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 ASC 606 "Revenue from Contracts with Customers," Cognex Corporation (the "Company") has provided disclosures related to revenue recognition 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, 2017
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, necessary to present fairly the Company’s financial position as of
September 30, 2018
, and the results of its operations for the three-month and nine-month periods ended
September 30, 2018
and
October 1, 2017
, 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 nine-month periods ended
September 30, 2018
are not necessarily indicative of the results to be expected for the full year.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The framework in support of this core principle includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the performance obligations are satisfied.
Identifying the Contract with the Customer
The Company identifies contracts with customers as agreements that create enforceable rights and obligations, which typically take the form of customer contracts or purchase orders.
Identifying the Performance Obligations in the Contract
The Company identifies performance obligations as promises in contracts to transfer distinct goods or services. Standard products and services that the Company regularly sells separately are accounted for as distinct performance obligations. Application-specific customer solutions that are comprised of a combination of products and services are accounted for as one performance obligation to deliver a total solution to the customer. On-site support services that are provided to the customer after the solution is deployed are accounted for as a separate performance obligation. These solutions are provided to customers in a variety of industries, including the consumer electronics, logistics, and automotive industries.
Shipping and handling activities for which the Company is responsible under the terms and conditions of the sale are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized.
The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. If revenue is recognized before immaterial promises have been completed, then the costs related to such immaterial promises are accrued at the time of sale.
Determining the Transaction Price
The Company determines the transaction price as the amount of consideration it expects to receive in exchange for transferring promised goods or services to the customer. Amounts collected from customers for sales taxes are excluded from the transaction price.
If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances.
Allocating the Transaction Price to the Performance Obligations
The Company allocates the transaction price to each performance obligation at contract inception based on a relative stand-alone selling price basis, or the price at which the Company would sell the good or service separately to similar customers in similar circumstances.
Recognizing Revenue When (or As) the Performance Obligations are Satisfied
The Company recognizes revenue when it transfers the promised goods or services to the customer. Revenue for standard products is recognized at the point in time when the customer obtains control of the goods, which is typically upon delivery when the customer has legal title, physical possession, the risks and rewards of ownership, and an enforceable obligation to pay for the products. Revenue for services, which are not material, is typically recognized over the time the service is provided.
Revenue for application-specific customer solutions is recognized at the point in time when the solution is validated, which is the point in time when the Company can objectively determine that the agreed-upon specifications in the contract have been met and the customer will accept the performance obligations in the arrangement. Although the customer may have taken legal title and physical possession of the goods when they arrived at the customer’s designated site, the significant risks and rewards of ownership transfer to the customer only upon validation. Revenue for on-site support services related to these solutions is recognized over the time the service is provided.
In certain instances, an arrangement may include customer-specified acceptance provisions or performance guarantees that allow the customer to accept or reject delivered products that do not meet the customer’s specifications. If the Company can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, then customer acceptance is a formality. If acceptance provisions are presumed to be substantive, then revenue is deferred until customer acceptance.
For the Company’s standard products and services, revenue recognition and billing typically occur at the same time. For application-specific customer solutions, however, the agreement with the customer may provide for billing terms which differ from revenue recognition criteria, resulting in either deferred revenue or unbilled revenue. Credit assessments are performed to determine payment terms, which vary by region, industry, and customer. Prepayment terms result in contract liabilities for customer deposits. When credit is granted to customers, payment is typically due 30 to 90 days from billing. The Company's contracts have an original expected duration of less than one year, and therefore as a practical expedient, the Company has elected to ignore the impact of the time value of money on a contract and to expense sales commissions. The Company recognizes an asset for costs to fulfill a contract if the costs relate directly to the contract and to future performance, and the costs are expected to be recovered.
Management exercises judgment when determining the amount of revenue to be recognized each period. Such judgments include, but are not limited to, assessing the customer’s ability and intention to pay substantially all of the contract consideration when due, determining when two or more contracts should be combined and accounted for as a single contract, determining whether a contract modification has occurred, assessing whether promises are immaterial in the context of the contract, determining whether material promises in a contract represent distinct performance obligations, estimating the transaction price for a contract that contains variable consideration, determining the stand-alone selling price of each performance obligation, determining whether control is transferred over time or at a point in time for performance obligations, and assessing whether formal customer acceptance provisions are substantive.
