UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended ~~June 28, 2020~~July 4, 2021 or


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

Commission File Number 001-34218

COGNEX CORPORATION


(Exact name of registrant as specified in its charter)


Massachusetts						04-2713778
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

One Vision Drive

Natick, Massachusetts 01760-2059

(508) 650-3000


(Address, including zip code, and telephone number, including area code, of principal executive offices)

Securities registered pursuant to ~~the~~ Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.002 per share	CGNX	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

☒

As of ~~June 28, 2020,~~July 4, 2021, there were ~~173,047,292~~176,707,164 shares of Common Stock, $.002 par value per share, of the registrant outstanding.

INDEX


PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (interim periods unaudited)	3
	Consolidated Statements of Operations for the three-month and six-month periods ended ~~June~~July 4 , 202 1 and June 28, 2020 ~~and June 30, 2019~~	3
	Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended July 4 , 202 1 and June 28, 2020 ~~and June 30, 2019~~	4
	Consolidated Balance Sheets as of ~~June 28, 2020~~July 4, 2021 and December 31, ~~2019~~2020	5
	Consolidated Statements of Cash Flows for the ~~six-month~~ six -month periods ended ~~June~~July 4 , 202 1 and June 28, 2020 ~~and June 30, 2019~~	6
	Consolidated Statements of Shareholders’ Equity for the three-month and six-month periods ended ~~June~~July 4 , 202 1 and June 28, 2020 ~~and June 30, 2019~~	7
	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2924

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3429

Item 4.	Controls and Procedures	3430

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3531

Item 1A.	Risk Factors	3531

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3631

Item 3.	Defaults Upon Senior Securities	3631

Item 4.	Mine Safety Disclosures	3631

Item 5.	Other Information	3631

Item 6.	Exhibits	3732

	Signatures	3833

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
		(unaudited)						(unaudited)							(unaudited)				(unaudited)
Revenue	Revenue	$	169,097	$	199,047	$	336,332	$	372,531	Revenue	$	269,158	$	169,097	$	508,185	$	336,332
Cost of revenue	Cost of revenue	50,320		50,967		91,520		97,251		Cost of revenue	68,432		50,320		122,477		91,520
Gross margin	Gross margin	118,777		148,080		244,812		275,280		Gross margin	200,726		118,777		385,708		244,812
Research, development, and engineering expenses	Research, development, and engineering expenses	30,397		28,079		66,343		58,321		Research, development, and engineering expenses	31,302		30,397		65,407		66,343
Selling, general, and administrative expenses	Selling, general, and administrative expenses	60,153		68,245		129,291		135,056		Selling, general, and administrative expenses	76,843		60,153		149,267		129,291
Restructuring charges (Note 16)	Restructuring charges (Note 16)	14,798		—		14,798		—		Restructuring charges (Note 16)	0		14,798		0		14,798
Intangible asset impairment charges (Note 8)	Intangible asset impairment charges (Note 8)	19,571		—		19,571		—		Intangible asset impairment charges (Note 8)	0		19,571		0		19,571
Operating income (loss)	Operating income (loss)	(6,142)		51,756		14,809		81,903		Operating income (loss)	92,581		(6,142)		171,034		14,809
Foreign currency gain (loss)	Foreign currency gain (loss)	336		140		(2,667)		(108)		Foreign currency gain (loss)	(639)		336		(1,647)		(2,667)
Investment income	Investment income	3,291		5,223		8,520		10,128		Investment income	1,723		3,291		3,277		8,520
Other income (expense)	Other income (expense)	203		(144)		20		783		Other income (expense)	(127)		203		(295)		20
Income (loss) before income tax expense (benefit)	Income (loss) before income tax expense (benefit)	(2,312)		56,975		20,682		92,706		Income (loss) before income tax expense (benefit)	93,538		(2,312)		172,369		20,682
Income tax expense (benefit)	Income tax expense (benefit)	(1,170)		8,226		1,347		10,853		Income tax expense (benefit)	15,940		(1,170)		24,923		1,347
Net income (loss)	Net income (loss)	$	(1,142)	$	48,749	$	19,335	$	81,853	Net income (loss)	$	77,598	$	(1,142)	$	147,446	$	19,335

Net income (loss) per weighted-average common and common-equivalent share:	Net income (loss) per weighted-average common and common-equivalent share:																	Net income (loss) per weighted-average common and common-equivalent share:
Basic	Basic	$	(0.01)	$	0.28	$	0.11	$	0.48	Basic	$	0.44	$	(0.01)	$	0.84	$	0.11
Diluted	Diluted	$	(0.01)	$	0.28	$	0.11	$	0.47	Diluted	$	0.43	$	(0.01)	$	0.82	$	0.11

Weighted-average common and common-equivalent shares outstanding:	Weighted-average common and common-equivalent shares outstanding:																	Weighted-average common and common-equivalent shares outstanding:
Basic	Basic	172,283		171,318		172,345		171,209		Basic	176,626		172,283		176,454		172,345
Diluted	Diluted	172,283		175,448		175,499		175,528		Diluted	179,991		172,283		179,982		175,499

Cash dividends per common share	Cash dividends per common share	$	0.055	$	0.050	$	0.110	$	0.100	Cash dividends per common share	$	0.060	$	0.055	$	0.120	$	0.110

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
		(unaudited)						(unaudited)							(unaudited)				(unaudited)
Net income (loss)	Net income (loss)	$	(1,142)	$	48,749	$	19,335	$	81,853	Net income (loss)	$	77,598	$	(1,142)	$	147,446	$	19,335
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:										Other comprehensive income (loss), net of tax:

Available-for-sale investments:	Available-for-sale investments:									Available-for-sale investments:
Net unrealized gain (loss), net of tax of ($836) and $239 in the three-month periods and net of tax of ($1,788) and $507 in the six-month periods, respectively		12,451		2,311		8,590		4,562
Reclassification of credit (recovery) loss on investments into current operations		(85)		—		75		—
Reclassification of net realized (gain) loss into current operations		(955)		(382)		(2,805)		(422)
Net unrealized gain (loss), net of tax of $(61) and $(836) in the three-month periods and net of tax of $(646) and $(1,788) in the six-month periods, respectively										Net unrealized gain (loss), net of tax of $(61) and $(836) in the three-month periods and net of tax of $(646) and $(1,788) in the six-month periods, respectively	(138)		12,451		(2,096)		8,590
Reclassification of credit loss (recovery) on investments into current operations										Reclassification of credit loss (recovery) on investments into current operations	0		(85)		0		75
Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations										Reclassification of net realized (gain) loss on the sale of available-for-sale investments into current operations	(68)		(955)		(68)		(2,805)
Net change related to available-for-sale investments	Net change related to available-for-sale investments	11,411		1,929		5,860		4,140		Net change related to available-for-sale investments	(206)		11,411		(2,164)		5,860

Foreign currency translation adjustments:	Foreign currency translation adjustments:									Foreign currency translation adjustments:
Foreign currency translation adjustments	Foreign currency translation adjustments	1,903		(663)		(5,462)		(445)		Foreign currency translation adjustments	(337)		1,903		(3,107)		(5,462)
Net change related to foreign currency translation adjustments	Net change related to foreign currency translation adjustments	1,903		(663)		(5,462)		(445)		Net change related to foreign currency translation adjustments	(337)		1,903		(3,107)		(5,462)

Other comprehensive income, net of tax		13,314		1,266		398		3,695
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax	(543)		13,314		(5,271)		398
Total comprehensive income	Total comprehensive income	$	12,172	$	50,015	$	19,733	$	85,548	Total comprehensive income	$	77,055	$	12,172	$	142,175	$	19,733

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


		June 28, 2020		December 31, 2019			July 4, 2021		December 31, 2020
		(unaudited)					(unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	286,021	$	171,431	Cash and cash equivalents	$	217,037	$	269,073
Current investments, amortized cost of $141,874 and $235,610 in 2020 and 2019, respectively, allowance for expected credit losses of $0 in 2020 and 2019		143,084		240,470
Accounts receivable, less reserves of $2,235 and $1,821 in 2020 and 2019, respectively		111,671		103,447
Current investments, amortized cost of $189,818 and $102,258 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020						Current investments, amortized cost of $189,818 and $102,258 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020	190,747		103,240
Accounts receivable, allowance for credit losses of $803 and $831 in 2021 and 2020, respectively						Accounts receivable, allowance for credit losses of $803 and $831 in 2021 and 2020, respectively	149,157		125,696
Unbilled revenue	Unbilled revenue	978		4,782		Unbilled revenue	1,788		5,632
Inventories	Inventories	52,953		60,261		Inventories	68,503		60,830
Prepaid expenses and other current assets	Prepaid expenses and other current assets	51,768		26,840		Prepaid expenses and other current assets	65,646		37,220
Total current assets	Total current assets	646,475		607,231		Total current assets	692,878		601,691
Non-current investments, amortized cost of $461,948 and $431,633 in 2020 and 2019, respectively, allowance for expected credit losses of $75 and $0 in 2020 and 2019, respectively		467,087		433,452
Non-current investments, amortized cost of $542,015 and $390,417 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020						Non-current investments, amortized cost of $542,015 and $390,417 in 2021 and 2020, respectively, allowance for credit losses of $0 in 2021 and 2020	543,965		395,125
Property, plant, and equipment, net	Property, plant, and equipment, net	83,936		89,443		Property, plant, and equipment, net	76,972		79,173
Operating lease assets	Operating lease assets	25,819		17,522		Operating lease assets	21,277		22,582
Goodwill	Goodwill	242,436		243,445		Goodwill	242,906		244,078
Intangible assets, net	Intangible assets, net	17,337		39,490		Intangible assets, net	13,702		15,555
Deferred income taxes	Deferred income taxes	443,732		449,519		Deferred income taxes	425,618		434,704
Other assets	Other assets	8,042		5,833		Other assets	7,603		7,794
Total assets	Total assets	$	1,934,864	$	1,885,935	Total assets	$	2,024,921	$	1,800,702

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	17,999	$	17,866	Accounts payable	$	32,304	$	16,270
Accrued expenses	Accrued expenses	66,264		52,199		Accrued expenses	76,653		77,264
Accrued income taxes	Accrued income taxes	5,952		30,333		Accrued income taxes	11,644		9,379
Deferred revenue and customer deposits	Deferred revenue and customer deposits	46,738		14,432		Deferred revenue and customer deposits	76,445		21,274
Operating lease liabilities	Operating lease liabilities	7,628		5,647		Operating lease liabilities	7,888		8,110
Total current liabilities	Total current liabilities	144,581		120,477		Total current liabilities	204,934		132,297
Non-current operating lease liabilities	Non-current operating lease liabilities	21,208		12,326		Non-current operating lease liabilities	16,362		18,120
Deferred income taxes	Deferred income taxes	326,295		332,344		Deferred income taxes	306,355		314,952
Reserve for income taxes	Reserve for income taxes	12,302		11,563		Reserve for income taxes	15,227		14,257
Non-current accrued income taxes	Non-current accrued income taxes	48,915		51,113		Non-current accrued income taxes	40,963		48,915
Other liabilities	Other liabilities	5,085		2,402		Other liabilities	11,626		9,959
Total liabilities	Total liabilities	558,386		530,225		Total liabilities	595,467		538,500

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, $.01 par value – Authorized: 400 shares in 2020 and 2019, respectively, no shares issued and outstanding		—		—
Common stock, $.002 par value – Authorized: 300,000 shares in 2020 and 2019, respectively, issued and outstanding: 173,047 and 172,440 shares in 2020 and 2019, respectively		346		345
Preferred stock, $.01 par value – Authorized: 400 shares in 2021 and 2020, respectively, 0 shares issued and outstanding						Preferred stock, $.01 par value – Authorized: 400 shares in 2021 and 2020, respectively, 0 shares issued and outstanding	0		0
Common stock, $.002 par value – Authorized: 300,000 shares in 2021 and 2020, respectively, issued and outstanding: 176,707 and 175,790 shares in 2021 and 2020, respectively						Common stock, $.002 par value – Authorized: 300,000 shares in 2021 and 2020, respectively, issued and outstanding: 176,707 and 175,790 shares in 2021 and 2020, respectively	353		352
Additional paid-in capital	Additional paid-in capital	710,412		639,372		Additional paid-in capital	874,883		807,739
Retained earnings	Retained earnings	702,597		753,268		Retained earnings	593,290		487,912
Accumulated other comprehensive loss, net of tax	Accumulated other comprehensive loss, net of tax	(36,877)		(37,275)		Accumulated other comprehensive loss, net of tax	(39,072)		(33,801)
Total shareholders’ equity	Total shareholders’ equity	1,376,478		1,355,710		Total shareholders’ equity	1,429,454		1,262,202
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,934,864	$	1,885,935	Total liabilities and shareholders' equity	$	2,024,921	$	1,800,702

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six-months Ended
June 28, 2020 June 30, 2019
(unaudited)
Cash flows from operating activities:
Net income $ 19,335 $ 81,853
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense 22,808 23,248
Depreciation of property, plant, and equipment 11,162 10,537
Amortization of intangible assets 2,582 1,538
Intangible asset impairment charges 19,571 —
Excess and obsolete inventory charges 8,783 1,713
Operating lease asset impairment charges 2,534 —
Amortization of discounts or premiums on investments 328 (342)
Realized gain on sale of investments (2,805) (422)
Credit loss on investments 75 —
Revaluation of contingent consideration (114) (863)
Change in deferred income taxes 1,395 (1,311)
Change in operating assets and liabilities:
Accounts receivable (8,957) 11,383
Unbilled revenue 3,804 (1,989)
Inventories (1,664) 8,681
Prepaid expenses and other current assets (25,461) (463)
Accounts payable 143 (4,528)
Accrued expenses 15,806 (12,270)
Accrued income taxes (25,411) (4,000)
Deferred revenue and customer deposits 32,586 8,575
Other 2,520 (1,190)
Net cash provided by operating activities 79,020 120,150
Cash flows from investing activities:
Purchases of investments (317,540) (664,896)
Maturities and sales of investments 387,765 587,175
Purchases of property, plant, and equipment (6,985) (8,969)
Net cash provided by (used in) investing activities 63,240 (86,690)
Cash flows from financing activities:
Issuance of common stock under stock plans 48,235 26,417
Repurchase of common stock (51,036) (61,690)
Payment of dividends (18,972) (17,146)
Payment of contingent consideration (1,039) —
Net cash provided by (used in) financing activities (22,812) (52,419)
Effect of foreign exchange rate changes on cash and cash equivalents (4,858) (149)
Net change in cash and cash equivalents 114,590 (19,108)
Cash and cash equivalents at beginning of period 171,431 108,212
Cash and cash equivalents at end of period $ 286,021 $ 89,104


