This Annual Report on Form 10-K contains forward-looking statements within the meaning of the 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 manufacturing 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 manufacturing 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.

Cognex machine vision is used to automate manufacturing and distribution processes in a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance. Virtually every manufacturer or distributor can achieve better quality and manufacturing efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including logistics, automotive, consumer electronics, automotive,medical-related, semiconductor, consumer products, and food and beverage, and medical-related. Cognex products are also used to automate distribution processes in the logistics industry for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers.beverage.

Although we consider Cognex to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the 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 may also compete with internal engineering departments of current or prospective customers, as well as open sourceopen-source tools available for free byfrom various companies. In recent years, we have encountered increased competition from low-cost vision providers in China.

Cognex’s ability to compete depends uponon our ability to design, manufacture, and sell high-quality products, as well as our ability to develop new products and functionality that meet evolving customer requirements. The primary competitive factors affecting the choice of a machine vision system include vendor reputation, product functionality and performance, ease of use, vendor reputation, price, and post-sales support. The importance of each of these factors varies depending uponon the specific customer’s needs.

Our goal is to expand our position as a leading worldwide provider of machine vision products for industrial customers. We are selective in choosing growth opportunities that we believe will maintain our historically high gross margin percentages, which have rangedbeen in the mid 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 and our deep learning vision software that solves complex applications with unpredictable defects and deviations. We invest through internal development, as well as the acquisition of businesses and technologies. We believe that our acquisition of Sualab Co., Ltd. in 2019 will continue to expand our deep learning technology to visual inspection tasks that could replace human inspectors and make automated inspection tasks fast, easy, and cost-effective.

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 are moving beyond barcode reading into more complex applications in e-commerce and omni-channel retail distribution centers, as well as parcel and ecommerce.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 andor may require supplemental technical support or integration assistance. We invest in emerging, high-growth regions where many manufacturers can benefit from incorporating machine vision into their production processes. This includes investment in China, where rising wages for assembly workers and a greater focus on product quality are driving assembly automation, particularly in the consumer electronics industry.

Our business strategy includes selective expansion into new machine vision applications and markets through the acquisition of businesses and technologies.

Cognex offers a full range of machine vision systems and sensors, 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 conduct simple presence/absence inspections, to deep learning solutions that

Cognex industrial image-based barcode readers quickly and reliably read 1D, 2D, label-based, and direct part mark (DPM) codes found in nearly every industry including automotive, consumer products, medical-related, and logistics. The DataMan® product line, which includes fixed-mount, handheld, and mobile models, as well as barcode verifiers, help organizations optimize performance, increase throughput, and control traceability.

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.

RD&E expenses as a percentage of revenue were 13% in 2021, 16% in 2020, and 16% in 2019, and 14% in 2018.2019. 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 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 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.

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 products are manufactured utilizing a turnkey operationthird-party contractors, whereby the majority of component procurement, system assembly, and initial testing are performed by third-party contract manufacturers.electronics manufacturing services suppliers. Cognex’s primary contract manufacturer is located in Indonesia. TheOur contract manufacturers use specified components sourced from a vendor list approved by Cognex and assembly/test documentation created and controlled by Cognex. Certain components are presently sourced from a single vendor that is selected based on price and performance considerations. In the event of a supply disruption from a single-source vendor, these components may be purchased from alternative vendors.

After the completion of initial testing, a fully-assembled productassembled products from theour contract manufacturers isare routed to our distribution centers in Cork, Ireland or Natick, Massachusetts, USA, where trained Cognex personnel load Cognex software onto the productproducts, provide additional assembly and image alignment as needed, and perform quality control procedures. Fully-configured finished products for customers in the Americas, with the exception of certain products stocked locally in Mexico, are then shipped from our Natick,

Cognex sells its products through a worldwide direct sales force that focuses on the development of strategic accounts that generate or are expected to generate significant sales volume, as well as through a global network of distribution and integration partners. Our distribution partners provide sales and local support to help Cognex reach the many prospects for our products in factories around the world, and our integration partners are experts in vision and complementary technologies that can provide turnkey solutions for complex automation projects using vision. Sales engineers call directly on targeted accounts, with the assistance of application engineers, and manage the activities of our distribution and integration partners within their territories in order to provide an advantageous sales model for our products.

