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). Cognex Corporation (the "Company") has provided new disclosures related to inventories and internal-use software 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, 2016
for a full description of significant accounting policies.
In the opinion of the management of the Company, the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments and financial statement reclassifications, including those related to the disposition of a business, necessary to present fairly the Company’s financial position as of
July 2, 2017
, and the results of its operations for the three-month and six-month periods ended
July 2, 2017
and
July 3, 2016
, 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
July 2, 2017
are not necessarily indicative of the results to be expected for the full year.
Inventories
On January 1, 2017, the Company adopted Accounting Standards Update (ASU) 2015-11 "Inventory - Simplifying the Measurement of Inventory." This Update requires companies to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This adoption did not have an impact on the Company's inventory value.
Internal-use Software
The Company accounts for the costs of computer software developed or obtained for internal use under Accounting Standards Codification 350-40 "Intangibles - Goodwill and Other, Internal-use Software." Internal-use software is software acquired, internally developed, or modified solely to meet the entity's internal needs, and during the software's development, no substantive plan exists to sell the software.
The preliminary project stage includes conceptual formulation of design alternatives, determination of system requirements, vendor demonstrations, and final selection of vendors, and during this stage costs are expensed as incurred. The application development stage includes software configuration, coding, hardware installation, and testing. During this stage, certain costs are capitalized, including external direct costs of materials and services, as well as payroll and payroll-related costs for employees who are directly associated with the project, while certain costs are expensed as incurred, including training and data conversion costs. The post-implementation stage includes training and maintenance, and during this stage costs are expensed as incurred.
Capitalization begins when both the preliminary project stage is completed and management commits to funding the project. Capitalization ceases at the point the project is substantially complete and ready for its intended use, that is, after all substantial testing is completed. Costs of specified upgrades and enhancements to internal-use software are capitalized if it is probable that those expenditures result in additional functionality. Capitalized costs are amortized on a straight line basis over the estimated useful life.
NOTE 2: New Pronouncements
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”
The amendments in ASU 2014-09 will supersede and replace all currently existing U.S. GAAP, including industry-specific revenue recognition guidance, with a single, principle-based revenue recognition framework. The concept guiding this new model is that revenue recognition will depict transfer of control to the customer in an amount that reflects consideration to which an entity expects to be entitled. The core principles supporting this framework include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. This new framework will require entities to apply significantly more judgment. This increase in management judgment will require expanded disclosure on estimation methods, inputs, and assumptions for revenue recognition.
In March 2016, ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," was issued, in April 2016, ASU 2016-10, "Identifying Performance Obligations and Licensing," was issued, in May 2016,
ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients," was issued, and in December 2016, ASU 2016-20, "Technical Corrections and Improvements," was issued. These Updates do not change the core principle of the guidance under ASU 2014-09, but rather provide implementation guidance. ASU 2015-14, "Deferral of the effective date," amended the effective date of ASU 2014-09 for public companies to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but only beginning after December 15, 2016. The Financial Accounting Standards Board may release additional implementation guidance in future periods.
We expect to adopt this standard using the full retrospective method to present all periods reported on a consistent basis. Upon adoption, revenue for software-only products sold as part of multiple-deliverable arrangements will no longer be deferred when vendor-specific objective evidence of fair value does not exist for undelivered elements of the arrangement. This change will likely result in earlier recognition of revenue. In addition, we expect certain of the Company’s product accessory sales, which are currently reported on a net basis, to be reported on a gross basis as a result of applying the expanded guidance in the new standard related to principal versus agent considerations. This change will result in the Company reporting higher revenue and higher cost of revenue when these sales are reported on a gross basis, although the gross margin dollars will not change. Furthermore, for arrangements that include customer-specified acceptance criteria, we expect to recognize revenue when we can objectively determine that control has been transferred to the customer in accordance with the agreed-upon specifications in the contract, which may occur before formal customer acceptance. This change will primarily impact revenue recognition for arrangements in the logistics industry where certain customer solutions include installed ID products and will likely result in earlier recognition of revenue. We do not expect these changes to have a material impact on total revenue. Management is currently in the process of updating the Company's revenue accounting policy, internal controls, and disclosures to finalize the implementation of this standard.
Accounting Standards Update (ASU) 2016-01, "Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities"
ASU 2016-01 provides guidance related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this Update affect all entities that hold financial assets or owe financial liabilities. This ASU requires equity investments (except those accounted under the equity method) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. This ASU also eliminates the requirement for public companies to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, and it requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. For public companies, the guidance in ASU 2016-01 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is not permitted except for certain amendments in this Update. Management does not expect ASU 2016-01 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2016-02, "Leases"
ASU 2016-02 creates Topic 842, Leases. The objective of this Update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet, and disclosing key information about leasing arrangements. This ASU applies to any entity that enters into a lease, although lessees will see the most significant changes. The main difference between current U.S. GAAP and Topic 842 is the recognition of lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S. GAAP. Topic 842 distinguishes between finance leases and operating leases, which are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current U.S. GAAP. For public companies, the guidance in ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. This ASU should be applied using a modified retrospective approach. Management is in the process of evaluating the impact of this Update.
Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Measurement of Credit Losses"
ASU 2016-13 applies to all reporting entities holding financial assets that are not accounted for at fair value through net income (debt securities). The amendments in this Update eliminate the probable initial recognition threshold to recognize a credit loss under current U.S. GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. In addition, this Update broadens the information an entity must consider in developing the credit loss estimate, including the use of reasonable and supportable forecasted information. The amendments in this Update require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down and an entity will be able to record reversals of credit losses in current period net income. For public companies, the guidance in ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those
annual periods. This ASU should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management does not expect ASU 2016-13 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory"
ASU 2016-16 applies to all reporting entities with intra-entity transfers of assets other than inventory. The amendments in this Update allow the recognition of deferred income taxes for an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to when the asset has been sold to an outside party under current U.S. GAAP. Two common examples of assets included in the scope of this Update are intellectual property and property, plant, and equipment. For public companies, the amendments in ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. This ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Management is in the process of evaluating the impact of this Update.
Accounting Standards Update (ASU) 2017-01, "Business Combinations - Clarifying the Definition of a Business"
ASU 2017-01 applies to all reporting entities that must determine whether they have acquired or sold a business. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, the amendments in ASU 2017-01 are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU should be applied prospectively on or after the effective date and no disclosures are required at transition. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date or the effective date of the amendments in this Update, only when the transaction has not been reported in financial statements that have been issued. Management does not expect ASU 2017-01 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2017-04, "Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment"
ASU 2017-04 applies to all reporting entities that have goodwill reported in their financial statements. The amendments in this Update eliminate Step 2 from the goodwill impairment test reducing the cost and complexity of evaluating goodwill for impairment. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment date of its assets and liabilities as would be required in a business combination. Instead, under the amendments in this Update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. For public companies, the amendments in ASU 2017-04 are effective for the annual or any interim goodwill impairment tests for reporting periods beginning after December 15, 2019. This ASU should be applied prospectively and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management does not expect ASU 2017-04 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2017-08, "Receivables - Nonrefundable Fees and Other Costs - Premium Amortization on Purchased Callable Debt Securities "
ASU 2017-08 applies to all reporting entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. If that callable debt security is subsequently called, the entity records a loss equal to the unamortized premium. The amendments in this Update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. For public companies, the amendments in ASU 2017-08 are effective for annual periods beginning after December 15, 2019 and interim reporting periods within annual years beginning after December 15, 2020. This ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption, and, in the period of adoption, the entity is required to provide disclosures about a change in accounting principle. Early adoption is
permitted, including adoption in an interim period. Management is in the process of evaluating the impact of this Update.
Accounting Standards Update (ASU) 2017-09, "Compensation - Stock Compensation - Scope of Modification Accounting"
ASU 2017-09 applies to all reporting entities that change the terms or conditions of a share-based payment award.
Currently, the definition of the term modification is broad and its interpretation results in diversity in practice. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3)the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. For public companies, the amendments in ASU 2017-09 are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. Early adoption is permitted including adoption in an interim period, for reporting periods for which financial statements have not yet been issued. This ASU should be applied prospectively to an award modified on or after the adoption date. Management does not expect ASU 2017-09 to have a material impact on the Company's financial statements and disclosures.
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
July 2, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Unobservable
Inputs (Level 3)
|
Assets:
|
|
|
|
|
|
Money market instruments
|
$
|
3,554
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
—
|
|
|
325,159
|
|
|
—
|
|
Treasury bills
|
—
|
|
|
152,563
|
|
|
—
|
|
Asset-backed securities
|
—
|
|
|
87,260
|
|
|
—
|
|
Euro liquidity fund
|
—
|
|
|
79,256
|
|
|
—
|
|
Sovereign bonds
|
—
|
|
|
30,933
|
|
|
—
|
|
Agency bonds
|
—
|
|
|
13,412
|
|
|
—
|
|
Municipal bonds
|
—
|
|
|
8,477
|
|
|
—
|
|
Cash flow hedge forward contracts
|
—
|
|
|
71
|
|
|
—
|
|
Economic hedge forward contracts
|
—
|
|
|
45
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
Economic hedge forward contracts
|
—
|
|
|
4
|
|
|
—
|
|
Contingent consideration liabilities
|
—
|
|
|
—
|
|
|
3,959
|
|
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 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.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company did not record an other-than-temporary impairment of these financial assets during the
six
-month period ended
July 2, 2017
.
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, and the likelihood of completing certain tasks. 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 with changes in fair value recorded in "Other income (expense)" on the Consolidated Statements of Operations.