	Six-months Ended
	July 4, 2021		June 28, 2020
	(unaudited)
Cash flows from operating activities:
Net income	$	147,446	$	19,335
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	22,739		22,808
Depreciation of property, plant, and equipment	8,510		11,162
Loss on disposal of property, plant, and equipment	4		1,214
Amortization of intangible assets	1,853		2,582
Intangible asset impairment charges	0		19,571
Excess and obsolete inventory charges	1,816		8,783
Operating lease asset impairment charges	0		2,534
Amortization of discounts or premiums on investments	1,840		328
Realized gain on sale of investments	(68)		(2,805)
Credit loss on investments	0		75
Revaluation of contingent consideration	0		(114)
Change in deferred income taxes	973		1,395
Change in operating assets and liabilities:
Accounts receivable	(23,488)		(8,957)
Unbilled revenue	3,844		3,804
Inventories	(9,521)		(1,664)

Prepaid expenses and other current assets	(28,830)		(25,461)
Accounts payable	16,058		143
Accrued expenses	206		15,806
Accrued income taxes	(5,588)		(25,411)
Deferred revenue and customer deposits	55,220		32,586
Other	1,711		(1,534)
Net cash provided by operating activities	194,725		76,180
Cash flows from investing activities:
Purchases of investments	(511,625)		(317,540)
Maturities and sales of investments	270,696		387,765
Purchases of property, plant, and equipment	(6,550)		(6,985)



Net cash provided by (used in) investing activities	(247,479)		63,240
Cash flows from financing activities:
Net proceeds from issuance of common stock under stock plans	44,407		48,235
Repurchase of common stock	(20,877)		(51,036)
Payment of dividends	(21,192)		(18,972)
Payment of contingent consideration	0		(1,039)
Net cash provided by (used in) financing activities	2,338		(22,812)
Effect of foreign exchange rate changes on cash and cash equivalents	(1,620)		(2,018)
Net change in cash and cash equivalents	(52,036)		114,590
Cash and cash equivalents at beginning of period	269,073		171,431
Cash and cash equivalents at end of period	$	217,037	$	286,021

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Common Stock Additional
Paid-in Capital Retained Earnings Accumulated
Other
Comprehensive
Loss Total
Shareholders’
Equity
Shares Par Value
Balance as of March 29, 2020 171,688 $ 344 $ 664,132 $ 713,208 $ (50,191) $ 1,327,493
Issuance of common stock under stock plans 1,359 2 38,262 — — 38,264
Repurchase of common stock — — — — — —
Stock-based compensation expense — — 8,018 — — 8,018
Payment of dividends — — — (9,469) — (9,469)
Net income (loss) — — — (1,142) — (1,142)
Net unrealized gain (loss) on available-for-sale investments, net of tax of ($836) — — — — 12,451 12,451
Reclassification of credit (recovery) loss on investments — — — — (85) (85)
Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — (955) (955)
Foreign currency translation adjustment — — — — 1,903 1,903
Balance as of June 28, 2020 (unaudited) 173,047 $ 346 $ 710,412 $ 702,597 $ (36,877) $ 1,376,478


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
	Shares	Par Value
Balance as of April 4, 2021	176,608	$	353	$	854,491	$	540,686	$	(38,529)	$	1,357,001
Net issuance of common stock under stock plans	277	1		9,662		—		—		9,663
Repurchase of common stock	(178)	(1)		—		(14,397)		—		(14,398)
Stock-based compensation expense	—	—		10,730		—		—		10,730
Payment of dividends ($0.060 per common share)	—	—		—		(10,597)		—		(10,597)
Net income	—	—		—		77,598		—		77,598


Net unrealized gain (loss) on available-for-sale investments, net of tax of $(61)	—	—		—		—		(138)		(138)

Reclassification of net realized (gain) loss on the sale of available-for-sale investments	—	—		—		—		(68)		(68)
Foreign currency translation adjustment	—	—		—		—		(337)		(337)
Balance as of July 4, 2021 (unaudited)	176,707	$	353	$	874,883	$	593,290	$	(39,072)	$	1,429,454


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
	Shares	Par Value
Balance as of March 29, 2020	171,688	$	344	$	664,132	$	713,208	$	(50,191)	$	1,327,493
Net issuance of common stock under stock plans	1,359	2		38,262		—		—		38,264

Stock-based compensation expense	—	—		8,018		—		—		8,018
Payment of dividends ($0.055 per common share)	—	—		—		(9,469)		—		(9,469)
Net income (loss)	—	—		—		(1,142)		—		(1,142)
Net unrealized gain (loss) on available-for-sale investments, net of tax of $(836)	—	—		—		—		12,451		12,451
Reclassification of credit loss (recovery) on investments	—	—		—		—		(85)		(85)
Reclassification of net realized (gain) loss on the sale of available-for-sale investments	—	—		—		—		(955)		(955)
Foreign currency translation adjustment	—	—		—		—		1,903		1,903
Balance as of June 28, 2020 (unaudited)	173,047	$	346	$	710,412	$	702,597	$	(36,877)	$	1,376,478

Common Stock Additional
Paid-in Capital Retained Earnings Accumulated
Other
Comprehensive
Loss Total
Shareholders’
Equity
Shares Par Value
Balance as of March 31, 2019 171,537 $ 343 $ 555,834 $ 670,754 $ (38,072) $ 1,188,859
Issuance of common stock under stock plans 522 1 12,070 — — 12,071
Repurchase of common stock (1,398) (3) — (61,687) — (61,690)
Stock-based compensation expense — — 10,967 — — 10,967
Payment of dividends — — — (8,582) — (8,582)
Net income — — — 48,749 — 48,749
Net unrealized gain (loss) on available-for-sale investments, net of tax of $239 — — — — 2,311 2,311
Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — (382) (382)
Foreign currency translation adjustment — — — — (663) (663)
Balance as of June 30, 2019 (unaudited) 170,661 $ 341 $ 578,871 $ 649,234 $ (36,806) $ 1,191,640

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Common Stock Additional
Paid-in Capital Retained Earnings Accumulated
Other
Comprehensive
Loss Total
Shareholders’
Equity
Shares Par Value
Balance as of December 31, 2019 172,440 $ 345 $ 639,372 $ 753,268 $ (37,275) $ 1,355,710
Issuance of common stock under stock plans 1,822 3 48,232 — — 48,235
Repurchase of common stock (1,215) (2) — (51,034) — (51,036)
Stock-based compensation expense — — 22,808 — — 22,808
Payment of dividends — — — (18,972) — (18,972)
Net income — — — 19,335 — 19,335
Net unrealized gain (loss) on available-for-sale investments, net of tax of ($1,788) — — — — 8,590 8,590
Reclassification of credit loss on investments — — — — 75 75
Reclassification of net realized (gain) loss on the sale of available-for-sale investments — — — — (2,805) (2,805)
Foreign currency translation adjustment — — — — (5,462) (5,462)
Balance as of June 28, 2020 (unaudited) 173,047 $ 346 $ 710,412 $ 702,597 $ (36,877) $ 1,376,478


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
	Shares	Par Value
Balance as of December 31, 2020	175,790	$	352	$	807,739	$	487,912	$	(33,801)	$	1,262,202
Net issuance of common stock under stock plans	1,175	2		44,405		—		—		44,407
Repurchase of common stock	(258)	(1)		—		(20,876)		—		(20,877)
Stock-based compensation expense	—	—		22,739		—		—		22,739
Payment of dividends ($0.120 per common share)	—	—		—		(21,192)		—		(21,192)
Net income	—	—		—		147,446		—		147,446


Net unrealized gain (loss) on available-for-sale investments, net of tax of $(646)	—	—		—		—		(2,096)		(2,096)

Reclassification of net realized (gain) loss on the sale of available-for-sale investments	—	—		—		—		(68)		(68)
Foreign currency translation adjustment	—	—		—		—		(3,107)		(3,107)
Balance as of July 4, 2021 (unaudited)	176,707	$	353	$	874,883	$	593,290	$	(39,072)	$	1,429,454


		Common Stock					Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss				Total Shareholders’ Equity	Common Stock				Additional Paid-in Capital		Retained Earnings				Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
		Shares	Par Value															Shares										Total Shareholders’ Equity
Balance as of December 31, 2018		170,820	$	342	$	529,208	$	646,214	$	(40,501)	$	1,135,263
Issuance of common stock under stock plans		1,239	2		26,415		—		—		26,417
Balance as of December 31, 2019													Balance as of December 31, 2019	172,440		$	345	$	639,372	$	753,268			$	(37,275)				$	1,355,710
Net issuance of common stock under stock plans													Net issuance of common stock under stock plans	1,822		3		48,232		—		—				48,235
Repurchase of common stock	Repurchase of common stock	(1,398)	(3)		—		(61,687)		—		(61,690)		Repurchase of common stock	(1,215)		(2)		—		(51,034)		—				(51,036)
Stock-based compensation expense	Stock-based compensation expense	—	—		23,248		—		—		23,248		Stock-based compensation expense	—		—		22,808		—		—				22,808
Payment of dividends		—	—		—		(17,146)		—		(17,146)

Payment of dividends ($0.110 per common share)													Payment of dividends ($0.110 per common share)	—		—		—		(18,972)		—				(18,972)
Net income	Net income	—	—		—		81,853		—		81,853		Net income	—		—		—		19,335		—				19,335

Net unrealized gain (loss) on available-for-sale investments, net of tax of $507		—	—		—		—		4,562		4,562

Net unrealized gain (loss) on available-for-sale investments, net of tax of $(1,788)													Net unrealized gain (loss) on available-for-sale investments, net of tax of $(1,788)	—		—		—		—		8,590				8,590
Reclassification of credit loss (recovery) on investments													Reclassification of credit loss (recovery) on investments	—		—		—		—		75				75
Reclassification of net realized (gain) loss on the sale of available-for-sale investments	Reclassification of net realized (gain) loss on the sale of available-for-sale investments	—	—		—		—		(422)		(422)		Reclassification of net realized (gain) loss on the sale of available-for-sale investments	—		—		—		—		(2,805)				(2,805)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		—		(445)		(445)		Foreign currency translation adjustment	—		—		—		—		(5,462)				(5,462)
Balance as of June 30, 2019 (unaudited)		170,661	$	341	$	578,871	$	649,234	$	(36,806)	$	1,191,640
Balance as of June 28, 2020 (unaudited)													Balance as of June 28, 2020 (unaudited)	173,047		$	346	$	710,412	$	702,597	$	(36,877)			$	1,376,478

The accompanying notes are an integral part of these consolidated financial statements.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: Summary of Significant Accounting Policies

As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles (GAAP). As a result of the adoption of ASU 2016-13 "Measurement of Credit Losses on Financial Instruments," Cognex Corporation (the "Company") has provided new disclosures related to credit losses in this Quarterly Report on Form 10-Q. Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for a full description of other significant accounting policies.

In the opinion of the management of ~~the Company,~~Cognex Corporation (the "Company"), the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, excess and obsolete inventory charges (Note 5), intangible asset impairment charges (Note 8), restructuring charges (Note 16), and financial statement reclassifications necessary to present fairly the Company’s financial position as of ~~June 28, 2020,~~July 4, 2021, and the results of its operations for the three-month and six-month periods ended July 4, 2021 and June 28, 2020, ~~and June 30, 2019,~~ and changes in shareholders’ equity, comprehensive income, and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 are not necessarily indicative of the results to be expected for the full year.

~~Cash, Cash Equivalents, and Investments~~

Money market instruments, as well as certificates of deposit and debt securities with original maturities of three months or less, are classified as cash equivalents and are stated at amortized cost. Certificates of deposit and debt securities with original maturities greater than three months and remaining maturities of one year or less are classified as current investments. Debt securities with remaining maturities greater than one year are classified as non-current investments. It is the Company’s policy to invest in debt securities with effective maturities that do not exceed ten years.

Debt securities with original maturities greater than three months are designated as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax and credit losses, recorded in shareholders’ equity as other comprehensive income (loss). Realized gains and losses are included in current operations, along with the amortization of the discount or premium on debt securities arising at acquisition, and are calculated using the specific identification method. The Company’s limited partnership interest is accounted for using the cost method because the Company’s investment is less than 5% of the partnership and the Company has no influence over the partnership’s operating and financial policies. The carrying value of this investment has been reduced to zero, and therefore, distributions are recorded as investment income as they occur.

Management monitors the carrying value of its investments in debt securities compared to their fair value to determine whether a credit loss or other type of impairment has occurred. If the fair value of a debt security is less than its amortized cost, the Company assesses whether the decline has resulted from a credit loss or other factors. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss exists and an allowance for credit losses is recorded. The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis of the security. Credit losses on impaired securities continue to be measured in subsequent periods, using the present value of expected future cash flows, and changes in the expected credit losses are recorded in current operations. Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statement of Operations. When developing an estimate of the expected credit losses, the Company considers all available information relevant to assessing the collectability of cash flows. This information includes internal and external factors, historical and current events, reasonable and supportable forecasts including management's expectations of future economic conditions, the type of security, the credit rating of the security, the size of the loss position, as well as other relevant information.

An impairment is recognized as a write-down if (i) the Company has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. If impairment is considered upon condition (i) or (ii) described above, the debt security's amortized cost basis is written-down to its fair value and the impairment is recognized in current operations. Subsequent increases in the fair value of the debt securities after the write-down are included in shareholders' equity as other comprehensive income. The differences between the new amortized cost basis and the cash flows expected to be collected are accreted as interest income.

Unrealized losses, that have not been recorded through an allowance for credit losses or write-down of the debt security, are recorded in shareholders' equity as other comprehensive loss, net of the applicable taxes.

~~Accounts Receivable~~

The Company extends credit with various payment terms to customers based upon an evaluation of their financial condition. Accounts that are outstanding longer than the payment terms are considered to be past due. The Company establishes an allowance against accounts receivable for potential credit losses and records bad debt expense in current operations when it determines receivables are at risk for collection based upon the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, general economic and industry conditions, and reasonable forecasts about the future, as well as various other factors. Receivables are written off against this allowance in the period they are determined to be uncollectible and payments subsequently received on previously written-off receivables are recorded as a reversal of the bad debt expense. Credit losses are included in "Selling, general, and administrative expenses" on the Consolidated Statement of Operations.