NOTE 2: New Pronouncements
Accounting Standards Update (ASU) 2016-02 and 2018-11, "Leases"
ASU 2016-02 creates Topic 842, Leases. The objective of this ASU 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 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 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 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 fiscal years. In July 2018, the Financial Accounting Standards Board issued ASU 2018-11 to amend ASU 2016-02 and provided an additional (and optional) transition method to adopt the new lease standard. This transition method allows entities to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption instead of using the original modified retrospective transition method of adoption which required the restatement of all prior period financial statements. Under this new transition method, the comparative periods presented in the financial statements will
continue to be in accordance with current GAAP (Topic 840, Leases). Management will adopt the new lease standard using this new transition method under ASU 2018-11. As of the date of this report, management has determined the scope of leases subject to the new accounting requirements, has selected a software package to assist with compliance, and has reviewed all leases in scope. Management is in the process of completing the implementation of the lease accounting software, training relevant employees, and finalizing the internal lease accounting policy and the related processes, internal controls, and disclosures.
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 ASU eliminate the probable initial recognition threshold to recognize a credit loss under current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. In addition, this ASU 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 ASU 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 fiscal years. 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) 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 ASU 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 ASU 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 fiscal 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 the change in accounting principle. Early adoption is permitted, including adoption in an interim period. Management does not expect ASU 2017-08 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2017-12, "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities"
ASU 2017-12 applies to all reporting entities that elect to apply hedge accounting. The hedge accounting requirements under current GAAP sometimes do not permit an entity to properly recognize the economic results of the hedging strategy in the financial statements, and they are difficult to understand and interpret. The amendments in this ASU make certain targeted improvements to simplify the application of the hedge accounting guidance. Also, they better align the risk management activities and financial reporting for hedging relationships through changes to both 1) the designation and measurement guidance for qualifying hedging relationships and 2) the presentation of hedge results. For public companies, the amendments in ASU 2017-12 are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those fiscal years. Early adoption is permitted including adoption in any interim period after issuance of the ASU. All transition requirements and elections should be applied to hedging relationships existing on the date of adoption. The entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this ASU. The amended presentation and disclosure guidance is required only prospectively. Management does not expect ASU 2017-12 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2018-01, "Land Easement Practical Expedient for Transition to Topic 842"
ASU 2018-01 applies to entities with land easements that exist or expired before an entity’s adoption of Topic 842, provided that the entity does not account for those land easements as leases under Topic 840. The amendments in
this ASU permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective but may be early adopted. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02, which is for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Management does not expect ASU 2018-01 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2018-02, "Income Statement - Reporting Comprehensive Income"
ASU 2018-02 applies to entities required to apply the provisions of Topic 220, Income Statement - Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. Management does not expect ASU 2018-02 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2018-07, "Compensation - Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting"
ASU 2018-07 applies to all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU expand the scope of Topic 718, Compensation - Stock Compensation, to include share-based payments transactions to nonemployees. Changes to the accounting for nonemployee awards as a result of this ASU include: 1) equity-classified nonemployee share-based payment awards are measured at the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, 2) for awards with performance conditions, compensation cost is recognized when the achievement of the performance condition is probable, rather than upon achievement, and 3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting is eliminated. This ASU clarifies that Topic 718 does not apply to financing transactions or awards granted to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which the measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Management does not expect ASU 2018-07 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software"
ASU 2018-15 applies to entities that are a customer in a hosting arrangement that is a service contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, the amendments in this ASU require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Further, it requires the entity to expense the capitalized implementation costs over the term of the hosting arrangement. In addition, it requires the presentation of the expenses related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and the classification of the payments for the capitalized implementation costs in the statement of cash flows in the same manner as the payments made for the fees associated with the hosting
element. The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Management does not expect ASU 2018-15 to have a material impact on the Company's financial statement 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
September 30, 2018
(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
|
$
|
2,717
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
—
|
|
|
314,106
|
|
|
—
|
|
Treasury bills
|
—
|
|
|
226,058
|
|
|
—
|
|
Asset-backed securities
|
—
|
|
|
131,549
|
|
|
—
|
|
Sovereign bonds
|
—
|
|
|
14,437
|
|
|
—
|
|
Agency bonds
|
—
|
|
|
8,909
|
|
|
—
|
|
Municipal bonds
|
—
|
|
|
6,886
|
|
|
—
|
|
Economic hedge forward contracts
|
—
|
|
|
21
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
Economic hedge forward contracts
|
—
|
|
|
91
|
|
|
—
|
|
Contingent consideration liabilities
|
—
|
|
|
—
|
|
|
2,507
|
|
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.