The following table summarizes the activity for the Company's liability measured at fair value using Level 3 inputs for the six-month period ended
July 2, 2017
(in thousands):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
4,173
|
|
Payment of EnShape contingent consideration
|
(1,401
|
)
|
Fair value adjustment to Manatee contingent consideration
|
(275
|
)
|
Fair value adjustment to Chiaro contingent consideration
|
124
|
|
Contingent consideration resulting from GVi acquisition
|
1,299
|
|
Foreign exchange rate changes
|
39
|
|
Balance as of July 2, 2017
|
$
|
3,959
|
|
Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis
Non-financial assets such as property, plant and equipment, goodwill, and intangible assets are required to be measured at fair value only when an impairment loss is recognized. The Company did not record an impairment charge related to these assets during the
six
-month period ended
July 2, 2017
.
NOTE 4: Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
|
December 31, 2016
|
Cash
|
$
|
64,712
|
|
|
$
|
77,307
|
|
Money market instruments
|
3,554
|
|
|
2,334
|
|
Cash and cash equivalents
|
68,266
|
|
|
79,641
|
|
Treasury bills
|
97,018
|
|
|
67,175
|
|
Corporate bonds
|
86,000
|
|
|
141,188
|
|
Euro liquidity fund
|
79,256
|
|
|
46,499
|
|
Asset-backed securities
|
42,449
|
|
|
69,614
|
|
Sovereign bonds
|
24,454
|
|
|
7,298
|
|
Agency bonds
|
7,610
|
|
|
2,903
|
|
Municipal bonds
|
5,615
|
|
|
6,517
|
|
Short-term investments
|
342,402
|
|
|
341,194
|
|
Corporate bonds
|
239,159
|
|
|
169,952
|
|
Treasury bills
|
55,545
|
|
|
92,280
|
|
Asset-backed securities
|
44,811
|
|
|
26,946
|
|
Sovereign bonds
|
6,479
|
|
|
23,585
|
|
Agency bonds
|
5,802
|
|
|
10,339
|
|
Municipal bonds
|
2,862
|
|
|
1,233
|
|
Long-term investments
|
354,658
|
|
|
324,335
|
|
|
$
|
765,326
|
|
|
$
|
745,170
|
|
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; the Euro liquidity fund invests in a portfolio of investment-grade bonds; asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement; sovereign bonds consist of direct debt issued by foreign governments; agency bonds consist of domestic or foreign obligations of government agencies and government sponsored enterprises that have government backing;
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and municipal bonds consist of debt securities issued by state and local government entities. The Euro liquidity fund is denominated in Euros, and the remaining securities are denominated in U.S. Dollars.
The following table summarizes the Company’s available-for-sale investments as of
July 2, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
Treasury bills
|
$
|
97,218
|
|
|
$
|
—
|
|
|
$
|
(200
|
)
|
|
$
|
97,018
|
|
Corporate bonds
|
85,918
|
|
|
85
|
|
|
(3
|
)
|
|
86,000
|
|
Euro liquidity fund
|
78,824
|
|
|
432
|
|
|
—
|
|
|
79,256
|
|
Asset-backed securities
|
42,467
|
|
|
2
|
|
|
(20
|
)
|
|
42,449
|
|
Sovereign bonds
|
24,495
|
|
|
4
|
|
|
(45
|
)
|
|
24,454
|
|
Agency bonds
|
7,600
|
|
|
10
|
|
|
—
|
|
|
7,610
|
|
Municipal bonds
|
5,615
|
|
|
—
|
|
|
—
|
|
|
5,615
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
238,417
|
|
|
929
|
|
|
(187
|
)
|
|
239,159
|
|
Treasury bills
|
55,671
|
|
|
—
|
|
|
(126
|
)
|
|
55,545
|
|
Asset-backed securities
|
44,733
|
|
|
95
|
|
|
(17
|
)
|
|
44,811
|
|
Sovereign bonds
|
6,519
|
|
|
1
|
|
|
(41
|
)
|
|
6,479
|
|
Agency bonds
|
5,787
|
|
|
16
|
|
|
(1
|
)
|
|
5,802
|
|
Municipal bonds
|
2,860
|
|
|
2
|
|
|
—
|
|
|
2,862
|
|
|
$
|
696,124
|
|
|
$
|
1,576
|
|
|
$
|
(640
|
)
|
|
$
|
697,060
|
|
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
July 2, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position For:
|
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Treasury bills
|
$
|
143,666
|
|
|
$
|
(306
|
)
|
|
$
|
8,897
|
|
|
$
|
(20
|
)
|
|
$
|
152,563
|
|
|
$
|
(326
|
)
|
Corporate bonds
|
62,295
|
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
62,295
|
|
|
(190
|
)
|
Asset-backed securities
|
52,141
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
52,141
|
|
|
(37
|
)
|
Sovereign bonds
|
24,737
|
|
|
(84
|
)
|
|
3,001
|
|
|
(2
|
)
|
|
27,738
|
|
|
(86
|
)
|
Agency bonds
|
3,076
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
3,076
|
|
|
(1
|
)
|
|
$
|
285,915
|
|
|
$
|
(618
|
)
|
|
$
|
11,898
|
|
|
$
|
(22
|
)
|
|
$
|
297,813
|
|
|
$
|
(640
|
)
|
As of
July 2, 2017
, the Company did not recognize any other-than-temporary impairment of these investments. In its evaluation, management considered the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, the Company's intent and ability to hold the security to expected recovery of value, and other meaningful information. The Company does not intend to sell, and is unlikely to be required to sell, any of these available-for-sale investments before their effective maturity or market price recovery.