NOTE 2: New Pronouncements

Accounting Standards Update (ASU) 2019-12, "Simplifying the Accounting for Income Taxes"

~~ASU 2019-12 applies to all entities within the scope of Topic 740, Income Taxes.~~ The amendments in this ASU ~~simplify the accounting for income taxes by removing the following exceptions: 1) exception~~eliminate certain exceptions related to the ~~incremental~~ approach for intraperiod tax allocation, ~~when there is a loss from continuing operations and income or a gain from other items; 2) exception to~~ the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and 4) exception to the general methodology for calculating income taxes in an interim period, ~~when a year-to-date loss exceeds~~and the ~~anticipated loss~~recognition of deferred tax liabilities for ~~the year. The amendments in this ASU~~outside basis differences. They also clarify and simplify other aspects of the accounting for income taxes by doing the following: 1) requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; 2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; 3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and 4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that included the enacted date.taxes. The amendments in this ASU are effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted; however, an entity that elects to early adopt the amendments must adopt all the amendments in the same period. The amendments in this ASU related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Management does not expectCompany adopted ASU 2019-12 toon January 1, 2021. Upon adoption, ASU 2019-12 did not have a material impact on the Company's consolidated financial statements and disclosures.

Accounting Standards Update (ASU) 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs"

The amendments in this ASU clarify that for each reporting period, for callable debt with multiple call dates and call prices that may change at each call date, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess is amortized to the next call date. The Company adopted ASU 2020-08 on January 1, 2021. Upon adoption, ASU 2020-08 did not have a material impact on the Company's consolidated financial statements and disclosures.

Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (Topic 848)": Facilitation of the Effects of Reference Rate Reform on Financial Reporting" and (ASU) 2021-01, "Reference Rate Reform (Topic 848): Scope"

The amendments in ~~this ASU~~these ASUs apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ~~The amendments in this ASU~~Together, the ASUs provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in ~~this ASU~~these ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. Management does not expect ASU 2020-04 or ASU 2021-01 to have a material impact on the Company's consolidated financial statements and disclosures.

119

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3: Fair Value Measurements

Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of ~~June 28, 2020~~July 4, 2021 (in thousands):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Unobservable Inputs (Level 3)
Assets:
Money market instruments	$	200	0	$	0
Corporate bonds	0		482,236	0
Treasury bills	0		130,961	0
Asset-backed securities	0		90,265	0

Agency bonds	0		18,960	0
Municipal bonds	0		6,997	0
Sovereign bonds	0		5,293	0




Economic hedge forward contracts	0		47	0
Liabilities:

Economic hedge forward contracts	0		585	0

~~Quoted Prices in~~
Active Markets
for Identical
Assets (Level 1)

Significant Other
Observable
Inputs (Level 2)

~~Unobservable Inputs (Level 3)~~

~~Assets:~~

~~Money market instruments~~

~~50,222~~

—

~~Corporate bonds~~

—

~~236,660~~

~~Treasury bills~~

—

~~230,692~~

—

~~Asset-backed securities~~

—

~~91,610~~

—

~~Sovereign bonds~~

—

~~27,517~~

—

~~Agency bonds~~

—

~~22,054~~

—

~~Municipal bonds~~

—

~~1,638~~

~~Economic hedge forward contracts~~

—

~~Liabilities:~~

~~Economic hedge forward contracts~~

—

~~458~~

—

~~Contingent consideration liabilities~~

—

The Company’s money market instruments are reported at fair value based upon the daily market price for identical assets in active markets, and are therefore classified as Level 1.

The Company’s debt securities and forward contracts are reported at fair value based ~~upon~~on model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset or liability, and are therefore classified as Level 2. Management is responsible for estimating the fair value of these financial assets and liabilities, and in doing so, considers valuations provided by a large, third-party pricing service. For debt securities, this service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the daily valuations. The Company's forward contracts are typically traded or executed in over-the-counter markets with a high degree of pricing transparency. The market participants are generally large commercial banks.

The Company recorded gross credit losses and gross credit recoveries on debt securities totaling $0 and $85,000, respectively, for the three-month period ended June 28, 2020, and $160,000 and $85,000, respectively, for the six-month period ended June 28, 2020. NaN credit losses or recoveries on debt securities were recorded for the three-month or six-month periods ended June 30, 2019. Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.

~~The~~ Company's contingent consideration liabilities are reported at fair value based upon probability-adjusted present values of the consideration expected to be paid using significant inputs that are not observable in the market, and are therefore classified as Level 3. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain revenue milestones. The fair values of these contingent consideration liabilities were calculated using discount rates consistent with the level of risk of achievement, and are remeasured each reporting period.

The fair value of the contingent consideration liability related to the Company's acquisition of Chiaro Technologies, LLC was $1,153,000 as of December 31, 2019. During the three-month period ended June 28, 2020, the Company paid out $1,039,000 based upon the revenue levels achieved, with the remaining $114,000 recorded as a fair value adjustment in "Other income (expense)" on the Consolidated Statements of Operations.

The fair value of the contingent consideration liability related to the Company's acquisition of GVi Ventures, Inc. in 2017 was written down to 0 ~~as of December 31,~~in 2019 resulting from a lower level of revenue in the Americas' automotive industry, and the balance remains at 0 as of ~~June 28, 2020.~~July 4, 2021. The undiscounted potential outcomes related to future contingent consideration range from $0 to $2,500,000 based upon certain revenue levels over the next ~~two years.~~year.

1210

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis

Non-financial assets, such as property, plant and equipment, operating lease assets, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. The Company evaluates these long-lived assets for impairment whenever events or changes in circumstances, referred to as "triggering events," indicate the carrying value may not be recoverable. ~~Our business has been adversely and materially impacted by deteriorating global economic conditions resulting from~~The adverse impact of the COVID-19 ~~pandemic. The significant decline~~pandemic on our business in ~~business levels~~2020 triggered a review of long-lived assets for potential impairment as of May 26, 2020, which resulted in operating lease asset impairment charges of $2,534,000 (refer to Notes 6 and 16) that ~~are~~were included in "Restructuring charges" on the Consolidated Statements of Operations, and intangible asset impairment charges of $19,571,000 (refer to Note 8). in the second quarter of 2020. These fair value measurements ~~are~~were based upon the present values of future cash flows using significant inputs that ~~are~~were not observable in the market, and ~~are~~were therefore classified as Level 3.

No triggering event occurred in the six-month period ended July 4, 2021 that would indicate a potential impairment of long-lived assets. However, the Company continues to monitor global economic conditions, as events or changes in circumstances could result in an impairment of long-lived assets in a future period.

NOTE 4: Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consisted of the following (in thousands):


		June 28, 2020		December 31, 2019			July 4, 2021		December 31, 2020
Cash	Cash	$	235,799	$	155,498	Cash	$	216,837	$	266,609

Money market instruments	Money market instruments	50,222		15,933		Money market instruments	200		2,464
Cash and cash equivalents	Cash and cash equivalents	286,021		171,431		Cash and cash equivalents	217,037		269,073
Asset-backed securities		50,311		66,680
Treasury bills						Treasury bills	92,939		35,403
Corporate bonds	Corporate bonds	42,248		65,624		Corporate bonds	66,452		32,714

Treasury bills		34,018		92,914
Sovereign bonds		14,869		6,294
Municipal bonds		1,638		4,630
Certificate of deposit		—		4,328

Current investments		143,084		240,470
Treasury bills		196,674		216,334
Corporate bonds		194,412		146,474
Asset-backed securities	Asset-backed securities	41,299		46,403		Asset-backed securities	24,756		25,160
Agency bonds		22,054		5,914
Sovereign bonds	Sovereign bonds	12,648		16,005		Sovereign bonds	4,196		8,660
Municipal bonds	Municipal bonds	—		2,322		Municipal bonds	2,404		1,303

Current investments						Current investments	190,747		103,240
Corporate bonds						Corporate bonds	415,784		203,428
Asset-backed securities						Asset-backed securities	65,509		67,058
Treasury bills						Treasury bills	38,022		96,458
Agency bonds						Agency bonds	18,960		19,006
Municipal bonds						Municipal bonds	4,593		5,735
Sovereign bonds						Sovereign bonds	1,097		3,440

Non-current investments	Non-current investments	467,087		433,452		Non-current investments	543,965		395,125
		$	896,192	$	845,353		$	951,749	$	767,438

~~Asset-backed~~Cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of ninety days or less at the time of acquisition. Cash equivalents consist primarily of government and institutional money market funds; treasury bills consist of debt securities issued by the U.S. government; corporate bonds consist of debt securities issued by both domestic and foreign companies; asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement; ~~corporate bonds consist of debt securities issued by both domestic and foreign companies; treasury bills consist of debt securities issued by the U.S. government;~~ sovereign bonds consist of direct debt issued by foreign governments; municipal bonds consist of debt securities issued by state and local government entities; ~~certificates of deposit are time deposits held by financial institutions with a fixed interest rate;~~ and agency bonds consist of domestic or foreign obligations of government agencies and government-sponsored enterprises that have government backing. All of the Company's securities ~~are~~as of July 4, 2021 and December 31, 2020 were denominated in U.S. ~~Dollars, with the exception of the certificate of deposit held as of December 31, 2019 that was denominated in Korean Won.~~Dollars.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accrued interest receivable is recorded in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to ~~$1,958,000~~$2,992,000 and ~~$2,874,000~~$1,560,000 as of ~~June 28, 2020~~July 4, 2021 and December 31, ~~2019,~~2020, respectively.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. The Company did not record an adjustment to retained earnings, as there were no debt securities with credit losses as of the adoption date.

The following table summarizes the Company’s available-for-sale investments as of ~~June 28, 2020~~July 4, 2021 (in thousands):

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
Current:
Asset-backed securities $ 49,899 $ 412 $ — $ 50,311
Corporate bonds 42,065 221 (38) 42,248
Treasury bills 33,480 538 — 34,018
Sovereign bonds 14,787 82 — 14,869
Municipal bonds 1,643 — (5) 1,638
Non-current:
Treasury bills 194,330 2,345 (1) 196,674
Corporate bonds 192,233 2,513 (334) 194,412
Asset-backed securities 40,817 484 (2) 41,299
Agency bonds 22,035 37 (18) 22,054
Sovereign bonds 12,533 115 — 12,648
$ 603,822 $ 6,747 $ (398) $ 610,171


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Current:
Treasury bills	$	92,502	$	437	$	0	$	92,939
Corporate bonds	66,164		291		(3)		66,452
Asset-backed securities	24,562		197		(3)		24,756


Sovereign bonds	4,189		7		0		4,196
Municipal bonds	2,401		3		0		2,404

Non-current:
Corporate bonds	414,453		1,874		(543)		415,784
Asset-backed securities	65,276		315		(82)		65,509
Treasury bills	37,677		345		0		38,022
Agency bonds	18,921		39		0		18,960
Municipal bonds	4,592		12		(11)		4,593
Sovereign bonds	1,096		1		0		1,097
	$	731,833	$	3,521	$	(642)	$	734,712

The following table summarizes the Company’s gross unrealized losses and fair values for available-for-sale investments in an unrealized loss position as of ~~June 28, 2020~~July 4, 2021 (in thousands):


		Unrealized Loss Position For:																					Unrealized Loss Position For:
		Less than 12 Months						12 Months or Greater								Total					Less than 12 Months				12 Months or Greater		Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate bonds	Corporate bonds	$	49,525	$	(363)	$	1,181	$	(9)	$	50,706	$	(372)	Corporate bonds	$	179,565	$	(546)	$	0	$	0	$	179,565	$	(546)
Treasury bills		12,962		(1)		—		—		12,962		(1)

Asset-backed securities	Asset-backed securities	5,749		(1)		260		(1)		6,009		(2)		Asset-backed securities	13,088		(85)		0		0		13,088		(85)

Agency bonds		3,128		(2)		2,784		(16)		5,912		(18)
Municipal bonds	Municipal bonds	1,293		(5)		—		—		1,293		(5)		Municipal bonds	3,946		(11)		0		0		3,946		(11)

		$	72,657	$	(372)	$	4,225	$	(26)	$	76,882	$	(398)

															$	196,599	$	(642)	$	0	$	0	$	196,599	$	(642)

The Company's allowance for credit losses on debt securities was 0 as of July 4, 2021 and December 31, 2020. There was 0 activity recorded in the allowance for credit losses during the three-month and six-month periods ended July 4, 2021. The Company recorded gross credit losses and gross credit recoveries ~~on debt securities~~ totaling $0 and $85,000, respectively, for the three-month period ended June 28, 2020, and $160,000 and $85,000, respectively, for the six-month period ended June 28, 2020. ~~NaN credit~~

The Company recorded gross realized gains and gross realized losses ~~or recoveries~~ on the sale of debt securities ~~were recorded~~totaling $68,000 and $0, respectively, for both the three-month orand six-month periods ended ~~June 30, 2019. Credit losses and recoveries are included in "Other income (expense)" on the Consolidated Statements of Operations.~~

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~The following table summarizes the allowance for credit losses activity for the six-month period ended June 28, 2020 (in thousands):~~


~~Balance as of December 31, 2019~~	$	—
~~Increases to the allowance for credit losses~~	~~160~~
~~Decreases to the allowance for credit losses~~	~~(85)~~
~~Write-offs~~	—

~~Balance as of June 28, 2020~~	$	75

July 4, 2021. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $962,000 and $7,000, respectively, for the three-month period ended June 28, 2020, and ~~$394,000 and $12,000, respectively, for the three-month period ended June 30, 2019. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling~~ $2,826,000 and $21,000, respectively, for the six-month period ended June 28, ~~2020, and $458,000 and $36,000, respectively, for the six-month period ended June 30, 2019.~~2020. These gains and losses are included in "Investment income" on the Consolidated Statements of Operations. Prior to the sale of these securities, unrealized gains and losses for these debt securities, net of tax, are recorded in shareholders’ equity as accumulated other comprehensive loss.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the effective maturity dates of the Company’s available-for-sale investments as of ~~June 28, 2020~~July 4, 2021 (in thousands):


		<1 year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		Total			<1 year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		5-8 Years		Total
Corporate bonds	Corporate bonds	$	42,248	$	81,987	$	102,034	$	10,391	$	—	$	236,660	Corporate bonds	$	66,452	$	161,596	$	139,870	$	77,234	$	30,143	$	6,941	$	482,236
Treasury bills	Treasury bills	34,018		138,612		58,062		—		—		230,692		Treasury bills	92,939		37,917		105		0		0		0		130,961
Asset-backed securities	Asset-backed securities	50,311		13,750		23,308		—		4,241		91,610		Asset-backed securities	24,756		30,896		20,090		9,510		0		5,013		90,265