Sales to customers based outside of the United States represented approximately 65%62% of our total revenue in 2020,2021, with approximately 26%24% from customers based in Europe, 21%19% from customers based in Greater China, and 18%19% from customers based in other regions outside the United States. Sales to customers based in Europe are denominated in Euros and U.S. Dollars, sales to customers based in Greater China are denominated in Yuan Renminbi

for sales within Mainland China and U.S. Dollars in other territories, and sales to customers based in other regions are denominated in U.S. Dollars, Japanese Yen, Korean Won, and Mexican Pesos.

Cognex’s service offerings represent less than 10% of our total revenue and include maintenance and support, consulting, and training services. Maintenance and support programs include hardware support programs that entitle customers to have failed products repaired, as well as software support programs that provide customers with application support and software updates to the latest software releases. Application support is provided by technical support personnel located at Cognex regional offices, as well as by field service engineers that provide support at the customer’s production site. We provide consulting services that range from a specific area of functionality to a completely integrated installed application. Training services include a variety of product courses that are available at our offices worldwide, at customer facilities, and online.

At Cognex, we referOur employees are our most valuable assets and critical to our success. We create and maintain an environment where “Cognoids,” a unique name for our employees, as "Cognoids."can engage with each other, perform their best work, develop their careers, and be creative. As of December 31, 2020,2021, Cognex employed 2,0552,257 Cognoids globally, including 1,1491,280 in sales, marketing, and service activities; 537569 in research, development, and engineering; 164198 in manufacturing and quality assurance; and 205210 in information technology, finance, and administration. Of our 2,0552,257 Cognoids, 1,2471,362 are based outside of the United States. We have not experienced any work stoppages due to labor disputes. We believe that our employee relations are good.

Cognex invests in tools and resources that support employees’ learning and development. We employ a team that creates content to provide skills and coaching to employees on a variety of the Board of Directors.

Our compensation programs are based onreflect a pay-for-performance with a greaterphilosophy. As Cognoids advance in their careers, an increasing percentage of total compensation is tied to variable incentive programs, such as performance-based bonuses and stock-based awards, as Cognoids advanceawards. In addition, we care about the health and well-being of our employees and provide access to more senior positions.a host of benefits, including health, vision, a student loan repayment program, and reward and recognition programs.

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 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 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

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.

A significant portion of our products is presently manufactured by a third-party contractor located in Indonesia. This contract manufacturer has agreed to provide Cognex with termination notification periods and last-time-buy rights, if and when that may be applicable. We rely uponon our contract manufacturers to provide quality product. We engage in extensive product quality programs and processes, including actively monitoring the performance of our third-party manufacturers; however, we may not detect all product quality issues through these programs and processes.

We also rely uponon our contract manufacturers to meet delivery schedules.

Certain key electronic and mechanical components, such as integrated circuit chips, are presently sourcedfundamental to the design of Cognex products. Due to the impact of the COVID-19 pandemic and other factors, we have experienced, and may continue to experience, disruptions to the supply of components for our products that have resulted, and may continue to result, in higher purchase costs, delivery costs, and manufacturing delays.

Although we are taking certain actions to mitigate supply risk an interruptionand the Company has entered into agreements, including in terminationbroker markets, for the supply of many components, there can be no assurance that the Company will be able to extend or material change inrenew these agreements on similar terms, such as purchase prices, or at all. Component suppliers may suffer from poor financial conditions, which can lead to business failure for the purchasesupplier, further limiting the Company’s ability to obtain sufficient quantities of components on reasonable terms, or at all. Therefore, the Company remains subject to risks of any key components could have a material adverse effect on oursupply shortages and price increases that can adversely affect its business and operating results.

Because the market for our products is characterized by rapid technological changes, we frequently introduce new products with improved ease-of-use, improved hardware performance, additional software features and functionality, or lower cost that may replace existing products. 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.

We may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing, address concerns about the availability of future supplies, or build safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times.times, or take advantage of favorable pricing. Disruptions in both the supply of materials for our products and delivery of products from our contract manufacturers, such as those caused by the impact of the COVID-19 pandemic or other factors, have resulted, and may continue to result, in the Company purchasing a significant amount of inventory in response to these disruptions and in advance of demand. These measures to purchase inventory may expose us to an increased risk of excess or obsolete inventory and resulting charges if actual demand is lower than anticipated.

In 2020, deteriorating global economic conditions from the COVID-19 pandemic resulted in lower projected sales of excess inventories, for which the company recorded provisions totaling $7,718,000 in the second quarter of 2020.quarter. Our failure to effectively manage product transitions or accurately forecast customer demand, in terms of both volume and configuration, has led to, and may again in the future lead to, an increased risk of excess or obsolete inventory and resulting charges.