The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling
$55,000
and
$13,000
, respectively, during the three-month period ended
July 2, 2017
and
$141,000
and
$0
, respectively, during the three-month period ended
July 3, 2016
. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling
$143,000
and
$36,000
, respectively, during the six-month period ended
July 2, 2017
and
$225,000
and
$97,000
, respectively, during the six-month period ended
July 3, 2016
. These gains and losses are included in "Investment income" on the Consolidated Statement 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 other comprehensive income (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
July 2, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<1 year
|
|
1-2 Years
|
|
2-3 Years
|
|
3-4 Years
|
|
4-5 Years
|
|
5-7 Years
|
|
Total
|
Corporate bonds
|
$
|
86,000
|
|
|
$
|
112,337
|
|
|
$
|
86,773
|
|
|
$
|
7,602
|
|
|
$
|
32,447
|
|
|
$
|
—
|
|
|
$
|
325,159
|
|
Treasury bills
|
97,018
|
|
|
55,545
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
152,563
|
|
Asset-backed securities
|
42,449
|
|
|
21,856
|
|
|
20,100
|
|
|
—
|
|
|
—
|
|
|
2,855
|
|
|
87,260
|
|
Euro liquidity fund
|
79,256
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79,256
|
|
Sovereign bonds
|
24,454
|
|
|
3,819
|
|
|
2,660
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,933
|
|
Agency bonds
|
7,610
|
|
|
2,726
|
|
|
3,076
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,412
|
|
Municipal bonds
|
5,615
|
|
|
2,862
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,477
|
|
|
$
|
342,402
|
|
|
$
|
199,145
|
|
|
$
|
112,609
|
|
|
$
|
7,602
|
|
|
$
|
32,447
|
|
|
$
|
2,855
|
|
|
$
|
697,060
|
|
NOTE 5: Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
23,197
|
|
|
$
|
18,224
|
|
Work-in-process
|
6,970
|
|
|
2,760
|
|
Finished goods
|
6,324
|
|
|
6,000
|
|
|
$
|
36,491
|
|
|
$
|
26,984
|
|
NOTE 6: Goodwill
The changes in the carrying value of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
Amount
|
Balance as of December 31, 2016
|
|
$
|
95,280
|
|
Acquisition of ViDi Systems S.A.
|
|
18,333
|
|
Acquisition of GVi Ventures, Inc.
|
|
1,476
|
|
Balance as of July 2, 2017
|
|
$
|
115,089
|
|
Refer to Note 15 to the Consolidated Financial Statements for further information regarding acquisitions.
NOTE 7: Intangible Assets
Amortized intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Distribution networks
|
$
|
38,060
|
|
|
$
|
38,060
|
|
|
$
|
—
|
|
Completed technologies
|
13,687
|
|
|
2,961
|
|
|
10,726
|
|
Customer relationships
|
9,205
|
|
|
5,044
|
|
|
4,161
|
|
Non-compete agreements
|
370
|
|
|
31
|
|
|
339
|
|
Balance as of July 2, 2017
|
$
|
61,322
|
|
|
$
|
46,096
|
|
|
$
|
15,226
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Distribution networks
|
$
|
38,060
|
|
|
$
|
37,422
|
|
|
$
|
638
|
|
Completed technologies
|
8,003
|
|
|
2,098
|
|
|
5,905
|
|
Customer relationships
|
6,605
|
|
|
4,836
|
|
|
1,769
|
|
Balance as of December 31, 2016
|
$
|
52,668
|
|
|
$
|
44,356
|
|
|
$
|
8,312
|
|
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of July 2, 2017, estimated future amortization expense related to intangible assets is as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
Amount
|
Remainder of fiscal 2017
|
|
$
|
1,598
|
|
2018
|
|
3,196
|
|
2019
|
|
2,821
|
|
2020
|
|
2,305
|
|
2021
|
|
2,097
|
|
2022
|
|
1,691
|
|
Thereafter
|
|
1,518
|
|
|
|
$
|
15,226
|
|
NOTE 8: 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 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, 2016
|
$
|
4,335
|
|
Provisions for warranties issued during the period
|
1,456
|
|
Fulfillment of warranty obligations
|
(1,249
|
)
|
Foreign exchange rate changes
|
395
|
|
Balance as of July 2, 2017
|
$
|
4,937
|
|
NOTE 9: 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 Company enters into
two
types of hedges to manage this risk. The first are economic hedges which utilize foreign currency forward contracts with maturities of up to
45
