel-related costs were higherrelatively flat from the prior year, as the impact of incremental resources added largely in 2016 resulting2019 were offset by savings from headcount additions, principally sales personnel. The Company also increased its spending on sales demonstration equipment related to new products and incurred higher depreciation expense related primarily to information technology and facilities investments. Offsetting these increases wasa workforce reduction in the settlementsecond quarter of patent litigation actions with Microscan Systems, Inc. in 2015. The company recorded legal fees of $3,190,000 and a settlement expense of $1,833,000 related to these actions in 2015.2020.

The Company recorded foreign currency gains of $101,000$3,697,000 in 20162020 and $1,122,000 in 2015. The foreign currency losses of $509,000 in 2019. Foreign currency gains in each period resultedand losses result primarily from the revaluation and settlement of cash, accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collecteddenominated in another. In 2020, the Company recognized foreign currency gains related to the revaluation of intercompany payables reported on the Company's China entity that are denominated in U.S. Dollars.

Investment income increaseddecreased by $3,365,000,$6,695,000, or 92%34%, from the prior year. In 2016, the Company received $2,257,000 in cash distributions from its limited partnership investment, of which $942,000 was accounted for as a return of capital, reducing the carrying value of this investment to zero, with the remaining $1,315,000 recorded as investment income. Future distributions will be recorded as investment income as they occur. The remaining increase in investment incomedecrease was due to increased funds available for investment, as well as higherlower yields on the Company's portfolio of debt securities.securities, and to a lesser extent, lower average investment balances.

The Company recorded other expense of $309,000 in 2020 and other income of $871,000$1,212,000 in 2016 and $645,000 in 2015.2019. Other income included a benefit(expense) includes fair value adjustments of $463,000 in 2016 and $790,000 in 2015contingent consideration liabilities arising from business acquisitions. In 2019, the Company recorded favorable fair value adjustments related to its acquisition of GVi Ventures, Inc., resulting from a decreaselower level of revenue in the fair value of the contingent consideration liability that arose from a 2015 business acquisition (refer to Note 20 to the Consolidated Financial Statements in Part II - Item 8 of this Annual Report on Form 10-K for further information). Other income also included a foreign government

The Company’s effective tax rate was 11%an expense of the Company’s6% of pre-tax income in 20162020 compared to 15%a benefit of 25% of pre-tax income in 2015.2019. The effective tax rate in both years reflected several discrete tax items described below.

The effective tax rate for 2016 included a decrease in tax expense of $11,889,000$12,788,000 in 2020 and $6,472,000 in 2019 related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises.

In 2016,2020, the Company adopted Accounting Standards Update 2016-09, "Improvementsrecorded discrete tax items related to Employee Share-Based Payment Accounting," which was issued by the Financial Accounting Standards Board in March 2016. This Update requires excess tax benefits to be recognized as income tax benefit in the income statement. Previous guidance required excess tax benefits to be recognized as additional paid-in-capital in shareholders' equity on the balance sheet. The effective tax rate for 2016 also included the impactfinal true-up of the following additional discreteprior year tax events: (1)accrual upon filing the related tax return. This included a decrease in tax expense of $893,000 from the expiration$13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the statutesUnited States based on clarifications to rules related to the use of limitationsforeign tax credits. This benefit was partially offset by tax expense for certaina transfer price adjustment in China of $3,267,000 and smaller tax expense adjustments related to foreign tax filings of $843,000.

In 2020, interpretations of a German law relating to withholding taxes on intellectual property rights emerged. The Company conducted a careful review of the interpretation and believes it has adequate reserves for incomethis German tax uncertainties, (2)exposure.

In 2019, the Company made changes to its international tax structure as a result of European Union tax reform legislation, and as a result, recorded a net discrete tax benefit of $87,500,000. Also, in 2019, the Company migrated acquired intellectual property to certain subsidiaries, and as a result, recorded a discrete tax expense of $28,528,000.

Other discrete tax items, none of which were individually material, resulted in a net decrease in tax expense of $439,000 from the final true-up of the prior-year's tax accrual upon filing the actual tax returns, (3) an increase$307,000 in tax expense of $547,000 from a 5% withholding tax triggered by the movement of intellectual property purchased as part of a foreign business acquisition,2020 and (4) an increase$1,932,000 in tax expense of $1,260,000 from the write-off of a deferred tax asset related to foreign branches resulting from an IRS rule change.

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $827,984,000$907,364,000 as of December 31, 2017.2021. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.

The Company’s cash requirements in 20172021 were primarily met with positive cash flows from operations investment maturities, and the proceeds from stock option exercises. Cash requirements consisted of operating activities, investment purchases, the repurchase of common stock, the payment of dividends, cash paid for business acquisitions, and capital

Capital expenditures in 20172021 totaled $28,754,000$15,455,000 and consisted primarily of computer hardware and software, (including the ERP system referred to in the subsequent paragraph), manufacturing test equipment related to new product introductions, and improvements made to the Company’sCompany's headquarters building in Natick, Massachusetts, andMassachusetts. In 2021, the Company's distribution centerCompany made investments in Cork, Ireland.