Sovereign bonds		14,869		9,218		3,430		—		—		27,517
Agency bonds	Agency bonds	—		—		22,054		—		—		22,054		Agency bonds	0		18,960		0		0		0		0		18,960
Municipal bonds	Municipal bonds	1,638		—		—		—		—		1,638		Municipal bonds	2,404		4,593		0		0		0		0		6,997
Sovereign bonds														Sovereign bonds	4,196		0		0		0		1,097		0		5,293

		$	143,084	$	243,567	$	208,888	$	10,391	$	4,241	$	610,171		$	190,747	$	253,962	$	160,065	$	86,744	$	31,240	$	11,954	$	734,712

NOTE 5: Inventories

Inventories consisted of the following (in thousands):


		June 28, 2020		December 31, 2019			July 4, 2021		December 31, 2020
Raw materials	Raw materials	$	20,736	$	27,285	Raw materials	$	22,229	$	26,800
Work-in-process	Work-in-process	4,111		5,503		Work-in-process	3,996		4,780
Finished goods	Finished goods	28,106		27,473		Finished goods	42,278		29,250
		$	52,953	$	60,261		$	68,503	$	60,830

The Company recorded provisions for excess and obsolete inventories of $1,111,000 and $1,816,000 for the three-month and six-month periods ended July 4, 2021, respectively, and $7,718,000 and $8,783,000 for the three-month and six-month periods ended June 28, 2020, respectively, which reduced the carrying value of the inventories to their net realizable value. ~~The charges for~~Estimates in 2020 took into account the ~~three-month period ended June 28, 2020 were due to lower projected sales of excess inventories as a result of deteriorating~~ global economic conditions resulting from the COVID-19 pandemic.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 6: Leases

The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. Certain leases may contain options to extend or terminate the lease at the Company's sole discretion. There were no options to extend or terminate that were included in the determination of the lease term for the leases outstanding as of ~~June 28, 2020.~~July 4, 2021. Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index. There were no restrictions or covenants for ~~the~~outstanding leases ~~outstanding~~ as of ~~June 28, 2020.~~July 4, 2021.

The total operating lease expense for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 was $2,021,000 and ~~June 30, 2019 was $2,147,000 and $1,742,000,~~$4,023,000, respectively. The total operating lease cash payments for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 were $2,014,000 and ~~June 30, 2019 were $2,091,000 and $1,669,000,~~$4,075,000, respectively. The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability ~~was $23,000 and $64,000~~ for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 was $38,000 and ~~June 30, 2019,~~$78,000, respectively.

The total operating lease expense for the three-month and six-month periods ended June 28, 2020 was $2,147,000 and ~~June 30, 2019 was~~ $4,053,000, ~~and $3,227,000,~~ respectively. The total operating lease cash payments for the three-month and six-month periods ended June 28, 2020 were $2,091,000 and ~~June 30, 2019 were~~ $3,954,000, ~~and $3,070,000,~~ respectively. The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability ~~was $62,000 and $233,000~~ for the three-month and six-month periods ended June 28, 2020 was $23,000 and ~~June 30, 2019,~~$62,000, respectively.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Future operating lease cash payments are as follows (in thousands):


Year Ended December 31,	Year Ended December 31,	Amount		Year Ended December 31,	Amount
Remainder of fiscal 2020		$	4,335
2021		8,340
Remainder of fiscal 2021				Remainder of fiscal 2021	$	4,598
2022	2022	6,169		2022	7,302
2023	2023	4,973		2023	5,531
2024	2024	2,391		2024	2,500
2025	2025	1,322		2025	1,580
2026				2026	1,018
Thereafter	Thereafter	4,462		Thereafter	3,838
		$	31,992		$	26,367

The discounted present value of the future lease cash payments resulted in a lease liability of ~~$28,836,000~~$24,250,000 and ~~$17,973,000~~$26,230,000 as of ~~June 28, 2020~~July 4, 2021 and December 31, ~~2019,~~2020, respectively. The Company did not have any leases that had not yet commenced but that created significant rights and obligations as of ~~June 28, 2020~~July 4, 2021 or ~~June 30, 2019.~~December 31, 2020.

The weighted-average discount rate was ~~4.1%~~3.8% and ~~4.8%~~4.0% for the leases outstanding as of ~~June 28,~~July 4, 2021 and December 31, 2020, ~~and June 30, 2019,~~ respectively. The weighted-average remaining lease term was ~~5.3~~4.8 and ~~3.6~~5.1 years for the leases outstanding as of ~~June 28,~~July 4, 2021 and December 31, 2020, ~~and June 30, 2019,~~ respectively.

AsManagement closed eleven leased offices in 2020, prior to the end of their lease terms, as a part of the Company's restructuring plan (refer to Note 16)~~, management closed ten leased offices as of June 28, 2020 prior to the end of their lease terms.~~. The carrying value of the lease assets associated with the majority of these ~~ten~~ offices ~~has been~~was reduced to 0 as of June 28, 2020, resulting in operating lease asset impairment charges of $2,534,000 for the three-month period ended June 28, 2020 that are included in "Restructuring charges" on the Consolidated Statements of Operations. Management is currently negotiating early contract terminations for the remaining lease liability obligations associated with these abandoned ~~offices.~~

~~The Company owns a building adjacent to its corporate headquarters that was partially occupied by a tenant for a portion~~offices, which obligations totaled $2,264,000 and $2,877,000 as of ~~the current year. This lease was terminated prior to the end of its lease term during the three-month period ended June 28, 2020. Rental income was $0~~July 4, 2021 and ~~$81,000 for the three-month periods ended June 28,~~December 31, 2020, ~~and June 30, 2019,~~ respectively, and ~~$77,000 and $158,000 for~~are included in "Operating lease liabilities" on the ~~six-month periods ended June 28, 2020 and June 30, 2019, respectively. The Company is now fully occupying this building for its operations.~~Consolidated Balance Sheets.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 7: Goodwill

The changes in the carrying value of goodwill were as follows (in thousands):


Balance as of December 31, ~~2019~~2020	$	~~243,445~~244,078
Foreign exchange rate changes	~~(1,009)~~(1,172)
Balance as of ~~June 28, 2020~~July 4, 2021	$	~~242,436~~242,906

The ~~significant decline in business levels resulting from~~adverse impact of the COVID-19 pandemic on our business in 2020 triggered a review of long-lived assets, including goodwill, for potential impairment during the ~~three-month period ended June 28,~~second quarter of 2020. Based ~~upon~~on this assessment, management concluded that events and circumstances did not indicate the fair value of the reporting unit ~~fair value~~ was ~~not~~ less than its carrying ~~value, and therefore no goodwill impairment charge was recognized for the three-month and six-month periods ended June 28, 2020.~~value. Factors that management considered in this qualitative assessment included macroeconomic conditions, industry and market ~~conditions,~~considerations, overall financial performance (both current and projected), changes in management or strategy, changes in the composition or carrying ~~value~~amount of net assets, and market capitalization.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8: Intangible Assets

Amortized intangible assets consisted of the following (in thousands):


		Gross Carrying Value		Accumulated Amortization		Net Carrying Value			Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Distribution networks	Distribution networks	$	38,060	$	38,060	$	—	Distribution networks	$	38,060	$	38,060	$	0
Completed technologies	Completed technologies	21,917		11,035		10,882		Completed technologies	24,217		13,835		10,382
Customer relationships	Customer relationships	10,578		6,795		3,783		Customer relationships	10,578		7,520		3,058
In-process technologies		2,300		—		2,300
Non-compete agreements	Non-compete agreements	710		409		301		Non-compete agreements	710		464		246
Trademarks	Trademarks	110		39		71		Trademarks	110		94		16
Balance as of June 28, 2020		$	73,675	$	56,338	$	17,337
Balance as of July 4, 2021								Balance as of July 4, 2021	$	73,675	$	59,973	$	13,702

		Gross Carrying Value		Accumulated Amortization		Net Carrying Value			Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Distribution networks	Distribution networks	$	38,060	$	38,060	$	—	Distribution networks	$	38,060	$	38,060	$	0
Completed technologies	Completed technologies	31,987		9,160		22,827		Completed technologies	24,217		12,397		11,820
Customer relationships	Customer relationships	14,407		6,402		8,005		Customer relationships	10,578		7,160		3,418
In-process technologies		8,200		—		8,200
Non-compete agreements	Non-compete agreements	710		350		360		Non-compete agreements	710		436		274
Trademarks	Trademarks	110		12		98		Trademarks	110		67		43
Balance as of December 31, 2019		$	93,474	$	53,984	$	39,490
Balance as of December 31, 2020								Balance as of December 31, 2020	$	73,675	$	58,120	$	15,555

As of July 4, 2021, estimated future amortization expense related to intangible assets was as follows (in thousands):


Year Ended December 31,	Amount
Remainder of fiscal 2021	$	1,803
2022	3,286
2023	2,594
2024	2,080
2025	1,757
2026	1,452
Thereafter	730
	$	13,702

The ~~significant decline in business levels resulting from~~adverse impact of the COVID-19 pandemic on our business in 2020 triggered a review of long-lived assets, including intangible assets, for potential impairment during the ~~three-month period ended June 28,~~second quarter of 2020. For finite-lived intangible assets that are subject to amortization, the Company follows a two-step process for impairment testing. In step one, known as the recoverability test, the carrying value of the asset is compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the sum of the undiscounted future cash flows is less than the carrying value, the asset is not recoverable and step two is performed. In step two, the impairment charge is measured as the amount by which the carrying value of the asset exceeds its fair value. For indefinite-lived intangible assets that are not subject to amortization, the fair value of the asset is measured and an impairment charge is recorded as the amount by which the carrying value of the asset exceeds its fair value.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Based ~~upon~~on this assessment, management concluded that certain of the Company's finite-lived intangible assets failed the recoverability test, and recorded impairment charges for these assets equal to the amount by which their carrying value exceeded their fair value. The Company also measured the fair value and recorded an impairment charge for its indefinite-lived intangible asset related to in-process technologies. The fair values were established, with the assistance of an outside valuation advisor, using the income approach based ~~upon~~on a discounted cash flow model that estimated future revenue streams and expenses attributable to those revenue streams provided by management.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

This review resulted in intangible asset impairment charges totaling $19,571,000 ~~for~~in the ~~three-month period ended June 28,~~second quarter of 2020, primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab Co. Ltd. ("Sualab") as a result of the deteriorating global economic conditions from the COVID-19 pandemic. Completed technologies, in-process technologies, and customer relationships acquired from Sualab were impaired in the amounts of $10,070,000, $5,900,000, and $3,382,000, respectively. In addition, customer relationships acquired from EnShape GmbH that had a gross carrying value of $447,000 and accumulated amortization of $228,000 on the measurement date were reduced to 0, resulting in an impairment charge of $219,000.

~~As of June 28, 2020, estimated future amortization expense~~ The Company did not record impairment charges related to intangible assets ~~was as follows (in thousands):~~

Year Ended December 31, Amount
Remainder of fiscal 2020 $ 1,686
2021 3,272
2022 2,902
2023 2,211
2024 1,697
2025 1,374
Thereafter 1,895
$ 15,037

~~In-process technology is an indefinite-lived intangible asset until~~during the ~~technology is finalized, at which point it is amortized over its estimated useful life.~~

three-month or six-month periods ended July 4, 2021.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 9: Warranty Obligations

The Company records the estimated cost of fulfilling product warranties at the time of sale based upon historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or changes in circumstances impacting product quality become known that would not have been taken into account using historical data. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. An adverse change in any of these factors may result in the need for additional warranty provisions. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets.

The changes in the warranty obligation were as follows (in thousands):


Balance as of December 31, ~~2019~~2020	$	~~4,713~~5,406
Provisions for warranties issued during the period	~~1,493~~1,693
Fulfillment of warranty obligations	~~(927)~~(1,235)

Balance as of ~~June 28, 2020~~July 4, 2021	$	~~5,279~~5,864

NOTE 10: Derivative Instruments

The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes in foreign currency exchange rates. ~~Currently, the~~The Company enters into economic hedges ~~to manage this risk. The economic hedges utilize~~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 gains and losses on these derivatives are intended to be offset by the changes in the fair value of the assets and liabilities being hedged. These economic hedges are not designated as hedging instruments for hedge accounting treatment.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company had the following outstanding forward contracts (in thousands):


		June 28, 2020				December 31, 2019						July 4, 2021			December 31, 2020
Currency	Currency	Notional Value	USD Equivalent		Notional Value	USD Equivalent		Currency	Notional Value	USD Equivalent		Notional Value	USD Equivalent
Derivatives Not Designated as Hedging Instruments:	Derivatives Not Designated as Hedging Instruments:										Derivatives Not Designated as Hedging Instruments:
Chinese Renminbi								Chinese Renminbi	490,000	$	75,228	0	$	0
Euro								Euro	35,000	41,457		50,000	61,342
Korean Won	Korean Won	138,690,000	$	115,604	161,951,500	$	139,688	Korean Won	21,000,000	18,483		6,925,000	6,377
Euro		50,000	56,137		18,000	20,249
Mexican Peso	Mexican Peso	184,700	8,051		80,000	4,223		Mexican Peso	130,000	6,519		155,000	7,776
Japanese Yen	Japanese Yen	600,000	5,587		575,000	5,291		Japanese Yen	600,000	5,391		600,000	5,808
Hungarian Forint	Hungarian Forint	1,085,000	3,443		870,000	2,962		Hungarian Forint	1,235,000	4,149		1,330,000	4,494
British Pound	British Pound	1,940	2,406		2,700	3,569		British Pound	2,820	3,881		1,675	2,287
Taiwanese Dollar	Taiwanese Dollar	42,765	1,455		37,450	1,256		Taiwanese Dollar	42,150	1,511		38,035	1,362
Canadian Dollar	Canadian Dollar	1,130	827		1,300	1,000		Canadian Dollar	1,435	1,160		1,285	1,010
Singapore Dollar	Singapore Dollar	1,090	784		845	628		Singapore Dollar	1,550	1,149		1,465	1,110

Information regarding the fair value of the outstanding forward contracts was as follows (in thousands):

Asset Derivatives Liability Derivatives
Balance Fair Value Balance Fair Value
Sheet
Location June 28, 2020 December 31, 2019 Sheet
Location June 28, 2020 December 31, 2019
Derivatives Not Designated as Hedging Instruments:
Economic hedge forward contracts Prepaid expenses and other current assets $ 46 $ 857 Accrued expenses $ 458 $ 23