If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and material repair or replacement costs. Our release-to-market process may not be robust enough to detect significant design flaws or software bugs. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and contract manufacturers, these actions may not be sufficient to avoid a product failure rate that results in:

Any of these results could have a material adverse effect on our operating results.

To support our growth and execute on our operating plans and strategic initiatives, we must effectively attract, train, develop, motivate, and retain skilled employees, while maintaining our unique corporate culture. During the COVID-19 pandemic, many of our employees have worked remotely from their homesat times due to health and safety concerns or to comply with governmental regulations, with the primary exception of our distribution center employees who have remained on-site in shifts throughout the pandemic to deliver products to essential businesses.our customers. While we have been able to effectively conduct most business activities in this manner, these conditions have made it more challenging to maintain our collaborative corporate culture. When regulatory and health conditions allow,have allowed, we anticipate returninghave returned to a more collaborative, largely on-site work environment. Our longer-term intention is to have a hybrid work model, where our employees work on-site in a team environment the majority of the time. If work-from-home conditions continue longer than anticipated or we are unable to successfully bring peopleunsuccessful in bringing our employees back into the office oncewhen safe to do so for a hybrid work model, or our employees choose to leave the company altogether for more remote work flexibility or higher compensation, the company's business and ability to execute its plans could be adversely affected in a material way.

We are highly dependent upon the management and leadership of our senior management team. Although we have many experienced and qualified senior managers, the loss of key personnel could have a material adverse effect on our company.

The market for our products is characterized by rapidly changing technology. Accordingly, we believe that our future success will depend uponon our ability to accelerate time-to-market for new products with improved functionality, ease-of-use, performance, and price. There can be no assurance that we will be able to introduce new products in accordance with scheduled release dates or that new products will achieve market acceptance. Our inability to keep pace with the rapid rate of technological change in the high-technology marketplace could have a material adverse effect on our operating results.

Product development is often a complex, time-consuming, and costly process involving significant investment in research and development with no assurance of return on investment. Our strong balance sheet allows us to continue to make significant investments in research, development, and marketing for new products and technologies. Research is by its nature speculative, and the ultimate commercial success of a product depends uponon various factors, many of which are not under our control. We may not achieve significant revenue from new product investments for a number of years, if at all. Moreover, new products, if introduced, may not generate the gross margins that we have experienced historically.

We utilize a direct sales force, as well as a network of distribution and integration partners, to sell our products and services. Successfully managing the interaction of our direct and indirect sales channels to reach various potential customers for our products and services is a complex process. In addition, our reliance uponon indirect selling methods may reduce visibility to demand and pricing issues.

Finished products for customers in the Americas, with the exception of certain products stocked locally in Mexico, are shipped from our Natick, Massachusetts distribution center, while finished products for customers outside of the Americas are shipped from our Cork, Ireland distribution center. In 2020, we began stocking certain fully-configured finished products in our Mexico facility in order to provide faster delivery to local customers. To support the expansion of our business internationally, we may decide to make changes to our operating structure in other countries in the future when we believe these changes will make us more competitive by offering faster delivery, importation services, and/or local currency sales. These new operating models may require changes in legal structures, business systems, and business processes that may result in significant business disruption and negatively impact our customers’ experience, resulting in loss of sales. Furthermore, as we assume more responsibility for the importation of our products into other countries, we face higher compliance risk to adhering to local regulatory and trade requirements. Finally, the local stocking of finished products in countries outside of our primary distribution centers may result in higher costs and increased risk of excess or obsolete inventory associated with maintaining the appropriate level and mix of stock in multiple inventory locations, resulting in lower gross margins.

Our go-to-market strategy has distinct risks and costs, and therefore, our failure to implement the most advantageous balance in the sales and operating model for our products and services could adversely affect our revenue and profitability.

The machine vision market is highly fragmented and competitive. Our competitors include other vendors of machine vision systems, controllers, and components; manufacturers of image processing systems, sensors, and components; and system integrators. We may also compete with internal engineering departments of current or prospective customers, as well as open sourceopen-source tools available for free by various companies. In recent years, we have encountered increased competition from low-cost vision providers in China.China, as well as from large technology companies that may offer free open-source solutions. Any of these competitors may have greater financial and other resources than we do.do, or develop more compelling technological innovations. We may not be able to compete successfully in the future and our investments in research and development, sales and marketing, and support activities may be insufficient to enable us to maintain our competitive advantage. In addition, competitive pressures could lead to price erosion that could have a material adverse effect on our gross margins and operating results.