The Company did not record an other-than-temporary impairment of these financial assets during the
nine
-month period ended
September 30, 2018
.
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 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 nine-month period ended
September 30, 2018
(in thousands):
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
3,557
|
|
Fair value adjustment to Manatee contingent consideration
|
(1,350
|
)
|
Fair value adjustment to GVi contingent consideration
|
1,130
|
|
Fair value adjustment to Chiaro contingent consideration
|
170
|
|
Payment of GVi contingent consideration
|
(1,000
|
)
|
Balance as of September 30, 2018
|
$
|
2,507
|
|
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, 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
nine
-month periods ended
September 30, 2018
and October 1, 2017.
NOTE 4: Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Cash
|
$
|
104,654
|
|
|
$
|
97,951
|
|
Money market instruments
|
2,717
|
|
|
8,631
|
|
Cash and cash equivalents
|
107,371
|
|
|
106,582
|
|
Treasury bills
|
193,347
|
|
|
150,371
|
|
Corporate bonds
|
138,099
|
|
|
47,395
|
|
Asset-backed securities
|
71,438
|
|
|
59,203
|
|
Sovereign bonds
|
8,119
|
|
|
21,579
|
|
Municipal bonds
|
6,044
|
|
|
8,805
|
|
Agency bonds
|
2,969
|
|
|
10,608
|
|
Short-term investments
|
420,016
|
|
|
297,961
|
|
Corporate bonds
|
176,007
|
|
|
296,014
|
|
Asset-backed securities
|
60,111
|
|
|
71,727
|
|
Treasury bills
|
32,711
|
|
|
23,459
|
|
Sovereign bonds
|
6,318
|
|
|
13,147
|
|
Agency bonds
|
5,940
|
|
|
14,890
|
|
Municipal bonds
|
842
|
|
|
4,204
|
|
Long-term investments
|
281,929
|
|
|
423,441
|
|
|
$
|
809,316
|
|
|
$
|
827,984
|
|
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; sovereign bonds consist of direct debt issued by foreign governments; municipal bonds consist of debt securities issued by state and local government entities; and agency bonds consist of domestic or foreign obligations of government agencies and government sponsored enterprises that have government backing. All securities are denominated in U.S. Dollars.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Company’s available-for-sale investments as of
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
Treasury bills
|
$
|
193,631
|
|
|
$
|
—
|
|
|
$
|
(284
|
)
|
|
$
|
193,347
|
|
Corporate bonds
|
138,383
|
|
|
56
|
|
|
(340
|
)
|
|
138,099
|
|
Asset-backed securities
|
71,646
|
|
|
1
|
|
|
(209
|
)
|
|
71,438
|
|
Sovereign bonds
|
8,172
|
|
|
—
|
|
|
(53
|
)
|
|
8,119
|
|
Municipal bonds
|
6,050
|
|
|
—
|
|
|
(6
|
)
|
|
6,044
|
|
Agency bonds
|
2,969
|
|
|
—
|
|
|
—
|
|
|
2,969
|
|
Long-term:
|
|
|
|
|
|
|
|
Corporate bonds
|
175,881
|
|
|
469
|
|
|
(343
|
)
|
|
176,007
|
|
Asset-backed securities
|
60,276
|
|
|
33
|
|
|
(198
|
)
|
|
60,111
|
|
Treasury bills
|
32,718
|
|
|
7
|
|
|
(14
|
)
|
|
32,711
|
|
Sovereign bonds
|
6,286
|
|
|
32
|
|
|
—
|
|
|
6,318
|
|
Agency bonds
|
5,930
|
|
|
10
|
|
|
—
|
|
|
5,940
|
|
Municipal bonds
|
855
|
|
|
—
|
|
|
(13
|
)
|
|
842
|
|
|
$
|
702,797
|
|
|
$
|
608
|
|
|
$
|
(1,460
|
)
|
|
$
|
701,945
|
|
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
September 30, 2018
(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