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Asset Derivatives

Liability Derivatives

Balance

Fair Value

Balance

Fair Value

Sheet
Location

July 4, 2021

December 31, 2020

Sheet
Location

July 4, 2021

December 31, 2020

Derivatives Not Designated as Hedging Instruments:

Economic hedge forward contracts

Prepaid expenses and other current assets

265

Accrued expenses

585

The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands):


Asset Derivatives	Asset Derivatives								Liability Derivatives									Asset Derivatives			Liability Derivatives
		June 28, 2020		December 31, 2019			June 28, 2020		December 31, 2019			July 4, 2021		December 31, 2020			July 4, 2021		December 31, 2020
Gross amounts of recognized assets	Gross amounts of recognized assets	$	46	$	857	Gross amounts of recognized liabilities	$	458	$	23	Gross amounts of recognized assets	$	47	$	265	Gross amounts of recognized liabilities	$	585	$	38
Gross amounts offset	Gross amounts offset	—		—		Gross amounts offset	—		—		Gross amounts offset	0		0		Gross amounts offset	0		0
Net amount of assets presented	Net amount of assets presented	$	46	$	857	Net amount of liabilities presented	$	458	$	23	Net amount of assets presented	$	47	$	265	Net amount of liabilities presented	$	585	$	38

Information regarding the effect of derivative instruments on the consolidated financial statements was as follows (in thousands):


		Location in Financial Statements	Three-months Ended									Six-months Ended								Location in Financial Statements				Three-months Ended							Six-months Ended
					June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019		Location in Financial Statements			July 4, 2021				June 28, 2020				July 4, 2021			June 28, 2020

Derivatives Not Designated as Hedging Instruments:	Derivatives Not Designated as Hedging Instruments:																						Derivatives Not Designated as Hedging Instruments:
Gains (losses) recognized in current operations	Gains (losses) recognized in current operations	Foreign currency gain (loss)	$	60		$	(439)		$	(8,180)		$	66	Gains (losses) recognized in current operations	Foreign currency gain (loss)		$	(746)			$	60			$	2,148		$	(8,180)

2017

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11: Revenue Recognition

The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands):


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Americas	Americas	$	68,966	$	77,408	$	129,214	$	142,178	Americas	$	108,418	$	68,966	$	216,254	$	129,214
Europe	Europe	35,987		59,620		84,569		119,158		Europe	59,967		35,987		117,015		84,569
Greater China	Greater China	31,898		35,816		58,301		58,632		Greater China	59,706		31,898		97,944		58,301
Other Asia	Other Asia	32,246		26,203		64,248		52,563		Other Asia	41,067		32,246		76,972		64,248
		$	169,097	$	199,047	$	336,332	$	372,531		$	269,158	$	169,097	$	508,185	$	336,332

The following table summarizes disaggregated revenue information by revenue type (in thousands):


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Standard products and services	Standard products and services	$	158,807	$	173,368	$	311,662	$	334,420	Standard products and services	$	234,322	$	158,807	$	456,648	$	311,662
Application-specific customer solutions	Application-specific customer solutions	10,290		25,679		24,670		38,111		Application-specific customer solutions	34,836		10,290		51,537		24,670
		$	169,097	$	199,047	$	336,332	$	372,531		$	269,158	$	169,097	$	508,185	$	336,332

Costs to Fulfill a Contract

Costs to fulfill a contract are included in "Prepaid expenses and other current assets" on the Consolidated Balance Sheet and amounted to ~~$10,888,000~~$25,328,000 and ~~$3,963,000~~$6,846,000 as of ~~June 28, 2020~~July 4, 2021 and December 31, ~~2019,~~2020, respectively.

Accounts Receivable, Contract Assets, and Contract Liabilities

Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value. The Company maintains an allowance against its accounts receivable for ~~potential~~ credit losses. Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.

On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments,” using the modified-retrospective approach, which requires the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. The Company did not record an adjustment to retained earnings as this ASU did not have a material impact on the Company's consolidated allowance for credit losses.

The Company recorded credit losses on accounts receivable of $300,000 and $600,000 for the three-month and six-month periods ended June 28, 2020, respectively. The Company recorded credit losses on accounts receivable of $90,000 for the three-month and six-month periods ended June 30, 2019. The Company's estimate of expected credit losses takes into account the deteriorating global economic conditions from the COVID-19 pandemic.

The following table summarizes the allowance for credit losses activity for the six-month period ended ~~June 28, 2020~~July 4, 2021 (in thousands):


Balance as of December 31, ~~2019~~2020	$	~~530~~831
Increases to the allowance for credit losses	~~600~~0
Write-offs, net of recoveries	~~(186)~~(28)
Foreign exchange rate changes	10
Balance as of ~~June 28, 2020~~July 4, 2021	$	~~945~~803

2118

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the deferred revenue and customer deposits activity for the six-month period ended ~~June 28, 2020~~July 4, 2021 (in thousands):


Balance as of December 31, ~~2019~~2020	$	~~14,432~~21,274
~~Increases to deferred~~Deferral of revenue ~~and customer deposits~~billed in the current period, net of recognition	~~57,904~~69,372
Recognition of revenue deferred in prior period	~~(25,493)~~(14,155)
Foreign exchange rate changes	~~(105)~~(46)
Balance as of ~~June 28, 2020~~July 4, 2021	$	~~46,738~~76,445

As a practical expedient, the Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 12: Stock-Based Compensation Expense

Stock Plans

The Company’s stock-based awards that result in compensation expense consist of stock options and restricted stock units ("RSUs"). As of ~~June 28, 2020,~~July 4, 2021, the Company had ~~16,335,000~~15,692,000 shares available for grant under its stock plans. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four or five years based upon continuous service and expire ten years from the grant date. RSUs generally vest upon three years of continuous employment or incrementally over such three-year period. Participants are not entitled to dividends on RSUs.

Stock Options

The following table summarizes the Company’s stock option activity for the six-month period ended ~~June 28, 2020:~~July 4, 2021:

Shares
(in thousands) Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term (in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding as of December 31, 2019 12,899 $ 37.95
Granted 975 51.58
Exercised (1,822) 26.47
Forfeited or expired (421) 50.28
Outstanding as of June 28, 2020 11,631 $ 40.45 6.98 $ 212,847
Exercisable as of June 28, 2020 5,331 $ 31.59 5.81 $ 144,694
Options vested or expected to vest as of June 28, 2020 (1) 10,683 $ 39.58 6.85 $ 204,795


	Shares (in thousands)	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2020	8,970	$	44.73
Granted	469	89.19
Exercised	(1,167)	38.51
Forfeited or expired	(171)	50.95
Outstanding as of July 4, 2021	8,101	$	48.07	6.91	$	298,370
Exercisable as of July 4, 2021	3,652	$	38.46	5.72	$	168,497
Options vested or expected to vest as of July 4, 2021 (1)	7,474	$	47.27	6.81	$	281,063

(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Risk-free rate	Risk-free rate	1.6	%	2.7	%	1.6		2.7	%	Risk-free rate	1.5	%	1.6	%	1.3	%	1.6	%
Expected dividend yield	Expected dividend yield	0.43	%	0.39	%	0.43	%	0.39	%	Expected dividend yield	0.31	%	0.43	%	0.27	%	0.43	%
Expected volatility	Expected volatility	37	%	37	%	37	%	37	%	Expected volatility	39	%	37	%	39	%	37	%
Expected term (in years)	Expected term (in years)	6.0		5.2		6.0		5.3		Expected term (in years)	7.1		6.0		5.8		6.0

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Risk-free rate

The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.

Expected dividend yield

Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date.

Expected volatility

The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.

Expected term

The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The weighted-average grant-date fair values of stock options granted during the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 were $32.07 and ~~June 30, 2019 were $19.13~~$33.47, respectively, and ~~$18.68, respectively. The weighted-average grant-date fair values of stock options granted~~ during the three-month and six-month periods ended June 28, 2020 were $19.13 and ~~June 30, 2019 were~~ $18.52, ~~and $18.59,~~ respectively.

The total intrinsic values of stock options exercised for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 were $11,621,000 and ~~June 30, 2019 were $39,359,000~~$53,948,000, respectively, and ~~$14,220,000, respectively. The total intrinsic values of stock options exercised~~ for the three-month and six-month periods ended June 28, 2020 were $39,359,000 and ~~June 30, 2019 were~~ $53,814,000, ~~and $36,799,000,~~ respectively. The total fair values of stock options vested for the three-month and six-month periods ended ~~June 28, 2020~~July 4, 2021 were $1,830,000 and ~~June 30, 2019 were $1,287,000~~$37,430,000, respectively, and ~~$887,000, respectively. The total fair values of stock options vested~~ for the three-month and six-month periods ended June 28, 2020 were $1,287,000 and ~~June 30, 2019 were~~ $37,951,000, ~~and $30,859,000,~~ respectively.

Restricted Stock Units (RSUs)

The following table summarizes the Company's RSUs activity for the six-month period ended ~~June 28, 2020:~~July 4, 2021:

Shares
(in thousands) Weighted-Average
Grant Date Fair Value
Nonvested as of December 31, 2019 150 $ 48.63
Granted 432 51.53
Vested — —
Forfeited or expired (21) 50.54
Nonvested as of June 28, 2020 561 $ 50.79


	Shares (in thousands)	Weighted-Average Grant Date Fair Value
Nonvested as of December 31, 2020	554	$	51.27
Granted	296	87.46
Vested	(15)	56.61
Forfeited or expired	(27)	54.60
Nonvested as of July 4, 2021	808	$	64.31

The weighted-average grant-date fair values of RSUs granted during the three-month and six-month periods ended July 4, 2021 were $75.98 and $87.46, respectively, and during the three-month and six-month periods ended June 28, 2020 were $56.97 and $51.53, respectively. There were 13,000 and 15,000 RSUs that vested during the three-month and six-month periods ended July 4, 2021, respectively. There were 0 RSUs that vested during the three-month and six-month periods ended June 28, 2020. ~~There were 0 RSUs granted or vested during the three-month and six-month periods ended June 30, 2019.~~

Stock-Based Compensation Expense

The Company ~~stratifies~~segments its employee population into 2 groups: one consisting of senior management and another consisting of all other employees. The Company currently applies an estimated annual forfeiture rate of 7%8% to all stock-based awards for senior management and a rate of 12% for all other employees. Each year during the first quarter, the Company revises its forfeiture ~~rate.~~rate based on updated estimates of employee turnover. This resulted in a decrease to compensation expense of $255,000 in 2021 and an increase to compensation expense of $1,787,000 in ~~2020 and a decrease to compensation expense of $499,000 in 2019.~~2020.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of ~~June 28, 2020,~~July 4, 2021, total unrecognized compensation expense related to non-vested equity awards, including stock options and RSUs, was ~~$65,128,000,~~$63,625,000, which is expected to be recognized over a weighted-average period of ~~2.0~~1.8 years.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended July 4, 2021 were $10,730,000 and $1,651,000, respectively, and for the six-month period ended July 4, 2021 were $22,739,000 and $3,464,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended June 28, 2020 were $8,018,000 ~~which includes~~and $1,277,000, respectively, and for the six-month period ended June 28, 2020 were $22,808,000 and $3,841,000, respectively. Stock-based compensation expense recognized for the three-month and six-month periods ended June 28, 2020 included credits of $1,401,000 relating to grants cancelled as a result of the Company's workforce reduction ~~and $1,277,000, respectively, and for~~in the three-month period ended June 30, 2019 were $10,967,000 and $1,813,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended June 28, 2020 were $22,808,000 and $3,841,000, respectively, and for the six-month period ended June 30, 2019 were $23,248,000 and $4,035,000, respectively.second quarter of 2020. NaN compensation expense was capitalized as of ~~June 28, 2020~~July 4, 2021 or December 31, ~~2019.~~2020.

The following table presents the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):

Three-months Ended Six-months Ended
June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Cost of revenue $ 363 $ 329 $ 717 $ 780
Research, development, and engineering 2,401 3,550 7,767 8,017
Selling, general, and administrative 5,254 7,088 14,324 14,451
$ 8,018 $ 10,967 $ 22,808 $ 23,248


	Three-months Ended				Six-months Ended
	July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Cost of revenue	$	351	$	363	$	599	$	717
Research, development, and engineering	3,064		2,401		7,067		7,767
Selling, general, and administrative	7,315		5,254		15,073		14,324
	$	10,730	$	8,018	$	22,739	$	22,808

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 13: Stock Repurchase Program

In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of ~~June 28, 2020,~~July 4, 2021, the Company repurchased ~~2,816,000~~3,075,000 shares at a cost of ~~$121,348,000~~$142,225,000 under this program, including 258,000 shares at a cost of $20,877,000 during the six-month period ended July 4, 2021, leaving a remaining balance of $57,775,000. 1,215,000 shares at a cost of $51,036,000 ~~during the three-month period ended March 29, 2020, leaving a remaining balance of $78,652,000. No shares~~ were repurchased during the ~~three-month~~six-month period ended June 28, ~~2020.~~2020 under this October 2018 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 under this March 2020 program will commence upon completion of the October 2018 program. The Company may repurchase shares under ~~these programs~~this program in future periods depending ~~upon~~on a variety of factors, including, among other things, the impact of dilution from employee ~~equity~~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.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 14: Income Taxes

A reconciliation of the United States federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows:


		Three-months Ended						Six-months Ended							Three-months Ended				Six-months Ended
		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019			July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Income tax expense (benefit) at U.S. federal statutory corporate tax rate	Income tax expense (benefit) at U.S. federal statutory corporate tax rate	(21)	%	21	%	21	%	21	%	Income tax expense (benefit) at U.S. federal statutory corporate tax rate	21	%	(21)	%	21	%	21	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	(1)	%	1	%	1	%	1	%	State income taxes, net of federal benefit	2	%	(1)	%	2	%	1	%
Foreign tax rate differential	Foreign tax rate differential	5	%	(7)	%	(5)	%	(7)	%	Foreign tax rate differential	(5)	%	5	%	(5)	%	(5)	%
Tax credit	Tax credit	2	%	(1)	%	(2)	%	(1)	%	Tax credit	(1)	%	2	%	(1)	%	(2)	%

Discrete tax benefit related to stock options	Discrete tax benefit related to stock options	(191)	%	(2)	%	(29)	%	(4)	%	Discrete tax benefit related to stock options	(2)	%	(191)	%	(4)	%	(29)	%
Discrete tax expense related to tax return filings	Discrete tax expense related to tax return filings	141	%	—	%	17	%	—	%	Discrete tax expense related to tax return filings	1	%	141	%	0	%	17	%
Tax rate adjustment	Tax rate adjustment	18	%	—	%	—	%	—	%	Tax rate adjustment	0	%	18	%	0	%	0	%
Other	Other	(4)	%	2	%	4	%	2	%	Other	1	%	(4)	%	1	%	4	%
Income tax expense		(51)	%	14	%	7	%	12	%
Income tax expense (benefit)										Income tax expense (benefit)	17	%	(51)	%	14	%	7	%

The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United States, Ireland, and China. The statutory tax rate is 12.5% in Ireland and 25% in China, compared to the U.S. federal statutory corporate tax rate of 21%. These differences resulted in a favorable impact to the effective tax rate of 5 percentage pointsfor both the three-month and six-month periods ended June 28, 2020, and 7 percentage points for the same periods in 2019. Management has determined that earnings from its legal entity in China will be indefinitely reinvested to provide local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested.