We have acquired, intangible assets.

Acquisitions are inherently risky and the inability to effectively manage these risks could have a material adverse effect on our operating results.

In 2021, theThe Company is making significant investments in business systems related to our sales processes, including systems to help our sales team more efficiently manage customer relationships and sales opportunities. We expect these new sales systems to be placed into service in the first quarter of 2022. Implementing new business systems requires a significant investment of time and money, and may divert management’s attention from other operational matters. The implementation of a new systembusiness systems and changes to associated business processes, particularly those that are customer-facing, may result in significant business disruption and negatively impact our customers’ experience, resulting in loss of sales. The Company intends to continue to make IT-related investments to improve its management information systems and support the expansion of our business internationally. Any disruption occurring with our business systems may have a material adverse effect on our operating results.

As of December 31, 2020,2021, we had approximately $498$721 million of debt securities in our investment portfolio. These debt securities are reported at fair value, with unrealized gains and losses, net of tax, included in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities. As of December 31, 2020,2021, our portfolio of debt securities had an unrealized gain of $5,690,000, and no unrealized losses. However, at any point in time, we may hold securities in ana net unrealized loss position.of $3,902,000. Included in this net loss, were gross unrealized losses totaling $4,971,000, of which $4,896,000 were in a loss position for less than twelve months and $75,000 were in a loss position for greater than twelve months. Management monitors its debt securities that are in an unrealized loss position to determine whether a loss exists related to the credit quality of the issuer that would be reported in current operations. It is our policy to invest in investment-grade debt securities that minimize our exposure to credit losses. No credit losses were recorded in 2021.

As of December 31, 2020,2021, we had approximately $16$12 million in acquired intangible assets, consisting primarily of acquired technologies and customer relationships. These assets are susceptible to changes in fair value due to a decrease in the historical or projected cash flows from the use of these assets, which may be negatively impacted by economic trends. DeterioratingIn 2020, deteriorating global economic conditions from the COVID-19 pandemic triggered a review of long-lived assets for potential impairment, which resulted in intangible asset impairment charges totaling $19,571,000 in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab.$19,571,000. A further decline in the cash flows generated by these or other intangible assets may result in future impairment charges.

If we determine that any of these investments or intangible assets are impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.

WeAs a multinational corporation, we are subject to income taxes, as well as non-income based taxes, in the United States as well as inand numerous foreign jurisdictions, includingjurisdictions. Our effective income taxes, indirect taxes such as value-added taxes (VAT),tax rate is dependent on the geographic distribution of our worldwide earnings or losses and payroll-related taxesthe tax laws and withholding obligations.regulations in each geographic region in which we operate. Significant judgment is required in determining our worldwide provision for income and other taxes. InThe application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty, and

tax laws themselves are subject to change. For example, many countries have recently adopted, or are considering the ordinary courseadoption of, business, thererevisions to their respective tax laws based on the Organization for Economic Co-operation and Development (“OECD”)’s Inclusive Framework, which could impact our tax liability due to our organizational structure and significant operations outside of the United States. Furthermore, we are many transactionssubject to regular review and calculations where the ultimate tax determination is uncertain. We are regularly under audit by both domestic and foreign tax authorities and may be assessed additional taxes, penalties, fees, or interest, which could have an adverse effect on our financial position, liquidity, or results of operations.

Although we believe our tax positions are reasonable, the final determination of tax audits andor any related litigation could be materially different than that whichfrom what is reflected in our financial statements and could have a material adverse effect on our income tax provision, net income, or cash flows in the period in which the determination is made.

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.

In addition to the U.S. Dollar, a significant portion of our revenues and expenses are denominated in the Euro and Chinese Yuan,Renminbi, and to a lesser extent the Japanese Yen, Korean Won, and Mexican Peso. We estimate that approximately 45%49% of our sales in 20202021 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. Economic downturnsUnfavorable 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 is subject to the following risks, among others:

As of December 31, 2020,2021, the Company had approximately $767$907 million in cash and investments. In addition, Cognex has no long-term debt and we do not anticipate needing debt financing in the near future.debt. We believe that our strong cash position puts us in a relatively good position to weather economic downturns. Nevertheless, our operating results have been materially adversely affected in the past, and could be materially adversely affected in the future, as a result of unfavorable economic conditions and reduced capital spending by manufacturers worldwide.