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. The second are cash flow hedges which utilize foreign currency forward contracts with maturities of up to
18 months
to hedge specific forecasted transactions of the Company's foreign subsidiaries with the goal of protecting our budgeted revenues and expenses against foreign currency exchange rate changes compared to our budgeted rates. These cash flow hedges are 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
|
December 31, 2016
|
Currency
|
Notional
Value
|
|
USD
Equivalent
|
|
Notional
Value
|
|
USD
Equivalent
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Japanese Yen
|
62,500
|
|
|
$
|
627
|
|
|
342,500
|
|
|
$
|
2,960
|
|
Hungarian Forint
|
—
|
|
|
—
|
|
|
39,000
|
|
|
130
|
|
Singapore Dollar
|
—
|
|
|
—
|
|
|
150
|
|
|
97
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
Japanese Yen
|
665,000
|
|
|
$
|
5,954
|
|
|
650,000
|
|
|
$
|
5,554
|
|
British Pound
|
1,690
|
|
|
2,197
|
|
|
1,350
|
|
|
1,658
|
|
Korean Won
|
2,100,000
|
|
|
1,839
|
|
|
1,750,000
|
|
|
1,450
|
|
Hungarian Forint
|
445,000
|
|
|
1,648
|
|
|
425,000
|
|
|
1,448
|
|
Singapore Dollar
|
2,025
|
|
|
1,473
|
|
|
1,350
|
|
|
929
|
|
Taiwanese Dollar
|
29,100
|
|
|
959
|
|
|
26,000
|
|
|
802
|
|
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
|
|
July 2, 2017
|
|
December 31, 2016
|
|
Sheet
Location
|
|
July 2, 2017
|
|
December 31, 2016
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
Cash flow hedge forward contracts
|
Prepaid expenses and other current assets
|
|
$
|
71
|
|
|
$
|
43
|
|
|
Accrued
expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
Economic hedge forward contracts
|
Prepaid expenses and other current assets
|
|
$
|
45
|
|
|
$
|
1
|
|
|
Accrued expenses
|
|
$
|
4
|
|
|
$
|
11
|
|
The following table presents the gross activity for all derivative assets and liabilities which were presented on a net basis on the Consolidated Balance Sheets due to the right of offset with each counterparty (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
July 2, 2017
|
|
December 31, 2016
|
|
|
|
July 2, 2017
|
|
December 31, 2016
|
Gross amounts of recognized assets
|
|
$
|
116
|
|
|
$
|
117
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
4
|
|
|
$
|
11
|
|
Gross amounts offset
|
|
—
|
|
|
(73
|
)
|
|
Gross amounts offset
|
|
—
|
|
|
—
|
|
Net amount of assets presented
|
|
$
|
116
|
|
|
$
|
44
|
|
|
Net amount of liabilities presented
|
|
$
|
4
|
|
|
$
|
11
|
|
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
|
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
Gains (losses) recorded in shareholders' equity (effective portion)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
60
|
|
|
$
|
(487
|
)
|
|
$
|
60
|
|
|
$
|
(487
|
)
|
Gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations (effective portion)
|
Revenue
|
|
$
|
9
|
|
|
$
|
(200
|
)
|
|
$
|
(46
|
)
|
|
$
|
(203
|
)
|
|
Research, development, and engineering expenses
|
|
—
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
Selling, general, and administrative expenses
|
|
—
|
|
|
8
|
|
|
8
|
|
|
13
|
|
|
Total gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations
|
|
$
|
9
|
|
|
$
|
(190
|
)
|
|
$
|
(35
|
)
|
|
$
|
(186
|
)
|
Gains (losses) recognized in current operations (ineffective portion and discontinued derivatives)
|
Foreign currency gain (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
Gains (losses) recognized in current operations
|
Foreign currency gain (loss)
|
|
$
|
177
|
|
|
$
|
(705
|
)
|
|
$
|
96
|
|
|
$
|
(1,065
|
)
|
The following table provides the changes in accumulated other comprehensive income (loss), net of tax, related to derivative instruments (in thousands):
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
37
|
|
Net unrealized loss on cash flow hedges
|
|
(12
|
)
|
Reclassification of net realized loss on cash flow hedges into current operations
|
|
35
|
|
Balance as of July 2, 2017
|
|
$
|
60
|
|
Net gains expected to be reclassified from accumulated other comprehensive income (loss), net of tax, into current operations within the next twelve months are
$60,000
.