The Company recorded discrete tax benefits arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises that resulted in a favorable impact to the effective tax rate of ~~191~~2% and ~~29 percentage points~~4% for the three-month and six-month periods ended July 4, 2021, respectively, and 191% and 29% for the three-month and six-month periods ended June 28, 2020, ~~respectively, and 2 and 4 percentage points for the same periods in 2019.~~respectively. In addition ~~the Company~~to stock option exercises, other discrete adjustments recorded ~~discrete tax expenses related to~~included the final true-up of the prior ~~year~~year's tax accrual upon filing the related tax return that resulted in an unfavorable impact to the effective tax rate of ~~141 and 17 percentage points~~1% for the three-month period ended July 4, 2021 and 0 impact for the six-month period ended July 4, 2021, and an unfavorable impact to the effective tax rate of 141% and 17% for the same periods ~~ended June 28, 2020, respectively.~~in 2020.

Excluding the impact of these discrete items, the Company’s effective tax rate was an expense of 18% of pre-tax income for both the three-month and six-month periods ended July 4, 2021, compared to a benefit of 1% of pre-tax loss and an expense of 19% of pre-tax income for the ~~three-month and six-month periods in 2020, respectively, compared to an expense of 17% and 16% of pre-tax income for the~~ same periods in ~~2019.~~2020. The ~~increase~~decrease in the effective tax rate for the six-month period, excluding the impact of discrete items, ~~for the six-month period from 16% in 2019 to 19% in 2020~~ was due to ~~more~~a lower percentage of the Company's ~~profits~~pre-tax income being earned and taxed in higher tax jurisdictions. ~~This~~There was an adjustment in the three-month period in 2020 to bring the year-to-date effective tax rate ~~resulted in an 18 percentage-point impact on the effective tax rate for the three-month period ended June 28, 2020.~~

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

to 19%.

During the six-month period ended ~~June 28, 2020,~~July 4, 2021, the Company recorded a ~~$710,000~~$935,000 increase in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled ~~$283,000~~$370,000 for the six-month period ended ~~June 28, 2020.~~July 4, 2021.

The Company’s reserve for income taxes, including gross interest and penalties, was ~~$13,330,000~~$16,255,000 as of ~~June 28, 2020,~~July 4, 2021, which included ~~$12,302,000~~$15,227,000 classified as a non-current liability and $1,028,000 recorded as ~~an increase~~a reduction to a non-current deferred tax ~~liability. The amount of gross interest and penalties included in these balances was $1,301,000.~~assets. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $450,000 to $500,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and ~~China,~~Korea, and within the United States, Massachusetts. The statutory tax rate is 12.5% in Ireland, 25% in China, and 25% in Korea compared to the U.S. federal statutory corporate tax rate of 21%. These differences resulted in an impact to the effective tax rate of 5% for both the three-month and six-month periods ended July 4, 2021, and an impact of 5% for the same periods in 2020.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Within the United States, the tax years ~~2016~~2017 through ~~2019~~2020 remain open to examination by the Internal Revenue Service ("IRS") and various state tax authorities. The tax years ~~2015~~2016 through ~~2019~~2020 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. The Company ~~has recently been notified that it~~ is under audit by the IRS for the tax ~~year 2017.~~years 2017 and 2018. Additionally, the Company is under audit by the Commonwealth of Massachusetts for tax years 2017 and 2018. Management believes the Company is adequately reserved for ~~this audit.~~these audits. The final determination of tax audits could result in favorable or unfavorable changes in our estimates.

NOTE 15: Weighted-Average Shares

Weighted-average shares were calculated as follows (in thousands):


		Three-months Ended			Six-months Ended				Three-months Ended		Six-months Ended
		June 28, 2020	June 30, 2019	June 28, 2020	June 30, 2019		July 4, 2021	June 28, 2020	July 4, 2021	June 28, 2020
Basic weighted-average common shares outstanding	Basic weighted-average common shares outstanding	172,283	171,318	172,345	171,209	Basic weighted-average common shares outstanding	176,626	172,283	176,454	172,345
Effect of dilutive equity awards	Effect of dilutive equity awards	—	4,130	3,154	4,319	Effect of dilutive equity awards	3,365	0	3,528	3,154
Weighted-average common and common-equivalent shares outstanding	Weighted-average common and common-equivalent shares outstanding	172,283	175,448	175,499	175,528	Weighted-average common and common-equivalent shares outstanding	179,991	172,283	179,982	175,499

Stock options to purchase ~~5,801,000~~701,000 and ~~6,328,000~~591,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended ~~June 28, 2020,~~July 4, 2021, respectively, and ~~6,113,000~~5,801,000 and ~~5,503,000~~6,328,000 for the same periods in ~~2019,~~2020, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Restricted stock units totaling ~~27,000~~500 and ~~14,000~~1,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended ~~June 28, 2020.~~July 4, 2021, respectively, and 27,000 and 14,000 for the same periods in 2020, but were not included in the calculation of dilutive net income per share because they were anti-dilutive. Additionally, because the Company recorded a cumulative net loss during the three-month period ended June 28, 2020, potential common stock equivalents of 3,120,000 were not included in the calculation of diluted net loss per share for this period. ~~There were no anti-dilutive restricted stock units outstanding, on a weighted-average basis, during the three-month and six-month periods ended June 30, 2019, respectively.~~

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 16: Restructuring Charges

On May 26, 2020, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs, optimize its business model, and address the impact of the COVID-19 pandemic. The restructuring plan included a global workforce reduction of approximately 8% and office closures.

~~The Company estimates~~As of December 31, 2020, the ~~total~~majority of these actions were completed and no additional charges are expected to be incurred in future periods in relation to this restructuring plan. There were 0 restructuring charges ~~from these actions to be approximately $16,445,000, of which $14,798,000 has been recorded~~recognized during the three-month or six-month periods ended July 4, 2021.

The following table summarizes the restructuring charges incurred in the three-month period ended June 28, 2020 and included in “Restructuring charges” on the Consolidated Statements of Operations. The remaining charges are expected to be recognized during the second half of 2020. The following table summarizes the restructuring charges (in thousands):

Total Amount Expected to be Incurred Incurred in the Three-months Ended June 28, 2020
One-time termination benefits $ 11,387 $ 10,386
Contract termination costs 3,995 3,995
Other associated costs 1,063 417
$ 16,445 $ 14,798


	Incurred in the Three-months Ended June 28, 2020
One-time termination benefits	$	10,386
Contract termination costs	3,995
Other associated costs	417
	$	14,798

One-time termination benefits ~~include~~included severance, health insurance, and outplacement services for 181 employees who were either terminated during the second quarter of 2020, or ~~have been~~were notified during the second quarter of 2020 that they ~~will~~would be terminated at a future date. For employees not required to render service beyond a minimum retention period, the one-time termination benefits were recognized in the three-month period ended June 28, 2020. Otherwise, these benefits, including retention bonuses for selected employees, ~~are being~~were recognized over the service period, which ~~is not expected to exceed the fourth quarter of~~was completed by December 31, 2020.

COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Contract termination costs ~~include remaining lease liability obligations and~~included operating lease asset ~~impairments~~impairment charges for offices closed prior to the end of the contractual lease term. These costs also ~~include~~included the write-off of leasehold improvements and other equipment related to these abandoned offices that had no alternative ~~use.~~use, as well as other associated operating costs, such as utilities, that the Company is obligated to pay for the remainder of the lease term. These contract termination costs were primarily recognized in the ~~three-month period ended June 28,~~second quarter of 2020 when the Company ceased using the property for economic benefit.

Other associated costs primarily ~~include~~included legal fees related to the employee termination actions, which ~~are being~~were recognized when the services ~~are~~were performed.

The following table summarizes the activity for the six-month period ended July 4, 2021 in the Company’s restructuring reserve which is included in “Accrued expenses” on the Consolidated Balance Sheets (in thousands):

One-time Termination Benefits Contract Termination Costs Other Associated Costs Total
Balance as of December 31, 2019 $ — $ — $ — $ —
Restructuring charges 10,386 3,995 417 14,798
Cash payments (4,654) (26) (9) (4,689)
Non-cash restructuring charges — (3,145) — (3,145)
Foreign exchange rate changes 60 5 7 72
Balance as of June 28, 2020 $ 5,792 $ 829 $ 415 $ 7,036


	One-time Termination Benefits		Contract Termination Costs		Other Associated Costs		Total
Balance as of December 31, 2020	$	1,624	$	750	$	15	$	2,389

Cash payments	(1,117)		(131)		(15)		(1,263)


Foreign exchange rate changes	0		(3)		0		(3)
Balance as of July 4, 2021	$	507	$	616	$	0	$	1,123

~~COGNEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 17: Subsequent Events

On ~~July 29, 2020,~~August 5, 2021, the Company’s Board of Directors declared a cash dividend of ~~$0.055~~$0.060 per share. The dividend is payable on ~~August 28, 2020~~September 3, 2021 to all shareholders of record as of the close of business on August ~~14, 2020.~~20, 2021.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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 ~~upon~~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 order rates and timing of related revenue, future product mix, restructuring and other ~~cost savings~~cost-savings initiatives, research and development activities, new product offerings, capital expenditures, investments, liquidity, dividends and stock repurchases, strategic 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 impact, duration, and severity of the COVID-19 pandemic; (2) ~~current and future conditions in the global economy, including the impact of the COVID-19 pandemic and the imposition of tariffs or export controls;~~potential disruptions to our business due to restructuring activities; (3) the loss of, or curtailment of purchases by, a large ~~customer;~~customers in the consumer electronics and logistics industries; (4) the reliance on revenue from the ~~consumer electronics or~~ automotive ~~industries;~~industry; (5) the inability to penetrate the logistics industry and other new markets; (6) the inability to achieve significant international revenue; (7) fluctuations in foreign currency exchange rates and the use of derivative instruments; (8) information security breaches or business system disruptions; (9) the inability to attract and retain skilled employees; (10) the failure to effectively manage our growth; (11) the reliance ~~upon~~on key suppliers to manufacture and deliver critical components for our ~~products; (12)~~products and potential disruptions to the supply chain, which could impact timely delivery of customer orders; (6) the failure to effectively manage product transitions or accurately forecast customer demand; ~~(13)~~(7) the inability to design and manufacture high-quality products; ~~(14)~~(8) 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; ~~(15)~~(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; ~~(17) our involvement in time-consuming and costly litigation;~~ (18) ~~the impact of competitive pressures; (19) the challenges in integrating and achieving expected results from acquired businesses, including the recent acquisition of Sualab; (20)~~ potential impairment charges with respect to our investments or ~~for~~ acquired intangible ~~assets or goodwill; (21)~~

assets; (19) exposure to additional tax liabilities; ~~and (22) potential disruptions to our business due to restructuring activities~~(20) fluctuations in foreign currency exchange rates and the ~~failure~~use of ~~such activities to generate the anticipated cost savings.~~derivative instruments; (21) our involvement in time-consuming and costly litigation; (22) unfavorable global economic conditions; and (23) economic, political, and other risks associated with international sales and operations. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019,~~2020, as updated by Part II - Item 1A of this Quarterly Report on Form 10-Q. 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.

Executive Overview

Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks where vision is required. 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 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 consumer electronics, automotive, consumer products, food and beverage, ~~pharmaceuticals,~~ and ~~medical devices.~~medical-related. Cognex products are also used to automate distribution processes in the logistics industry, including for applications in retail distribution and ~~ecommerce~~e-commerce to scan, track, and sort goods through distribution centers.

The second quarter of 2020 was marked by a disruption to our business precipitated by the COVID-19 pandemic. In response, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs and optimize its business model. As a result of this plan, Cognex recorded restructuring, intangible asset impairment, and excess and obsolete inventory charges totaling over $42 million in the second quarter of 2020. Unless indicated otherwise, these charges are reflected in applicable year-on-year comparisons. Additional detail on these charges can be found by referring to the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Revenue for the second quarter of ~~2020~~2021 totaled ~~$169,097,000, representing a decrease~~$269,158,000, an increase of ~~15%~~59% from the second quarter of ~~2019. Our business has been~~2020, which was adversely ~~and materially~~ impacted by ~~deteriorating~~ global economic conditions ~~resulting from~~related to the COVID-19 pandemic. ~~This impact was~~The increase came from a broad base of industries, and most ~~notable in the automotive industry, our largest market, for which revenue continued to decline~~notably from the ~~first quarter~~logistics, automotive, and consumer electronics industries.

Gross margin as a percentage of ~~2020 and was significantly lower than~~

revenue improved to 75% for the second quarter of ~~2019. Gross margin was~~2021 from 70% for the second quarter of 2020, ~~compared~~primarily due to ~~74%~~lower provisions for excess and obsolete inventories.

Operating expenses decreased by $16,774,000, or 13%, for the second quarter of ~~2019 due to higher provisions for excess and obsolete inventories as a result of the deteriorating business conditions.~~

~~Operating expenses increased by 30% from the second quarter of 2019. In order to more closely align our cost structure~~2021 compared to the ~~lower level of business, we implemented a variety of cost-cutting measures~~same quarter in ~~the second quarter, including a workforce reduction~~2020, as restructuring and ~~office closures, and recorded restructuring charges of $14,798,000 from these actions. The significant decline in business levels also triggered a review of long-lived assets that resulted in~~ intangible asset impairment charges of ~~$19,571,000.~~$34,369,000 recorded in the second quarter of 2020 did not repeat. Excluding these charges, operating expenses ~~decreased~~increased by 6%$17,595,000, or 19%, primarily due to higher incentive compensation costs and the impact of foreign currency exchange rate changes, partially offset by savings from cost-cutting measures implemented in 2020.