In 2020,2021, approximately 65%62% of our revenue was derived from customers located outside of the United States. We anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we source components from suppliers located outside of the United States, including China, and utilize third-party contract manufacturers, primarily located in Indonesia, to assemble certain of our products. We intend to continue to expand our sales and operations outside of the United States and expand our presence in international emerging markets. As a result, our business is subject to the risks inherent in international sales and operations, including, among other things:

Any of these 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

our products. Toproducts, which, to date, these cost increases have been immaterial to our total cost of goods sold and primarily relate to components sourced in China for new products that we build in the United States in their infancy before they are moved to our contract manufacturer in Indonesia; however,goods. However, cost increases as a result of these or other trade tariffs could becomebe material in the future.

Trade tariffs have also had an indirect impact on the economic climate in China, which in turn, has had a negative impact on the Company's revenue from customers based in China. Further escalations of trade conflicts between the United States and China or other countries where Cognex has operations, may havewho see risk in doing business with a further adverse effect on our revenue.U.S. company. In addition to trade tariffs, United States export controls that place restrictions on the exportation of our products or a subset of our products, including without limitation, any applicable regulations promulgated by the U.S. Commerce Department’s Bureau of Industry and Security, have had a negative impact on our revenue from customers based in China. To date, the impact of these restrictions has been immaterial to our total revenue; however, further or continued restrictions could have a material adverse effect on our operating results in the future.

Additionally, we are subject to applicable 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 government 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 our 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 severe civil and criminal penalties for noncompliance. Even an unsuccessful challenge or investigation into our practices is costly to defend, and could cause adverse publicity, and thus could have a material adverse effect on our business, financial condition, or operating results.

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. These matters can be 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 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 occupied by employees primarily in research, development, and engineering, sales, marketing, service, logistics, finance, and information technology functions.

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 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. This facility serves as the distribution center for customers in the Americas. In December 2021, Cognex entered into a lease for 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 a 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 2030.2032. 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, 2020:2021:

Dr. Shillman and Mr. Willett, who are both membersis a member of the Company's Board of Directors, havehas been employed by Cognex in theirhis current positionsposition for no less than the past five years.

Ms. DiPalma joined Cognex in 1992. She has served for more than 25 years in a series of increasingly responsible roles in the finance function, including six years as Cognex Treasurer, before transitioning to 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.

Mr. Gerst joined Cognex in 1999. He worked in a number of product-focused roles before being promoted to Senior Vice President of the ID Products Business Unit in 2014. In 2020,Following 2014, Mr. GerstGerst’s leadership role expanded into Vision Products and he was promoted to Executive Vice President of Vision and ID Products and his leadership role was expanded to include Vision Products and Global Marketing Communications.in October 2020. Prior to joining Cognex, Mr. Gerst held roles in engineering, sales, and product marketing for Hand Held Products (now Honeywell Imagingpart of Honeywell’s Safety and Mobility), a leading supplier of Automatic Identification and Data Collection equipment.Productivity Solutions). Mr. Gerst holds a Bachelor of Science degree in Electrical Engineering from Clarkson University and a Master in Business Administration from the Simon School of Business at the University of Rochester.

The Company’s common stock is traded on The NASDAQ Stock Market LLC, under the symbol CGNX. As of January 31, 2021,30, 2022, there were approximately 650 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 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of December 31, 2020,Under this October 2018 program, the Company repurchased 2,816,0001,398,000 shares at a cost of $121,348,000 under this program, including$61,690,000 in 2019, 1,215,000 shares at a cost of $51,036,000 duringin 2020, leavingand 957,000 shares at a remaining balancecost of $78,652,000.$78,652,000 in 2021, which completed purchases under this program. On March 12, 2020, the Company's Board of Directors authorized the repurchase of an additional $200,000,000 of the Company's common stock. Purchases underUnder this March 2020 program, will commence upon completionthe Company repurchased 1,060,000 shares, including 5,000 shares that had not yet settled as of the October 2018 program.December 31, 2021, at a cost of $83,000,000 in 2021, leaving a remaining balance of $117,000,000. The Company may repurchase shares under this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions.