|
$
|
137,108
|
|
|
$
|
(174
|
)
|
|
$
|
63,030
|
|
|
$
|
(124
|
)
|
|
$
|
200,138
|
|
|
$
|
(298
|
)
|
Corporate bonds
|
116,028
|
|
|
(386
|
)
|
|
42,922
|
|
|
(297
|
)
|
|
158,950
|
|
|
(683
|
)
|
Asset-backed securities
|
57,678
|
|
|
(207
|
)
|
|
38,256
|
|
|
(200
|
)
|
|
95,934
|
|
|
(407
|
)
|
Sovereign bonds
|
3,527
|
|
|
(6
|
)
|
|
4,592
|
|
|
(47
|
)
|
|
8,119
|
|
|
(53
|
)
|
Municipal bonds
|
2,854
|
|
|
(6
|
)
|
|
842
|
|
|
(13
|
)
|
|
3,696
|
|
|
(19
|
)
|
|
$
|
317,195
|
|
|
$
|
(779
|
)
|
|
$
|
149,642
|
|
|
$
|
(681
|
)
|
|
$
|
466,837
|
|
|
$
|
(1,460
|
)
|
As of
September 30, 2018
, 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
$283,000
and
$17,000
, respectively, during the three-month period ended
September 30, 2018
and
$306,000
and
$43,000
, respectively, during the three-month period ended
October 1, 2017
. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling
$646,000
and
$111,000
, respectively, during the nine-month period ended
September 30, 2018
and
$449,000
and
$79,000
, respectively, during the nine-month period ended
October 1, 2017
. 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 accumulated 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
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<1 year
|
|
1-2 Years
|
|
2-3 Years
|
|
3-4 Years
|
|
4-5 Years
|
|
5-7 Years
|
|
Total
|
Corporate bonds
|
$
|
138,099
|
|
|
$
|
80,605
|
|
|
$
|
68,684
|
|
|
$
|
22,429
|
|
|
$
|
1,434
|
|
|
$
|
2,855
|
|
|
$
|
314,106
|
|
Treasury bills
|
193,347
|
|
|
32,711
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
226,058
|
|
Asset-backed securities
|
71,438
|
|
|
30,840
|
|
|
5,431
|
|
|
12,102
|
|
|
5,138
|
|
|
6,600
|
|
|
131,549
|
|
Sovereign bonds
|
8,119
|
|
|
6,318
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,437
|
|
Agency bonds
|
2,969
|
|
|
—
|
|
|
—
|
|
|
5,940
|
|
|
—
|
|
|
—
|
|
|
8,909
|
|
Municipal bonds
|
6,044
|
|
|
842
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,886
|
|
|
$
|
420,016
|
|
|
$
|
151,316
|
|
|
$
|
74,115
|
|
|
$
|
40,471
|
|
|
$
|
6,572
|
|
|
$
|
9,455
|
|
|
$
|
701,945
|
|
NOTE 5: Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
46,660
|
|
|
$
|
33,927
|
|
Work-in-process
|
4,071
|
|
|
2,114
|
|
Finished goods
|
43,304
|
|
|
31,882
|
|
|
$
|
94,035
|
|
|
$
|
67,923
|
|
NOTE 6: 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
|
|
|
6,010
|
|
|
7,677
|
|
Customer relationships
|
8,607
|
|
|
5,587
|
|
|
3,020
|
|
Non-compete agreements
|
370
|
|
|
185
|
|
|
185
|
|
Balance as of September 30, 2018
|
$
|
60,724
|
|
|
$
|
49,842
|
|
|
$
|
10,882
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Distribution networks
|
$
|
38,060
|
|
|
$
|
38,060
|
|
|
$
|
—
|
|
Completed technologies
|
13,687
|
|
|
4,181
|
|
|
9,506
|
|
Customer relationships
|
8,607
|
|
|
5,202
|
|
|
3,405
|
|
Non-compete agreements
|
370
|
|
|
92
|
|
|
278
|
|
Balance as of December 31, 2017
|
$
|
60,724
|
|
|
$
|
47,535
|
|
|
$
|
13,189
|
|
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2018, estimated future amortization expense related to intangible assets is as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
Amount
|
Remainder of fiscal 2018
|
|
$
|
769
|
|
2019
|
|
2,701
|
|
2020
|