Operating income expanded to 34% of revenue for the second quarter of ~~2019 due primarily~~2021 compared to ~~lower travel expenses resulting from COVID-19 restrictions.~~

~~As a result of the lower revenue level and charges related to excess inventories, restructuring actions, and intangible asset impairments, we reported~~ an operating loss of 4% of revenue infor the second quarter of ~~2020 compared to an operating profit of 26%~~2020. Net income was 29% of revenue infor the second quarter of ~~2019. We reported a~~2021, or $0.43 per diluted share, compared to net loss of 1% of revenue infor the second quarter of 2020, or $0.01 per ~~share, compared to a net profit of 24% of revenue in the second quarter of 2019, or $0.28 per~~diluted share.

Results of Operations

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.

Revenue

Revenue ~~decreased~~increased by ~~$29,950,000,~~$100,061,000, or ~~15%~~59%, for the three-month period and ~~decreased~~increased by ~~$36,199,000,~~$171,853,000, or ~~10%~~51%, for the six-month period. ~~Changes in foreign currency exchange rates did not have~~This increase reflected a ~~material impact on revenue.~~

~~Deteriorating global economic conditions resulting~~broad-based recovery from the COVID-19 pandemic, which ~~had a modest impact on~~most significantly impacted our business in the ~~first~~second quarter of ~~2020, had a more~~2020. Although revenue increased from the prior year in all major industries we serve, the most significant ~~impact~~dollar increases came from our three largest markets of logistics, automotive, and consumer electronics. Included in our logistics growth is higher revenue from e-commerce customers that we believe may be benefiting from an online ordering trend that has grown since the ~~second quarter, as we noted lower demand for our products~~COVID-19 pandemic. Growth in ~~certain~~other industries ~~additional disruptions~~also contributed to ~~our supply chain, longer customer delivery times,~~the increase, including higher revenue from customers in

the semiconductor and ~~further shutdowns of customer facilities. This impact was most notable in the automotive industry, for which revenue declined from~~medical-related industries.

Compared to the first quarter of ~~2020 and was significantly lower than~~2021, revenue increased by $30,131,000, or 13%, due largely to the prior year for both the three-month and six-month periods. Revenue in the logistics industry increased from the first quarter of 2020 and was higher than the prior year for both the three-month and six-month periods driven by higher demand from ecommerce customers. This was partially offset, however, by lower demand from retail distribution customers and delays in revenue recognition related to customer facility access for on-site installations caused by COVID-19 conditions. The timing of revenue ~~recognition also impacted revenue~~ in the consumer electronics ~~industry, which was lower than the prior year~~industry. Revenue for the ~~three-month period and relatively flat~~second quarter of 2021 was modestly impacted by delays of customer deliveries for ~~the six-month period.~~certain products due to global supply shortages.

From a geographic perspective, revenue from customers based in the Americas ~~decreased~~increased by ~~11%~~57% for the three-month period and 9%67% for the six-month period ~~with~~driven by higher revenue in the ~~most significant decrease coming~~logistics industry, and to a lesser extent, from ~~the~~applications in medical-related and automotive ~~industry.~~ industries.

Revenue from customers based in Europe ~~decreased~~increased by ~~40%~~67% for the three-month period and ~~29%~~38% for the six-month period ~~also due~~as a result of higher revenue from customers in a variety of industries, most notably automotive and logistics. Changes in foreign currency exchange rates accounted for approximately 10% of the revenue increase in both periods, and related to ~~lower sales in~~ the ~~automotive industry, as well as in the electronics industry.~~ translation of Euro denominated revenue to U.S. Dollars.

Revenue from customers based in Greater China ~~decreased~~increased by ~~11%~~87% for the three-month period ~~due to lower sales from the automotive industry~~ and ~~were relatively flat~~68% for the six-month period ~~as lower revenue in the automotive industry was offset by~~due largely to higher revenue in the consumer electronics ~~industry.~~ and automotive industries. A portion of the increase was driven by the timing of revenue in the consumer electronics industry, as there was a higher concentration of this revenue in the second quarter of 2021 compared to the second quarter of 2020. Changes in foreign currency exchange rates accounted for a relatively small percentage of the revenue increase in both periods, and related to the translation of Chinese Yuan denominated revenue to U.S. Dollars.

Revenue from other countries in Asia increased by ~~23%~~27% for the three-month period and ~~22%~~20% for the six-month period due primarily to higher ~~sales from~~revenue in the ~~electronics industry.~~semiconductor and automotive industries.

As of the date of this report, we expect revenue for the third quarter of ~~2020~~2021 to be higher than ~~both~~ the second quarter of ~~2020~~2021, due primarily to higher revenue from customers in the consumer electronics and logistics industries. Although we expect a sequential increase in revenue from the consumer electronics industry, we expect revenue from this industry to be lower than the prior year. Our estimates for the third quarter of ~~2019~~2021 assume continued delays of customer deliveries for certain products due to anticipated higher revenue in the electronics industry. We expect COVID-19 to continue to adversely impact our revenue in the third quarter of 2020 as compared to the prior year outside of electronics, logistics ecommerce, and a few smaller industries, with the most notable adverse impact expected in the automotive industry. It is difficult for us to quantify this impact due to many factors beyond our control and knowledge, including changing governmental regulations and the scope and duration of social distancing and commerce restrictions, including access to customer facilities for on-site installations.

global supply shortages.

Gross Margin

Gross margin as a percentage of revenue was ~~70%~~75% and ~~73%~~76% for the three-month and six-month periods in ~~2020,~~2021, respectively, compared to ~~74%~~70% and 73% for ~~both~~the same periods in ~~2019.~~2020. The ~~decrease~~increase in the gross margin percentage was primarily due to ~~higher~~lower provisions for excess and obsolete inventories ~~which totaled $7,718,000 and $8,783,000 for the three-month and six-month periods ended June 28, 2020, respectively,~~as compared to ~~$933,000 and $1,713,000 for~~ the ~~same periods in 2019.~~prior year. The higher ~~level of~~ provisions ~~recorded~~ in ~~the three-month period ended June 28,~~ 2020 ~~was due to lower projected sales of excess inventories as a result of~~took into account the ~~deteriorating~~ global economic conditions resulting from the COVID-19 pandemic.

Gross margin as a percentage of revenue would be relatively consistent for all periods presented excluding the provisions for excess and obsolete ~~inventories.~~inventories, as manufacturing efficiencies related to the higher revenue level were partially offset by a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins. In addition, we paid higher prices to purchase inventories in the second quarter of 2021 due to global supply shortages that we expect to continue for the remainder of the year.

As of the date of this report, we expect gross margin as a percentage of revenue for the third quarter of ~~2020~~2021 to be ~~similar to the percentage reported~~ in the ~~first half of 2019. Although we expect provisions for excess and obsolete inventory to be~~low-to-mid 70% range, but likely lower than the 75% reported for the second quarter of ~~2020, we~~2021. We expect a ~~greater percentage of revenue~~sequential decrease due to lower margins from ~~application-specific customer solutions, which have relatively lower margins.~~strategic logistics projects, as well continued higher inventory purchase prices.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses increased by ~~$2,318,000,~~$905,000, or 8%3%, for the three-month period and ~~$8,022,000,~~decreased by $936,000, or ~~14%~~1%, for the six-month period as detailed in the table below (in thousands).


		Three-month period		Six-month period			Three-month period		Six-month period
RD&E expenses in 2019		$	28,079	$	58,321
RD&E expenses in 2020						RD&E expenses in 2020	$	30,397	$	66,343
Personnel-related costs	Personnel-related costs	1,405		3,033		Personnel-related costs	(1,350)		(2,637)
Acquisition deferred compensation		1,310		2,620
Stock-based compensation expense						Stock-based compensation expense	554		(1,014)
Foreign currency exchange rate changes						Foreign currency exchange rate changes	1,215		2,565
Incentive compensation	Incentive compensation	1,601		2,549		Incentive compensation	789		1,551
Travel expense		(671)		(771)
Stock expense		(1,130)		(172)
Other	Other	(197)		763		Other	(303)		(1,401)
RD&E expenses in 2020		$	30,397	$	66,343
RD&E expenses in 2021						RD&E expenses in 2021	$	31,302	$	65,407

~~RD&E expenses increased~~

Personnel-related costs were lower due to ~~higher personnel-related costs primarily from headcount additions related to~~ a team of deep learning engineers from the Company's acquisition of Sualab in the fourth quarter of 2019. The consideration for this acquisition included deferred payments that are being recorded as compensation expense over four years from the closing date, which accounted for an additional increase in RD&E expense of $1,310,000 for the three-month period and $2,620,000 for the six-month period. In addition, the Company recorded higher incentive compensation accruals for annual plans with relevant performance goals for 2020. We will continue to monitor the achievement of these performance goals for the remainder of the year due to the impact of COVID-19 on our business, among other factors, which may result in adjustments to our incentive compensation accruals in future quarters.

These increases were partially offset by lower travel expenses resulting from COVID-19 restrictions. We expect these restrictions to continue in the third quarter of 2020. The Company also recorded lower stock 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 stock expense recognition from a shift in our compensation practices toward the granting of restricted stock units with cliff vesting. In addition, credits were recorded to stock expenseworkforce reduction in the second quarter of 2020, partially offset by annual salary increases and higher fringe benefits provided to employees. Stock-based compensation expense decreased for the six-month period due to changes in equity awards ~~cancelled~~over time (e.g., increased number of restricted stock units, varied vesting schedules, etc.), as ~~a result~~well as the cancellation of aawards resulting from the workforce reduction. This decrease was partially offset by credits related to the workforce reduction that were recorded in the second quarter of 2020 and did not repeat, the impact of which resulted in an increase in stock-based compensation expense for the three-month period.

Foreign currency exchange rate changes resulted in a higher level of RD&E expenses as compared to the prior year, as costs denominated in foreign currencies were translated to U.S. Dollars at a higher rate. Incentive bonus accruals were higher than the prior year based on management's assessment of the Company's expected performance against relevant full-year goals.

RD&E expenses as a percentage of revenue were 12% and 13% for the three-month period and six-month period, respectively, compared to 18% and 20% for the ~~three-month and six-month periods in 2020, respectively, compared to 14% and 16% for the~~ same periods in ~~2019.~~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,~~This quarterly percentage is impacted by revenue levels and ~~currently intend to continue our product development plans during periods of lower revenue levels.~~

investing cycles.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses ~~decreased~~increased by ~~$8,092,000,~~$16,690,000, or ~~12%~~28%, for the three-month period and ~~$5,765,000,~~$19,976,000, or 4%15%, for the six-month period as detailed in the table below (in thousands).


		Three-month period		Six-month period			Three-month period		Six-month period
SG&A expenses in 2019		$	68,245	$	135,056
Travel expense		(4,843)		(6,588)
SG&A expenses in 2020						SG&A expenses in 2020	$	60,153	$	129,291
Incentive compensation						Incentive compensation	6,214		11,361
Foreign currency exchange rate changes	Foreign currency exchange rate changes	(1,074)		(1,857)		Foreign currency exchange rate changes	2,955		5,822
Business system investments						Business system investments	494		1,307
Marketing programs	Marketing programs	(949)		(1,231)		Marketing programs	702		971
Contract labor		(636)		(1,126)
Stock expense		(1,810)		(25)
Incentive compensation		2,654		3,783
Stock-based compensation expense						Stock-based compensation expense	1,963		449
Personnel-related costs						Personnel-related costs	603		(1,021)
Travel expenses						Travel expenses	1,749		(195)
Other	Other	(1,434)		1,279		Other	2,010		1,282
SG&A expenses in 2020		$	60,153	$	129,291
SG&A expenses in 2021						SG&A expenses in 2021	$	76,843	$	149,267

The increase from the prior year was due to higher expenses related to annual incentive compensation plans, which include incentive bonuses and sales commissions. Incentive bonus accruals were higher than the prior year based on management's assessment of the Company's expected performance against relevant full-year goals. Likewise, sales commissions increased due to the higher business levels.

~~SG&A expenses decreased due to lower travel expenses resulting from COVID-19 restrictions. We expect these restrictions to continue in the third quarter of 2020.~~ Foreign currency exchange rate changes ~~also~~ resulted in a ~~lower~~higher level of SG&A expenses ~~in 2020,~~as compared to the prior year, as costs denominated in foreign currencies were translated to U.S. Dollars at a ~~lower rate~~higher rate. Expenses were also higher due to ~~a relatively stronger U.S. Dollar. In addition,~~investments the Company ~~reduced~~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 is expensed as incurred, while the majority of these investments will be accounted for as a capital asset that is expected to be placed into service in the first quarter of 2022. The Company also increased spending on marketing programs ~~and contract labor~~ in ~~response~~an effort to generate future sales opportunities, particularly related to new product introductions. Finally, stock-based compensation expense increased due primarily to credits related to the lower business levels. The Company also recorded lower stock 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 stock expense recognition from a shift in our compensation practices toward the granting of restricted stock units with cliff vesting. In addition, creditsworkforce reduction that were recorded ~~to stock expense~~ in the second quarter of 2020 ~~for awards cancelled as a result of a workforce reduction.~~

~~These decreases were~~and did not repeat, partially offset by ~~higher incentive compensation accruals for annual plans with relevant performance goals for 2020. We will continue to monitor the achievement of these performance goals for the remainder of the year~~decreases due to the impact of forfeiture rates revised in the first quarter of 2021 and changes in equity awards over time.

These increases were partially offset by lower personnel-related costs for the six-month period due to the workforce reduction, net of higher costs from annual salary increases and higher fringe benefits provided to employees. For the three-month period, there was a lesser impact due to the timing of the workforce reduction that took place on May 26, 2020. In addition, during the second quarter of 2021, the Company increased its sales headcount in strategic growth areas of the business. Travel expenses were slightly lower for the six-month period, but were higher for the three-month period, as restrictions related to COVID-19 ~~on our business, among other factors, which may result~~that were still in ~~adjustments to our incentive compensation accruals~~place in ~~future quarters.~~the first quarter of 2021 were eased in certain regions in the second quarter of 2021.