NOTE 10: Stock-Based Compensation Expense
The Company’s share-based payments that result in compensation expense consist of stock option grants and restricted stock awards. As of
July 2, 2017
, the Company had
6,205,027
shares available for grant. 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
years based upon continuous service and expire
ten
years from the grant date. Restricted stock awards are granted with an exercise price equal to the market value of the Company's common stock at the time of grant. Conditions of the award may be based on continuing employment and/or achievement of pre-established performance goals and objectives. Vesting for performance-based restricted stock awards and time-based restricted stock awards must be greater than
one
year and
three
years, respectively.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Company’s stock option activity for the
six
-month period ended
July 2, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding as of December 31, 2016
|
6,433
|
|
|
$
|
32.16
|
|
|
|
|
|
Granted
|
1,937
|
|
|
77.36
|
|
|
|
|
|
Exercised
|
(1,365
|
)
|
|
25.68
|
|
|
|
|
|
Forfeited or expired
|
(64
|
)
|
|
43.11
|
|
|
|
|
|
Outstanding as of July 2, 2017
|
6,941
|
|
|
$
|
45.95
|
|
|
7.91
|
|
$
|
270,790
|
|
Exercisable as of July 2, 2017
|
2,015
|
|
|
$
|
27.39
|
|
|
5.85
|
|
$
|
115,900
|
|
Options vested or expected to vest as of July 2, 2017 (1)
|
6,033
|
|
|
$
|
44.28
|
|
|
7.74
|
|
$
|
245,371
|
|
(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
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Risk-free rate
|
2.4
|
%
|
|
1.7
|
%
|
|
2.4
|
%
|
|
1.7
|
%
|
Expected dividend yield
|
0.39
|
%
|
|
0.84
|
%
|
|
0.39
|
%
|
|
0.84
|
%
|
Expected volatility
|
41
|
%
|
|
41
|
%
|
|
41
|
%
|
|
41
|
%
|
Expected term (in years)
|
5.2
|
|
|
5.4
|
|
|
5.3
|
|
|
5.5
|
|
Risk-free rate
The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.
Expected dividend yield
Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date.
Expected volatility
The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.
Expected term
The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.
The Company stratifies its employee population into
two
groups: one consisting of senior management and another consisting of all other employees. The Company currently expects that approximately
75%
of its stock options granted to senior management and
72%
of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated annual forfeiture rate of
10%
to all unvested options for senior management and a rate of
12%
for all other employees. The Company revised its estimated forfeiture rate in the first quarter of 2017, resulting in a decrease to compensation expense of
$673,000
. The Company also revised its estimated forfeiture rate in the first quarter of 2016, resulting in an increase to compensation expense of
$334,000
.
The weighted-average grant-date fair values of stock options granted during the three-month periods ended
July 2, 2017
and
July 3, 2016
were
$31.01
and
$12.22
, respectively. The weighted-average grant-date fair values of stock options granted during the six-month periods ended
July 2, 2017
and
July 3, 2016
were
$29.95
and
$12.25
, respectively.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The total intrinsic values of stock options exercised for the three-month periods ended
July 2, 2017
and
July 3, 2016
were
$19,408,000
and
$5,652,000
, respectively. The total intrinsic values of stock options exercised for the six-month periods ended
July 2, 2017
and
July 3, 2016
were
$72,451,000
and
$9,376,000
, respectively. The total fair values of stock options vested for the three-month periods ended
July 2, 2017
and
July 3, 2016
were
$725,000
and
$709,000
, respectively. The total fair values of stock options vested for the six-month periods ended
July 2, 2017
and
July 3, 2016
were
$18,713,000
and
$16,045,000
, respectively.
As of
July 2, 2017
, total unrecognized compensation expense related to non-vested stock options was
$48,313,000
, which is expected to be recognized over a weighted-average period of
1.89
years.
The following table summarizes the Company's restricted stock activity for the six-month period ended
July 2, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted-Average Grant Fair Value
|
|
Aggregate Intrinsic Value (in thousands)(1)
|
Nonvested as of December 31, 2016
|
20
|
|
|
$
|
34.05
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
Vested
|
(10
|
)
|
|
34.05
|
|
|
825
|
|
Forfeited or expired
|
—
|
|
|
—
|
|
|
|
Nonvested as of July 2, 2017
|
10
|
|
|
$
|
34.05
|
|
|
$
|
849
|
|
(1) Fair market value as of April 22, 2017 for vested shares, and as of
July 2, 2017
for nonvested shares.
The fair values of restricted stock awards granted were determined based upon the market value of the Company's common stock at the time of grant. The initial cost is then amortized over the period of vesting until the restrictions lapse. These restricted shares will be fully vested in 2018. Participants are entitled to dividends on restricted stock awards, but only receive those amounts if the shares vest. The sale or transfer of these shares is restricted during the vesting period.
The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended
July 2, 2017
were
$7,846,000
and
$2,583,000
, respectively, and for the three-month period ended
July 3, 2016
were
$4,457,000
and
$1,462,000
, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended
July 2, 2017
were
$15,329,000
and
$5,022,000
, respectively, and for the six-month period ended
July 3, 2016
were
$11,261,000
and
$3,690,000
, respectively.
No
compensation expense was capitalized as of
July 2, 2017
or
December 31, 2016
.