|
2,185
|
|
2021
|
|
2,017
|
|
2022
|
|
1,691
|
|
2023
|
|
989
|
|
Thereafter
|
|
530
|
|
|
|
$
|
10,882
|
|
NOTE 7: 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, 2017
|
$
|
4,701
|
|
Provisions for warranties issued during the period
|
3,376
|
|
Fulfillment of warranty obligations
|
(3,223
|
)
|
Foreign exchange rate changes
|
(117
|
)
|
Balance as of September 30, 2018
|
$
|
4,737
|
|
NOTE 8: 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 the Company's budgeted revenues and expenses against foreign currency exchange rate changes compared to its 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Currency
|
Notional
Value
|
|
USD
Equivalent
|
|
Notional
Value
|
|
USD
Equivalent
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
Euro
|
19,500
|
|
|
$
|
22,602
|
|
|
—
|
|
|
$
|
—
|
|
Japanese Yen
|
455,000
|
|
|
4,018
|
|
|
455,000
|
|
|
4,049
|
|
British Pound
|
2,100
|
|
|
2,742
|
|
|
1,650
|
|
|
2,232
|
|
Hungarian Forint
|
700,000
|
|
|
2,513
|
|
|
545,000
|
|
|
2,110
|
|
Korean Won
|
2,050,000
|
|
|
1,847
|
|
|
1,825,000
|
|
|
1,708
|
|
Taiwanese Dollar
|
49,000
|
|
|
1,615
|
|
|
37,725
|
|
|
1,278
|
|
Canadian Dollar
|
800
|
|
|
616
|
|
|
—
|
|
|
—
|
|
Singapore Dollar
|
760
|
|
|
557
|
|
|
—
|
|
|
—
|
|
Swiss Franc
|
—
|
|
|
—
|
|
|
1,365
|
|
|
1,401
|
|
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
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Sheet
Location
|
|
September 30, 2018
|
|
December 31, 2017
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
Economic hedge forward contracts
|
Prepaid expenses and other current assets
|
|
$
|
21
|
|
|
$
|
16
|
|
|
Accrued expenses
|
|
$
|
91
|
|
|
$
|
13
|
|
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
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Gross amounts of recognized assets
|
|
$
|
21
|
|
|
$
|
16
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
91
|
|
|
$
|
13
|
|
Gross amounts offset
|
|
—
|
|
|
—
|
|
|
Gross amounts offset
|
|
—
|
|
|
—
|
|
Net amount of assets presented
|
|
$
|
21
|
|
|
$
|
16
|
|
|
Net amount of liabilities presented
|
|
$
|
91
|
|
|
$
|
13
|
|
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
|
|
Nine-months Ended
|
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
Gains (losses) recorded in shareholders' equity (effective portion)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations (effective portion)
|
Revenue
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
Research, development, and engineering expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Selling, general, and administrative expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Total gains (losses) reclassified from accumulated other comprehensive income (loss) into current operations
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
21
|
|
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)
|
|
$
|
299
|
|
|
$
|
43
|
|
|
$
|
(366
|
)
|
|
$
|
139
|
|
NOTE 9: Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification (ASC) 606, "Revenue from Contracts with Customers," using the full retrospective method to present all periods reported on a consistent basis. Accordingly, prior-period results have been restated to apply the provisions of this ASC.