The Tax CutsCompany's material cash requirements include contractual obligations related to inventory purchase commitments and Jobs Act was signed into law onleases. As of December 22, 2017, and as a result,31, 2021, the Company has recorded a one-time estimated transition tax on unrepatriated foreign earningshad inventory purchase commitments of $101,379,000 in 2017. The Company has offset this expense$100,750,000, with net operating lossesthe majority payable within 12 months, and tax prepayments resulting in a net estimated liabilitylease payment obligations of $66,741,000, which is$37,968,000, with $9,178,000 payable over eight years beginning in 2019.

The Tax Cuts and technologies. The Company has completed seven business acquisitions since August 2015, noneJobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax, which are significant individually or in the aggregate to the Company's financial positions or operating results. Certain of these acquisitions have contractual obligations for deferred cash payments, contingent cash payments tied to performance, and special incentive cash payments tied to employment, none of which are materially individually or in the aggregate to the Company's cash flows.

The Company believes that its existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. As of December 31, 2017,In addition, the Company had $827,984,000 in cash and investments. In addition, Cognex has no long-term debt and does not anticipate needing debt financing in the near future.debt. We believe that our strong cash position has put us in a relatively good position with respect to ouranticipated longer-term liquidity needs.

Our discussion and analysis of the Company’s financial condition and results of operations are based uponon the consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. ActualChanges in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ from these estimates under different assumptions or circumstances resulting in charges that could be material in future reporting periods. We believe the following critical accounting policies require the use of significant estimates and judgments in the preparation of our consolidated financial statements.

Management monitors the carrying value of its debt securities compared to their fair valuethat are in an unrealized loss position to determine whether an other-than-temporary impairment has occurred. In considering whether a decline in fair value is other-than-temporary, we consider many factors, both qualitative and quantitative in nature, including the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, our ability and intent to hold the security to expected recovery of value, and other meaningful information. If a decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded in current operations to reduce the carrying value of the investment to its fair value. There were no other-than-temporary impairments of investments in 2017, 2016, or 2015.

Management estimates excess and obsolescence exposures based uponon assumptions about future demand, product transitions, and marketgeneral economic and industry conditions, and records reserves to reduce the carrying value of inventories to their net realizable value. Volatility in the global economy makes these assumptions about future demand more judgmental. Among the risks associated with the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product. In addition, we may strategically enter into non-cancelable commitments with vendors to purchase materials for products in advance of demand to take advantage of favorable pricing or address concerns about the availability of future supplies, andbuild safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times. Astimes, or take advantage of December 31, 2017, the Company’s reserve for excess and obsolete inventory totaled $4,961,000, or 6% of the gross inventory balance. A 10% difference in inventory reserves as of December 31, 2017 would have affected net income by approximately $456,000.favorable pricing.

The Company has long-lived assets, including property, plant, and equipment and acquiredCompany's intangible assets. These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. The Company evaluates the potential impairment of these long-livedintangible assets whenever events or circumstances indicate theirthe carrying value may not be recoverable. Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an acquired asset, a change in the Company’s business strategy or its use of an acquired asset, or negative economic or industry trends.

If an event or circumstance indicates the carrying value of long-livedintangible assets may not be recoverable, the Company assesses the recoverability of the assets by comparing the carrying value of the assets to the sum of the undiscounted future cash flows that the assets are expected to generate over their remaining economic lives. If the carrying value exceeds the sum of the undiscounted future cash flows, the Company compares the fair value of the long-livedintangible assets to the carrying value and records an impairment loss for the difference. The Company generally estimates the fair value of its long-livedintangible assets using the income approach based uponon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount

Compensation expense is recognized for all grants of stock optionoptions and restricted stock grants.units. Determining the appropriate valuation model and estimating the fair values of thesestock option grants requires the input of subjective assumptions, including expected stock price volatility, dividend yields, expected term, and forfeiture rates. The expected volatility assumption is based partially upon the historical volatility of the Company’s common stock, which may or may not be a true indicator of future volatility, particularly as the Company continues to seek to diversify its customer base.volatility. The assumptions used in calculating the fair values of stock option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the

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

Significant judgment is required in determining worldwide income tax expense based uponon tax laws in the various jurisdictions in which the Company operates. The Company has established reserves for income taxes by applying the “more likely than not” criteria, under which the recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant tax authority. All tax positions are analyzed periodically and adjustments are made as events occur that warrant modification, such as the completion of audits or the expiration of statutes of limitations, which may result in future charges or credits to income tax expense. The Company is currently under audit by the Internal Revenue Service (“IRS”) for the tax years 2017 and 2018. Additionally, the Company is under audit by the Commonwealth of Massachusetts for tax years 2017 and 2018. Although management believes the Company is adequately reserved for these audits, the evaluation of the Company’s tax positions involves significant judgment, and the final determination these tax audits and any related litigation could result in material changes in our estimates.

As part of the process of preparing consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the current tax liability, as well as assessing temporary differences arising from the different treatment of items for financial statement and tax purposes. These differences result in deferred tax assets and liabilities, which are recorded on the Consolidated Balance Sheets.

In 2019, the Company failmade changes to generate sufficient pre-tax profits in future periods, we may be required to record further material adjustments to these deferredits international tax assets, resulting in additional charges to income in the period of determination.

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 two types of hedges to manage this risk. The first are economic hedges which utilizeutilizing foreign currency forward contracts with maturities of up to 4595 days 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