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 2020:2021:

Total dividends amounted topaid 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, and $31,865,000 in 2018.2019. Future dividends will be declared at the discretion of the Company's Board of Directors and will depend uponon such factors as the Board deems relevant, including, among other things, the Company's ability to 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 on our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer demand and order rates and timing of related revenue, managing supply shortages, delivery lead times, future product mix, restructuring and other cost-savings initiatives, research and development activities, sales and marketing activities, new product offerings, capital projects,expenditures, investments, acquisitions, liquidity, dividends and stock repurchases, strategic and growth plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the reliance on key suppliers to manufacture and deliver quality products; (2) the inability to obtain components for our products; (3) the failure to effectively manage product transitions or accurately forecast customer demand; (4) the ability to manage disruptions to our distribution centers; (5) the inability to design and manufacture high-quality products; (6) the impact, duration, and severity of the COVID-19 pandemic; (2) potential disruptions to our business due to restructuring activities; (3)pandemic, including the availability and effectiveness of vaccines; (7) the loss of, or curtailment of purchases by, large customers in the consumer electronics and logistics industries; (4) the reliance on revenue from the automotive industry; (5) the reliance on key suppliers to manufacture and deliver critical components for our products; (6) the failure to effectively manage product transitions or accurately forecast customer demand; (7)(8) information security breaches; (9) the inability to designprotect our proprietary technology and manufacture high-quality products; (8)intellectual property; (10) the inability to attract and retain skilled employees and maintain our unique corporate culture; (9) the failure to effectively manage our growth; (10) the inability to achieve growth in revenue and profits from the logistics industry; (11) the technological obsolescence of current products and the inability to develop new products; (12) the failure to properly manage the distribution of products and services; (13) the impact of competitive pressures; (14) the challenges in integrating and achieving expected results from acquired businesses; (15) potential disruptions in our business systems; (16) information security breaches; (17) the inability to protect our proprietary technology and intellectual property; (18) potential impairment charges with respect to our investments or acquired intangible assets; (19)(17) exposure to additional tax liabilities; (20)(18) fluctuations in foreign currency exchange rates and the use of derivative instruments; (21) our involvement in time-consuming and costly litigation; (22)(19) unfavorable global economic conditions; and (23)(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.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 manufacturing and distribution tasks where vision is required. In addition to product revenue derived from the sale of machine vision products, the Company also generates revenue by providing maintenance and support, consulting, and training services to its customers; however, service revenue accounted for less than 10% of total revenue for all periods presented.

Cognex machine vision is used to automate manufacturing and distribution processes in a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance. Virtually every manufacturer or distributor can achieve better quality and manufacturing efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including logistics, automotive, consumer electronics, automotive,medical-related, semiconductor, consumer products, and food and beverage, and medical-related. Cognex products are also used to automate distribution processes in the logistics industry, including for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers.beverage.

Revenue for the year ended December 31, 20202021 totaled $811,020,000,$1,037,098,000, representing an increase of 12%28% from 2019. This2020. The increase was driven largely bydue in part to significantly higher revenue from certain customers in the consumer electronics industry and ecommerce customers in the logistics industry. We believe that both of these industries benefited in 2020 from higher consumer demand during the COVID-19 pandemic. These increases were partially offset by lower revenue from customers in the automotive industry, which was our largest market in 2019 and continues to be negatively impacted2021, as well as the impact of a broader recovery in industries that were adversely affected by global economic conditions resulting from the COVID-19 pandemic.pandemic in 2020, most notably the automotive industry.

Gross margin improvedas a percentage of revenue was 73% in 2021 compared to 75% of revenue in 2020, from 74% of revenue in 2019. Gross margin expansion wasprimarily due to the favorable impact of the higher revenue on fixed manufacturing costs,prices paid to purchase inventories, as well as favorable product mix. a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

Operating expenses increased by 10%$10,656,000, or 2%, from the prior year due primarily to one-time restructuring charges and intangible asset impairment charges. Excluding these charges, operating expenses were relatively flat with the prior year as higher incentive compensation costs, the impact of foreign currency exchange rate changes, and costs of additional headcount to support our future growth plans, were partially offset by lower travel expenses resulting from COVID-19 restrictions and savings from 2020 cost-cutting measures and one-time restructuring actions.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 2021 compared to 21% of revenue in 2020 compared to 20% of revenue in 2019. A2020. This higher level of discrete tax benefits in 2019 related to tax structure changesoperating income resulted in net income of 27% of revenue in 2021 compared to 22% of revenue in 2020, compared to 28% of revenue in 2019, and net income per diluted share of $1.56 in 2021 compared to $1.00 in 2020 compared to $1.16 in 2019.2020.