As a result of this adoption, revenue for software-only products sold as part of multiple-deliverable arrangements are no longer deferred when vendor-specific objective evidence of fair value does not exist for the undelivered elements of the arrangement. This change results in earlier recognition of revenue. In addition, certain of the Company’s product accessory sales, which were reported on a net basis, are now 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 results 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 do not change. Furthermore, for arrangements that include customer-specified acceptance criteria, revenue is recognized when the Company 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 primarily impacts revenue recognition for arrangements in the logistics industry where certain customer solutions include installed products and results in earlier recognition of revenue.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The adoption of the standard impacted our previously-reported results as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Nine-months Ended
|
|
October 1, 2017
|
|
October 1, 2017
|
|
As previously reported
|
|
Adjustment
|
|
As restated
|
|
As previously reported
|
|
Adjustment
|
|
As restated
|
Revenue
|
$
|
259,739
|
|
|
$
|
6,303
|
|
|
$
|
266,042
|
|
|
$
|
567,585
|
|
|
$
|
15,576
|
|
|
$
|
583,161
|
|
Cost of revenue
|
62,360
|
|
|
5,701
|
|
|
68,061
|
|
|
128,056
|
|
|
14,701
|
|
|
142,757
|
|
Gross margin
|
197,379
|
|
|
602
|
|
|
197,981
|
|
|
439,529
|
|
|
875
|
|
|
440,404
|
|
Operating income
|
110,247
|
|
|
602
|
|
|
110,849
|
|
|
207,211
|
|
|
875
|
|
|
208,086
|
|
Income before income tax expense
|
112,150
|
|
|
602
|
|
|
112,752
|
|
|
212,918
|
|
|
875
|
|
|
213,793
|
|
Income tax expense (benefit)
|
9,802
|
|
|
457
|
|
|
10,259
|
|
|
8,843
|
|
|
491
|
|
|
9,334
|
|
Net income
|
$
|
102,348
|
|
|
$
|
145
|
|
|
$
|
102,493
|
|
|
$
|
204,075
|
|
|
$
|
384
|
|
|
$
|
204,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted-average common and common-equivalent share:
|
Basic
|
$
|
0.59
|
|
|
$
|
—
|
|
|
$
|
0.59
|
|
|
$
|
1.18
|
|
|
$
|
—
|
|
|
$
|
1.18
|
|
Diluted
|
$
|
0.57
|
|
|
$
|
—
|
|
|
$
|
0.57
|
|
|
$
|
1.14
|
|
|
$
|
—
|
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
December 31, 2017
|
|
As previously reported
|
|
Adjustment
|
|
As restated
|
Prepaid expenses and other current assets
|
$
|
30,800
|
|
|
$
|
(117
|
)
|
|
$
|
30,683
|
|
Accrued income taxes
|
11,391
|
|
|
112
|
|
|
11,503
|
|
Deferred revenue and customer deposits
|
9,969
|
|
|
(549
|
)
|
|
9,420
|
|
Retained earnings
|
668,267
|
|
|
320
|
|
|
668,587
|
|
The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Nine-months Ended
|
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Europe
|
|
$
|
115,592
|
|
|
$
|
146,230
|
|
|
$
|
242,161
|
|
|
$
|
252,386
|
|
Americas
|
|
58,830
|
|
|
54,902
|
|
|
189,859
|
|
|
155,977
|
|
Greater China
|
|
32,796
|
|
|
35,546
|
|
|
101,130
|
|
|
84,764
|
|
Other Asia
|
|
25,003
|
|
|
29,364
|
|
|
79,902
|
|
|
90,034
|
|
|
|
$
|
232,221
|
|
|
$
|
266,042
|
|
|
$
|
613,052
|
|
|
$
|
583,161
|
|
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes disaggregated revenue information by revenue type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Nine-months Ended
|
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Standard products and services
|
|
$
|
150,993
|
|
|
$
|
159,981
|
|
|
$
|
493,019
|
|
|
$
|
453,464
|
|
Application-specific customer solutions
|
|
81,228
|
|
|
106,061
|
|
|
120,033
|
|
|
129,697
|
|
|
|
$
|
232,221
|
|
|
$
|
266,042
|
|
|
$
|
613,052
|
|
|
$
|
583,161
|
|
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
$6,811,000
and
$3,230,000
as of September 30, 2018 and December 31, 2017, 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 reserves against its accounts receivable for potential credit losses. Credit losses recognized on accounts receivable were immaterial for the three-month and nine-month periods ended September 30, 2018 and October 1, 2017, respectively. Contract assets consist of unbilled revenue which arises when revenue is recognized in advance of billing for certain application-specific customer solutions contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.
The following table summarizes the deferred revenue and customer deposits activity for the nine-month period ended September 30, 2018 (in thousands):
|
|
|
|
|
|
Amount
|
Balance as of December 31, 2017
|
$
|
9,420
|
|
Increases to deferred revenue and customer deposits
|
55,408
|
|
Recognition of revenue
|
(50,590
|
)
|
Foreign exchange rate changes
|
(986
|
)
|
Balance as of September 30, 2018
|
$
|
13,252
|
|
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.