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
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Cost of revenue
|
$
|
454
|
|
|
$
|
229
|
|
|
$
|
884
|
|
|
$
|
522
|
|
Research, development, and engineering
|
2,715
|
|
|
1,397
|
|
|
5,325
|
|
|
3,576
|
|
Selling, general, and administrative
|
4,677
|
|
|
2,831
|
|
|
9,120
|
|
|
7,163
|
|
|
$
|
7,846
|
|
|
$
|
4,457
|
|
|
$
|
15,329
|
|
|
$
|
11,261
|
|
NOTE 11: Stock Repurchase Program
In November 2015, the Company's Board of Directors authorized the repurchase of
$100,000,000
of the Company's common stock. As of July 2, 2017, the Company has repurchased
1,271,000
shares at a cost of
$93,428,000
under this program, including
732,000
shares at a cost of
$62,343,000
for the six-month period ended July 2, 2017. In April 2017, the Company's Board of Directors authorized the repurchase of an additional
$100,000,000
of the Company's common stock. Purchases under this April 2017 program will commence upon completion of the November 2015 program. The Company may repurchase shares under these programs in future periods depending upon a variety of factors, including, among other things, the impact of dilution from employee stock options, stock price, share availability, and cash requirements.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12: Taxes
A reconciliation of the United States federal statutory corporate tax rate to the Company’s income tax expense on continuing operations, or effective tax rate, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Six-months Ended
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Income tax provision at federal statutory corporate tax rate
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
State income taxes, net of federal benefit
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Foreign tax rate differential
|
(18
|
)%
|
|
(18
|
)%
|
|
(18
|
)%
|
|
(18
|
)%
|
Tax credit
|
(1
|
)%
|
|
(1
|
)%
|
|
(1
|
)%
|
|
(1
|
)%
|
Discrete tax benefit related to stock option exercises
|
(9
|
)%
|
|
(1
|
)%
|
|
(19
|
)%
|
|
(2
|
)%
|
Other
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Income tax provision on continuing operations
|
9
|
%
|
|
17
|
%
|
|
(1
|
)%
|
|
16
|
%
|
The majority of income earned outside of the United States is permanently reinvested to provide funds for international expansion. The Company is tax resident in numerous jurisdictions around the world and has identified its major 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
35%
. International rights to certain of the Company's intellectual property are held by a subsidiary whose legal jurisdiction does not tax this income, resulting in a foreign effective tax rate that is lower than the above mentioned statutory rates. These differences resulted in a decrease in the effective tax rate by
18
percentage points for the three-month and six-month periods ended July 2, 2017 and July 3, 2016.
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 resulted in a decrease of the effective tax rate by
9
and
1
percentage points for the three-month periods ended July 2, 2017 and July 3, 2016, respectively, and a decrease of the effective tax rate by
19
and
2
percentage points for the six-month periods ended July 2, 2017 and July 3, 2016, respectively.
During the
six
-month period ended
July 2, 2017
, the Company recorded a
$702,000
increase in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled
$86,000
for the
six
-month period ended
July 2, 2017
.
The Company’s reserve for income taxes, including gross interest and penalties, was
$7,150,000
as of
July 2, 2017
, which included
$6,122,000
classified as a non-current liability and
$1,028,000
recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was
$798,000
. 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
$800,000
to
$900,000
over the next twelve months.
The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts and California. Within the United States, the tax years
2013 through 2016
remain open to examination by the Internal Revenue Service and various state tax authorities. The tax years
2012 through 2016
remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.
NOTE 13: Weighted-Average Shares
Weighted-average shares were calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Six-months Ended
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Basic weighted-average common shares outstanding
|
86,639
|
|
|
85,107
|
|
|
86,480
|
|
|
85,024
|
|
Effect of dilutive stock options
|
2,975
|
|
|
1,699
|
|
|
2,972
|
|
|
1,689
|
|
Weighted-average common and common-equivalent shares outstanding
|
89,614
|
|
|
86,806
|
|
|
89,452
|
|
|
86,713
|
|
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Stock options to purchase
1,896,132
and
1,357,254
shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended July 2, 2017, respectively, and
3,904,396
and
4,502,777
for the same periods in 2016, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.
NOTE 14: Discontinued Operations
On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD). A binding arbitration was concluded in the second quarter of 2016 with respect to certain product performance claims made by an SISD customer, for which the Company remained responsible under the indemnity provisions of the sale transaction. In that proceeding, the tribunal ordered the Company to pay the customer approximately
$326,000
, primarily representing a refund of the product purchase price. The tribunal also ordered the customer to pay the Company approximately
$45,000
, primarily representing reimbursement of legal fees. The net settlement of
$281,000
was recorded in discontinued operations in the second quarter of 2016, along with
$123,000
of legal fees. The tax benefit related to this expense was
$149,000
, resulting in a net loss from discontinued operations of
$255,000
.