The following table sets forth certain consolidated financial data 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 improved to 75% in 2020 compared to 74% in 2019. The increase in the gross margin percentage was primarily due to the favorable impact of the higher revenue on fixed manufacturing costs, as well as favorable product mix. In 2020, revenue from customers in the consumer electronics and logistics industries each represented a greater percentage of our total revenue than 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 greater contribution of relatively higher-margin consumer electronics revenue.

The favorable impact of sales volume and product mix was partially offset by higher provisions for excess and obsolete inventories, which totaled $9,908,000 in 2020 compared to $5,296,000 in 2019. The higher level of provisions in 2020 was due to lower projected sales of excess inventories as a result of the deteriorating global economic conditions from the COVID-19 pandemic.

Research, development, and engineering (RD&E) expenses in 2020 increased by $11,555,000, or 10%, from the prior year as detailed in the table below (in thousands).

RD&E expenses also increased due to higher expenses for annual incentive compensation plans. 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 thisthe quarter that exceeded our prior estimates. These annual incentive compensation plans will be reset with relevant performance goals for 2021 and incentive compensation expenses will reflect our estimates of achievement throughout the year, which we expect will result in lower expense for the first quarter of 2021 as compared to the fourth quarter of 2020.

These increases were partially offset by lower stock-based compensation expense as a result of a lower total value of awards granted in 2020 as compared to 2019, as well as the impact 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 in the second quarter of 2020 for awards canceled as a result of a workforce reduction. The Company also incurred lower travel expenses resulting from COVID-19 restrictions. We expect these restrictions to continue into 2021.

Selling, general, and administrative (SG&A) expenses decreased in 2020 by $6,249,000, or 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 plans. 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 thisthe 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 in 2020 versus 2019. These annual incentive compensation plans will be reset with relevant performance goals for 2021 and incentive compensation expenses will reflect our estimates of achievement throughout the year, which we expect will result in lower expense for the first quarter of 2021 as compared to the fourth quarter of 2020.

SG&A personnel-related costs were relatively flat from the prior year, as the impact of incremental resources added largely in 2019 were offset by savings from a workforce reduction in the second quarter of 2020.

The Company recorded foreign currency gains of $3,697,000 in 2020 and foreign currency losses of $509,000 in 2019. Foreign currency gains and losses result primarily from the revaluation of cash, accounts receivable, accounts payable, and intercompany balances that are reported in one currency and denominated 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. The Company currently does not hedge its Chinese Yuan exposures due to limitations in hedging instruments available for this currency.

Investment income decreased by $6,695,000, or 34%, from the prior year. The decrease was due to lower yields on the Company's portfolio of debt securities, and to a lesser extent, lower average investment balances.

The Company recorded other expense of $309,000 in 2020 and other income of $1,212,000 in 2019. Other income (expense) includes fair value adjustments of contingent 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 lower level of revenue in the Americas' automotive industry.

The Company’s effective tax rate was an expense of 6% of pre-tax income in 2020 compared to a benefit of 25% of pre-tax income in 2019. The effective tax rate in both years reflected several discrete tax items described below.

The effective tax rate included a decrease in tax expense of $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. The Company cannot predict the level of stock option exercises by employees in future periods.

In 2020, the Company recorded discrete tax items related to the final true-up of the prior year tax accrual upon filing the related tax return. This included a decrease in tax expense of $13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the United States based on clarifications to rules related to the use of foreign tax credits. This benefit was partially offset by tax expense for a 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 this German tax exposure. Management will continue to monitor this law and court rulings in Germany.

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 $307,000 in 2020 and $1,932,000 in 2019. Excluding the impact of all discrete tax items, the Company’s effective tax rate was an expense of 17% of pre-tax income in 2020 and 16% of pre-tax income in 2019. The increase in the effective tax rate excluding discrete tax items was due to more of the Company's profits being earned and taxed in higher tax jurisdictions, as well as the impact of changes in 2019 to the Company's international tax structure.

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 $767,438,000$907,364,000 as of December 31, 2020.2021. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.

The Company’s cash requirements in 20202021 were primarily met with positive cash flows from operations maturities and sales of investments, and the proceeds from stock option exercises. Cash requirements consisted of operating activities, the payment of dividends, the repurchase of common stock, the payment of dividends, and capital expenditures. Working capital requirementsOperating activities included an increase in accounts receivable resulting from the higher business level and the timing of invoicing for a material customer, as well as an increase in grosscash outflows to secure inventories to support the higher business levellevels and build safety stock to mitigate the Company's exposure to demand changes or supply disruptions. Cash outlays in the first quarter of 20212022 are planned to include incentive compensation payments that were earned and accrued in 2020.2021.