Restructuring and Intangible Asset Impairment Charges

~~On May 26,~~In the second quarter of 2020, the ~~Company's Board~~Company recorded restructuring charges totaling $14,798,000 as a result of ~~Directors approved a~~actions related to the Company’s restructuring plan, ~~intended to reduce the Company's operating costs, optimize its business model, and address the impact of the COVID-19 pandemic. The restructuring plan~~which included a global workforce reduction of approximately 8% and office closures. ~~The Company estimates~~In addition, the ~~total restructuring charges from these actions to be approximately $16,445,000,~~adverse impact of ~~which $14,798,000 has been recorded in~~ the ~~second quarter. The remaining charges of approximately $1,647,000 are expected to be recognized during the second half of 2020, primarily in the third quarter.~~

The actions described above, together with actions already taken to reduce the Company's overall costs, were designed to generate an aggregate annualized cost savings of approximately $25,000,000 versus the Company's original planned cost structure. Management does not believe these cost-saving measures will impair the Company's ability to conduct its key business functions.

~~Intangible Asset Impairment Charges~~

~~The significant decline in business levels~~COVID-19 pandemic triggered a review of long-lived 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 ~~primarily related to lower projected cash flows from the technologies and customer relationships acquired from Sualab as a result~~ of ~~the deteriorating global economic conditions from the COVID-19 pandemic.~~

2020.

Non-operating Income (Expense)

The Company recorded foreign currency losses of $639,000 and $1,647,000 for the three-month and six-month periods in 2021, respectively, compared to foreign currency gains of $336,000 and foreign currency losses of $2,667,000 for the ~~three-month and six-month periods in 2020, respectively, compared to foreign currency gains of $140,000 and foreign currency losses of $108,000 for the~~ same periods in ~~2019.~~2020. Foreign currency gains and losses result primarily from the revaluation and settlement of accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collected in another. The higher level of foreign currency losses for the six-month period in 2020 was primarily related to the revaluation of an intercompany balance that was created by the migration of acquired intellectual property from one subsidiary to another in the fourth quarter of 2019. This intercompany balance is expected to be settled in the third quarter of 2020.

Investment income decreased by ~~$1,932,000,~~$1,568,000, or ~~37%~~48%, for the three-month period and ~~$1,608,000,~~$5,243,0000, or ~~16%~~62%, for the six-month period. The decrease was due primarily to lower yields on the Company's portfolio of debt ~~securities and a lower average invested balance.~~securities.

The Company recorded other expense of $127,000 and $295,000 for the three-month and six-month periods in 2021, respectively, compared to other income of $203,000 and $20,000 for the ~~three-month and six-month periods in 2020, respectively, compared to other expense of $144,000 and other income of $783,000 for the~~ same periods in ~~2019.~~2020. Other income (expense) includes fair value adjustments of contingent consideration liabilities arising from business acquisitions. The Company recorded a $1,060,000 decrease in the fair value of its GVi contingent consideration liability in the first quarter of 2019, resulting from a lower level of revenue in the Americas’ automotive industry.

Income Tax Expense (Benefit)

The Company’s effective tax rate was 17% and 14% of pre-tax income for the three-month and six-month periods in 2021, respectively, compared to a benefit of 51% of pre-tax loss and an expense of 7% of pre-tax income for the ~~three-month and six-month periods in 2020, respectively, compared to an expense of 14% and 12% of pre-tax income for the~~ same periods in ~~2019.~~2020.

The effective tax rate included a decrease in tax expense of ~~$4,413,000~~$1,431,000 and ~~$6,093,000~~$6,638,000 for the three-month and six-month periods in ~~2020,~~2021, respectively, and ~~$1,248,000~~$4,413,000 and ~~$3,978,000~~$6,093,000 for the same periods in ~~2019,~~2020, 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 accurately predict the level of stock option exercises by employees in future periods.

Other discrete tax items included an increase in tax expense of $535,000 for both the three-month and six-month periods in 2021, and an increase in tax expense of $3,267,000 and $3,509,000 for the three-month and six-month periods in 2020, respectively, ~~primarily~~ from the final true-up of the prior year's tax accrual upon filing the related tax return.

Excluding the impact of these discrete items, the Company’s effective tax rate was an expense of 18% of pre-tax income for both the three-month and six-month periods in 2021, compared to a benefit of 1% of pre-tax loss and an expense of 19% of pre-tax income for the ~~three-month and six-month periods in 2020, respectively, compared to an expense of 17% and 16% of pre-tax income for the~~ same periods in ~~2019.~~2020. The ~~increase~~decrease in the effective tax rate for the six-month period, excluding the impact of discrete items, ~~for the six-month period from 16% in 2019 to 19% in 2020~~ was due to ~~more~~a lower percentage of the Company's ~~profits~~pre-tax income being earned and taxed in higher tax jurisdictions. ~~This~~There was an adjustment in the three-month period in 2020 to bring the year-to-date effective tax rate ~~resulted in an 18 percentage-point impact on the effective tax rate for the three-month period ended June~~ to 19%.

28 ~~2020.~~

Liquidity and Capital Resources

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of ~~$896,192,000~~$951,749,000 as of ~~June 28, 2020.~~July 4, 2021. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.

The Company’s cash requirements for the six-month period ended ~~June 28, 2020~~July, 4, 2021 were primarily met with positive cash flows from ~~operations.~~operations 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. Cash flows from operating activities included increases in accounts receivable and inventories related to higher business levels. The Company expects inventory levels to continue to increase for the remainder of the year as we receive inventory that we purchased in response to global supply chain challenges.

Capital expenditures for the six-month period ended ~~June 28, 2020~~July 4, 2021 totaled ~~$6,985,000~~$6,550,000 and consisted primarily of computer hardware and software, as well as manufacturing test equipment related to new product ~~introductions, and improvements made to~~introductions. In 2021, the ~~Company's headquarters building~~Company is making investments in ~~Natick, Massachusetts and various leased facilities. The Company intends to continue to invest in capital projects in the second half of 2020 despite the current lower~~ business ~~levels, particularly~~systems related to its ~~management information systems, which we believe are important to support our longer-term growth objectives.~~

~~Our business has been adversely and materially impacted by deteriorating global economic conditions resulting from~~sales process, the COVID-19 pandemic. In order to more closely align our cost structure to the lower level of business, we implemented a variety of cost-cutting measures in the second quarter of 2020, including a workforce reduction and

~~office closures. The Company estimates the total restructuring charges from these actions to be approximately $16,445,000,~~majority of which ~~$3,145,000 represents non-cash charges, $4,689,000 was paid in the second quarter of 2020, and the remainder~~will be accounted for as a capital asset that is expected to be ~~paid out~~placed into service in the ~~second half~~first quarter of ~~2020, primarily in the third quarter.~~2022.

In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of ~~June 28, 2020,~~July 4, 2021, the Company repurchased ~~2,816,000~~3,075,000 shares at a cost of ~~$121,348,000~~$142,225,000 under this program, including ~~1,215,000~~258,000 shares at a cost of ~~$51,036,000 in~~$20,877,000 during the ~~first quarter of 2020,~~six-month period ended July 4, 2021, leaving a remaining balance of ~~$78,652,000. No shares were repurchased during the second quarter of 2020.~~$57,775,000. 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 under this March 2020 program will commence upon completion of the October 2018 program. The Company may repurchase shares under ~~these programs~~this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee ~~equity~~stock awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions.

The Company’s Board of Directors declared and paid cash dividends of ~~$0.050~~$0.060 per share in the first ~~second,~~ and ~~third~~second quarters of 2019. The dividend was increased to $0.055 per share in the fourth quarter of 2019, the first quarter of 2020, and the second quarter of 2020. Total dividends paid amounted to $18,972,000 for the six-month period ended June 28, 2020.2021, totaling $21,192,000. Future dividends will be declared at the discretion of the ~~Company’s~~Company's Board of Directors and will depend upon such factors as the Board deems relevant, including, among other things, the ~~Company’s~~Company's ability to generate positive cash ~~flows~~flow from operations.

The Company believes that its existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. ~~As of June 28, 2020, the Company had $896,192,000 in cash and investments.~~ In addition, the Company has no long-term debt and does not anticipate needing debt financing in the near future. We believe that our strong cash position has put us in a relatively good position ~~to maintain our liquidity during downturns in our business related to COVID-19 and~~ with respect to our longer-term liquidity needs.

New Pronouncements

Refer to Part I - Note 2 within this Form 10-Q, for a full description of recently issued accounting pronouncements including the expected dates of adoption and the expected impact on the financial position and results of operations of the Company.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s exposures to market risk since December 31, ~~2019.~~2020.

ITEM 4: CONTROLS AND PROCEDURES

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures (as defined in such rules) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of that date. From time to time, the Company reviews its disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

There was no change in the Company's internal control over financial reporting that occurred during the quarter ended ~~June 28, 2020~~July 4, 2021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. We have considered the impact of COVID-19 on our internal controls over financial reporting. Personnel constraints related to working from home have made our ability to execute certain controls more challenging; however, we have enhanced existing monitoring controls in an effort to ensure we continue to have effective internal controls during this time.

3430

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations.

ITEM 1A. RISK FACTORS

For a ~~complete~~ list of factors that could affect the Company’s business, results of operations, and financial condition, see the risk factors discussion provided in Part I—Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019. The following information updates, and should be read in conjunction with, Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.~~

~~Our business has been, and is expected to continue to be, adversely affected by the recent COVID-19 pandemic.~~

~~The COVID-19 (also referred to as “coronavirus”) outbreak, which was first reported in China in the beginning of 2020, developed into a global pandemic in March~~ 2020. The COVID-19 outbreak had a modest adverse impact on our business in the first quarter of 2020, primarily near the end of the quarter. This impact expanded and accelerated into the second quarter, as we noted lower demand for our products in certain industries, additional disruptions to our supply chain, longer customer delivery times, higher delivery costs, and further shutdowns of customer facilities.

We face several risks and uncertainties related to the impact of COVID-19 on our business. It is difficult for us to quantify the duration and severity of this impact due to many factors beyond our control and knowledge, including changing governmental regulations and the scope and duration of social distancing and commercial restrictions. These risks and uncertainties include, among others:

•~~our customers may further delay or cancel orders for our products,~~

•~~additional customer facilities may be shut down for extended periods of time~~, ~~resulting in our inability to deliver products, perform on-site services, or make on-site sales visits,~~

•~~our customers may not have sufficient cash flow or access to financing to purchase our products,~~

•~~our customers may not pay us within agreed upon terms or may default on their payments altogether,~~

•our vendors may be unable to fulfill their delivery obligations to us within acceptable lead times for extended periods of time, which may force us to seek alternative sources of supply at higher costs,

•~~our contract manufacturers may experience interruptions that result in delivery delays and higher costs for our products,~~

•~~we may experience manufacturing delays and higher costs in the event of a supply disruption from a single-source vendor,~~

•~~we may experience extended customer delivery times and higher delivery costs,~~

•our distribution centers in Natick, Massachusetts and Cork, Ireland may be forced to operate with a significantly reduced workforce or be forced to shut down altogether due to government regulations or health concerns,

•~~our online sales and marketing efforts may be less effective than face-to-face activities, resulting in fewer customer acquisitions and lower sales from new products,~~

•~~challenges involved in working from home may delay certain of our new product introductions~~,

•~~lower demand for our products may result in charges for excess and obsolete inventory if we are unable to sell inventory that is either already on hand or committed to purchase,~~

•~~lower cash flows may result in impairment charges for acquired intangible assets or goodwill,~~

•~~our investment portfolio of debt securities may be exposed to material credit losses, and~~

•~~a decline in our stock price may make stock-based awards a less attractive form of compensation and a less attractive form of retention for our employees.~~

These risks and uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition. The impact of COVID-19 also may exacerbate other risks discussed in Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, any of which could have a material adverse effect on our business, results of operations and financial condition. This situation is continuously changing and additional impacts on our business may arise of which we are not currently aware.

~~Our restructuring activities may result in disruption to our business and may not generate the anticipated cost savings.~~

In May 2020, our Board of Directors approved a restructuring plan intended to reduce our operating costs, optimize our business model, and address the impact of the COVID-19 pandemic. These actions, which include workforce reductions and office closures, were designed to generate an aggregate annualized cost savings of approximately $25,000,000 versus our original planned cost structure. Our ability to achieve the anticipated cost savings and other benefits from these actions within the expected timeframe is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, many of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected. In addition, although we currently expect to continue to make investments in strategic areas, these restructuring actions may nevertheless negatively impact programs we believe are important to the long-term success of our company, such as the ability to accelerate time to market for new products. In addition, our ability to provide a high level of service to our customers may be negatively impacted by these actions, particularly in regions where we have downsized our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information with respect to purchases by the Company of shares of its common stock during the three-month period ended ~~June 28, 2020:~~July 4, 2021:

Total
Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)

Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (1)

~~March 30, 2020 - April 26, 2020~~

—

~~278,652,000~~

~~April 27, 2020 - May 24, 2020~~

—

~~278,652,000~~

~~May 25, 2020 - June 28, 2020~~

—

~~278,652,000~~

~~Total~~

—

~~278,652,000~~


	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 5, 2021 - May 2, 2021	54,000	$	85.21	54,000	$	267,614,000
May 3, 2021 - May 30, 2021	52,000	77.74		52,000	263,535,000
May 31, 2021 - July 4, 2021	72,000	79.91		72,000	257,775,000
Total	178,000	$	80.89	178,000	$	257,775,000

(1) In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. Purchases under this program commenced in October 2018. 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. This new authorization will commence once the Company completes the October 2018 program, with repurchases subject to market conditions and other relevant factors. 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

3631

ITEM 6. EXHIBITS


Exhibit Number
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934*
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934*
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.SCH	Inline XBRL Taxonomy Extension Schema Document*
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document*
104	Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)
*	Filed herewith
**	Furnished herewith

3732

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:

~~July 29, 2020~~August 5, 2021

COGNEX CORPORATION

By:

/s/ Robert J. Willett

Robert J. Willett

President and Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Paul D. Todgham

Paul D. Todgham

Senior Vice President of Finance and Chief Financial Officer

(Principal Financial Officer)

3833


	Shares (in thousands)	Weighted-Average Grant Date Fair Value
Nonvested as of December 31, 2019	150	$	48.63
Granted	432	51.53
Vested	—	—
Forfeited or expired	(21)	50.54
Nonvested as of June 28, 2020	561	$	50.79


	Total Amount Expected to be Incurred		Incurred in the Three-months Ended June 28, 2020
One-time termination benefits	$	11,387	$	10,386
Contract termination costs	3,995		3,995
Other associated costs	1,063		417
	$	16,445	$	14,798