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
September 30, 2018
, the Company had
20,246,002
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
or five years based upon continuous service and expire
ten
years from the grant date. Vesting of restricted stock awards 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 not be less than
one
year and
three
years, respectively; however, awards with time-based vesting may become vested incrementally over such three-year period.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Company’s stock option activity for the
nine
-month period ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding as of December 31, 2017
|
12,726
|
|
|
$
|
25.24
|
|
|
|
|
|
Granted
|
2,318
|
|
|
55.66
|
|
|
|
|
|
Exercised
|
(1,434
|
)
|
|
18.06
|
|
|
|
|
|
Forfeited or expired
|
(429
|
)
|
|
33.24
|
|
|
|
|
|
Outstanding as of September 30, 2018
|
13,181
|
|
|
$
|
31.11
|
|
|
7.48
|
|
$
|
329,301
|
|
Exercisable as of September 30, 2018
|
4,327
|
|
|
$
|
20.14
|
|
|
6.01
|
|
$
|
154,377
|
|
Options vested or expected to vest as of September 30, 2018 (1)
|
11,916
|
|
|
$
|
29.99
|
|
|
7.37
|
|
$
|
310,772
|
|
(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
|
|
Nine-months Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Risk-free rate
|
2.9
|
%
|
|
2.4
|
%
|
|
2.9
|
%
|
|
2.4
|
%
|
Expected dividend yield
|
0.32
|
%
|
|
0.39
|
%
|
|
0.32
|
%
|
|
0.39
|
%
|
Expected volatility
|
39
|
%
|
|
41
|
%
|
|
39
|
%
|
|
41
|
%
|
Expected term (in years)
|
5.4
|
|
|
5.1
|
|
|
5.3
|
|
|
5.3
|
|
Risk-free rate
The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.
Expected dividend yield
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 applies an estimated annual forfeiture rate of
8%
to all unvested options for senior management and a rate of
12%
for all other employees. Each year during the first quarter, the company revises its estimated forfeiture rate. This resulted in an increase to compensation expense of
$1,283,000
in 2018 and a decrease to compensation expense of
$673,000
in 2017.
The weighted-average grant-date fair values of stock options granted during the three-month periods ended
September 30, 2018
and
October 1, 2017
were
$22.52
and
$14.80
, respectively. The weighted-average grant-date fair values of stock options granted during the nine-month periods ended
September 30, 2018
and
October 1, 2017
were
$21.70
and
$14.97
, respectively.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The total intrinsic values of stock options exercised for the three-month periods ended
September 30, 2018
and
October 1, 2017
were
$17,985,000
and
$28,462,000
, respectively. The total intrinsic values of stock options exercised for the nine-month periods ended
September 30, 2018
and
October 1, 2017
were
$50,975,000
and
$100,913,000
, respectively. The total fair values of stock options vested for the three-month periods ended
September 30, 2018
and
October 1, 2017
were
$997,000
and
$844,000
, respectively. The total fair values of stock options vested for the nine-month periods ended
September 30, 2018
and
October 1, 2017
were
$27,557,000
and
$19,557,000
, respectively.
As of
September 30, 2018
, total unrecognized compensation expense related to non-vested stock options was
$50,387,000
, which is expected to be recognized over a weighted-average period of
1.61
years.
The following table summarizes the Company's restricted stock activity for the nine-month period ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted-Average Grant Fair Value
|
|
Aggregate Intrinsic Value (in thousands)
|
Nonvested as of December 31, 2017
|
20
|
|
|
$
|
17.03
|
|
|
|
Granted
|
|
|
|
|
|
Vested
|
(20
|
)
|
|
17.03
|
|
|
993
|
|
Forfeited or expired
|
|
|
|
|
|
Nonvested as of September 30, 2018
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 was then amortized over the period of vesting until the restrictions lapsed. These restricted shares became fully vested in 2018. Participants were entitled to dividends on the restricted stock awards, but only received those amounts if the shares vested. The sale or transfer of these shares was restricted during the vesting period.