Capital expenditures in 20202021 totaled $13,303,000$15,455,000 and consisted primarily of computer hardware and software, manufacturing test equipment related to new product introductions, and improvements made to the Company's headquarters building in Natick, Massachusetts and various leased facilities.Massachusetts. In 2021, the Company is making significantmade investments in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities. As of the date of this report, the Company estimates cash outlays for this initiative to be up to $10 million, a large portionmajority of which we expect will be capitalized andwere accounted for as a capital asset that was placed into service in the first quarter of 2022.

The following table summarizes the Company’sCompany's material cash requirements include contractual obligations both fixedrelated to inventory purchase commitments and contingent (in thousands):

The Tax Cuts and Jobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax, which is expected to result in tax payments of $51,113,000 starting$51,113,000. These payments started in 2021 and are expected to continue through 2025.

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, 2020, the Company had $767,438,000 in cash and investments. In addition, the Company 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 anticipated longer-term liquidity needs.

Our discussion and analysis of the Company’s financial condition and results of operations are based on 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. Changes 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.

As of December 31, 2020,2021, the Company’s investment portfolio of debt securities totaled $498,365,000.$721,203,000. These debt securities are reported at fair value, with unrealized gains and losses, net of tax, included in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities. As of December 31, 2020,2021, the Company’s portfolio of debt securities had ana net unrealized gainloss of $5,690,000,$3,902,000. Included in this net loss, were gross unrealized losses totaling $4,971,000, of which $4,896,000 were in a loss position for less than twelve months and no unrealized losses.

Management monitors its 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 that project theof expected future cash flows. Credit losses on debt securities were not material in 2021, 2020, 2019, or 2018.2019.

Management estimates excess and obsolescence exposures based on 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. Estimates in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic. Astimes, or take advantage of December 31, 2020, the Company’s reserve for excess and obsolete inventory totaled $14,578,000, or 19% of the gross inventory balance. A 10% difference in inventory reserves as of December 31, 2020 would have affected net income by approximately $1,210,000.

The Company's intangible 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 intangible assets whenever events or circumstances indicate the 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 intangible 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 intangible assets to the carrying value and records an impairment loss for the difference. The Company generally estimates the fair value of its intangible assets using the income approach based on a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows, and assets’ economic lives. Volatility in the global economy makes these assumptions and estimates more judgmental. Actual future operating results and the remaining economic lives of our intangible assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of intangible assets in future periods.

Deteriorating global economic conditions from the COVID-19 pandemic triggered a review of intangible assets for potential impairment in the second quarter of 2020. This review resulted in intangible asset impairment charges totaling $19,571,000 recorded in the second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab.2020. No impairment charges related to intangible assets were recorded in 20192021 or 2018.2019.

Compensation expense is recognized for all grants of stock options and restricted stock 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. 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 on 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.

The Tax Cuts and Jobs Act of 2017 imposed a minimum tax on foreign earnings related to intangible assets, known as the Global Intangible Low-Taxed Income (GILTI) tax. In 2019, the Company elected to account for the impact of the GILTI minimum tax in deferred taxes, a change from the Company’s initial election made in 2018 whereby the GILTI minimum tax was included in income tax expense as incurred on an annual basis. Management has determined that this change is considered preferable, based on the conclusion that it appropriately matches the Company’s current and deferred income tax implications related to the change in tax structure noted below.

In 2019, the Company made changes to its international tax structure as a result of tax reform legislation enacted by the European Union that resulted in an intercompany sale of intellectual property based on the fair value of this

The Company enters into economic hedges utilizing 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 Company’s investment policy allows investment in debt securities with effective maturities up to ten years, however as of December 31, 2020, 97%2021, 84% of the investment portfolio has effective maturity dates of less than three years. Given the relatively short maturities and investment-grade quality of the Company’s portfolio of debt securities as of December 31, 2020,2021, a sharp rise in interest rates should not have a material adverse effect on the fair value of these instruments. As a result, the Company does not currently hedge these interest rate exposures.

The following table presents the hypothetical change in the fair value of the Company’s portfolio of debt securities arising from selected potential changes in interest rates (in thousands). This modeling technique measures the change in fair value that would result from a parallel shift in the yield curve plus or minus 50 and 100 basis points (BP) over a twelve-month time horizon.