The losses included in discontinued operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Six-months Ended
|
|
July 2, 2017
|
|
July 3, 2016
|
|
July 2, 2017
|
|
July 3, 2016
|
Operating income from discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) on sale of discontinued operations
|
—
|
|
|
(404
|
)
|
|
—
|
|
|
(404
|
)
|
Income (loss) from discontinued operations before income tax expense (benefit)
|
—
|
|
|
(404
|
)
|
|
—
|
|
|
(404
|
)
|
Income tax expense (benefit) on discontinued operations
|
—
|
|
|
(149
|
)
|
|
—
|
|
|
(149
|
)
|
Net income (loss) from discontinued operations
|
$
|
—
|
|
|
$
|
(255
|
)
|
|
$
|
—
|
|
|
$
|
(255
|
)
|
NOTE 15: Acquisitions
ViDi Systems S.A.
On April 4, 2017, the Company acquired all of the outstanding shares of ViDi Systems, S.A. (ViDi), a privately-held vision software company based in Switzerland. This transaction has been accounted for as a business combination.
The total purchase price of
$23,015,000
included cash payment of $
20,019,000
, with the remaining $
2,996,000
recorded as a holdback to secure potential claims under the agreement. The holdback limitation period is
18
months, and therefore, this amount has been recorded in "Other non-current liabilities" on the Consolidated Balance Sheet. In addition, the Company entered into a special incentive payment tied to employment, which is not material, that the Company will record as compensation expense.
Under this transaction, in addition to completed technologies, the Company acquired a team of software engineers that are expected to help the Company broaden the scope of applications that can be addressed with Cognex vision. ViDi's deep learning software uses artificial intelligence techniques to improve image analysis in applications where it is difficult to predict the full range of image variations that might be encountered. Using feedback, ViDi's software trains the system to distinguish between acceptable variations and defects. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The purchase price was allocated as follows (in thousands):
|
|
|
|
|
Cash
|
$
|
146
|
|
Accounts receivable
|
425
|
|
Prepaid expenses
|
129
|
|
Property, plant, and equipment
|
40
|
|
Accounts payable
|
(98
|
)
|
Accrued expenses
|
(716
|
)
|
Deferred income tax liability
|
(388
|
)
|
Non-compete agreement
|
370
|
|
Completed technologies
|
4,774
|
|
Goodwill
|
18,333
|
|
Purchase price
|
$
|
23,015
|
|
The non-compete agreement and completed technology are included in "Intangible assets" on the Consolidated Balance Sheet. The non-compete agreement will be amortized to research, development and engineering expenses over
three
years, and the completed technology will be amortized to cost of revenue over
six
years, both on a straight-line basis. The portion of the acquired goodwill deductible for tax purposes is
$5,112,000
.
Transaction costs were immaterial and were expensed as incurred.
GVi Ventures, Inc.
On April 12, 2017, the Company acquired selected assets and assumed selected liabilities of GVi Ventures, Inc., a privately-held maker of pre-configured vision solutions for common automotive applications based in the United States. This transaction has been accounted for as a business combination.
The total purchase price of
$5,368,000
included cash payment of
$4,069,000
and contingent consideration valued at
$1,299,000
. In addition, the Company entered into special incentive payments tied to employment, none of which are material, that the Company will record as compensation expense.
The undiscounted potential outcomes related to the contingent consideration range from
$0
to
$3,500,000
based upon certain milestone revenue levels over the next
five
years. As of July 2, 2017, the fair value of the contingent consideration was
$1,299,000
, with
$274,000
recorded in “Accrued expenses,” and
$1,025,000
recorded in "Other non-current liabilities" on the Consolidated Balance Sheet. The contingent consideration will be remeasured each reporting period with changes in fair value recorded in "Other income (expense)" on the Consolidated Statements of Operations.
Under this transaction, in addition to customer relationships and completed technologies, the Company acquired a team of software engineers that are expected to develop new products and increase the Company's ability to serve large customers in the automotive industry. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The purchase price was allocated as follows (in thousands):
|
|
|
|
|
Accounts receivable
|
$
|
423
|
|
Inventories
|
120
|
|
Prepaid expenses and other current assets
|
1
|
|
Accounts payable
|
(152
|
)
|
Accrued expenses
|
(10
|
)
|
Completed technologies
|
910
|
|
Customer relationships
|
2,600
|
|
Goodwill
|
1,476
|
|
Purchase price
|
$
|
5,368
|
|
The customer relationships and completed technologies are included in "Intangible assets" on the Consolidated Balance
Sheet. The customer relationships are being amort
ized to selling, general, and administrative e
xpenses over
eight
years, and the completed technologies are being amortized to cost of revenue over
five
years, both on a straigh
t-line basis. A portion of t
he acquired goodwill is deductible for tax purposes.
Transaction costs were immaterial and were expensed as incurred.
Pro-forma information for these acquisitions has not been presented because they are not material, either individually or in the aggregate.
NOTE 16: Subsequent Events
On July 31, 2017, the Company’s Board of Directors declared a cash dividend of
$0.085
per share. The dividend is payable
September 1, 2017
to all shareholders of record as of the close of business on
August 18, 2017
.