The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended
September 30, 2018
were
$9,143,000
and
$1,654,000
, respectively, and for the three-month period ended
October 1, 2017
were
$8,026,000
and
$2,639,000
, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended
September 30, 2018
were
$31,339,000
and
$5,608,000
, respectively, and for the nine-month period ended
October 1, 2017
were
$23,355,000
and
$7,661,000
, respectively.
No
compensation expense was capitalized as of
September 30, 2018
or
December 31, 2017
.
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
|
|
Nine-months Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Cost of revenue
|
$
|
544
|
|
|
$
|
520
|
|
|
$
|
1,898
|
|
|
$
|
1,404
|
|
Research, development, and engineering
|
3,197
|
|
|
2,765
|
|
|
11,166
|
|
|
8,090
|
|
Selling, general, and administrative
|
5,402
|
|
|
4,741
|
|
|
18,275
|
|
|
13,861
|
|
|
$
|
9,143
|
|
|
$
|
8,026
|
|
|
$
|
31,339
|
|
|
$
|
23,355
|
|
NOTE 11: Stock Repurchase Program
In April 2017, the Company's Board of Directors authorized the repurchase of
$100,000,000
of the Company's common stock. As of September 30, 2018, the Company had repurchased
1,744,000
shares at a cost of
$100,000,000
under this program, including
803,000
shares at a cost of
$45,200,000
in the three-month period ended April 1, 2018. Stock repurchases under this April 2017 program were completed in the three-month period ended April 1, 2018. In February 2018, the Company's Board of Directors authorized the repurchase of an additional
$150,000,000
of the Company's common stock. As of September 30, 2018, the Company had repurchased
1,947,000
shares at a cost of
$97,062,000
under this program, leaving a remaining authorized balance of
$52,938,000
. Total stock repurchases in the nine-month period ended September 30, 2018 amounted to
$142,262,000
. The Company may repurchase shares under this program 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, or effective tax rate, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Ended
|
|
Nine-months Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Income tax provision at federal statutory corporate tax rate
|
21
|
%
|
|
35
|
%
|
|
21
|
%
|
|
35
|
%
|
State income taxes, net of federal benefit
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Foreign tax rate differential
|
(7
|
)%
|
|
(18
|
)%
|
|
(7
|
)%
|
|
(18
|
)%
|
Tax credit
|
—
|
%
|
|
(1
|
)%
|
|
—
|
%
|
|
(1
|
)%
|
Discrete tax benefit related to Tax Act 2017
|
(9
|
)%
|
|
—
|
%
|
|
(4
|
)%
|
|
—
|
%
|
Discrete tax benefit related to stock option exercises
|
(4
|
)%
|
|
(7
|
)%
|
|
(5
|
)%
|
|
(13
|
)%
|
Other discrete tax events
|
(2
|
)%
|
|
(2
|
)%
|
|
(1
|
)%
|
|
(1
|
)%
|
Other
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Income tax provision
|
1
|
%
|
|
9
|
%
|
|
6
|
%
|
|
4
|
%
|
On December 22, 2017, the United States Congress passed and the President signed into law the Tax Cuts and Jobs Act of 2017 (Tax Act). The Tax Act included a decrease in the U.S. federal statutory corporate tax rate from
35%
to
21%
, a one-time transition tax on unrepatriated foreign earnings, and limits on certain deductions. The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 118 to provide guidance to companies on how to implement the accounting and disclosure changes as a result of the Tax Act. The Company made what it considered to be a reasonable estimate of the impact of the Tax Act in its financial statements for the year ended December 31, 2017. In the third quarter of 2018, the Company revised its estimate of the impact of the Tax Act based on additional regulatory guidance. The effective tax rate, as a result, was reduced by
9
percentage points and
4
percentage points for the three-month and nine-month period ended September 30, 2018, respectively.
This significant estimate is highly judgmental and changes to this estimate could result in material charges or credits in future reporting periods. The Company will continue to review the guidance at the Federal and State levels through the end of 2018 and additional revisions to the estimates of the impact of the Tax Act may be required in the fourth quarter of 2018 as regulatory guidance continues to develop, specifically at the individual State level. The Tax Act subjects the Company to current tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The Company has made an accounting policy election to provide for the tax expense related to GILTI in the year the tax is incurred rather than recognize deferred taxes for these temporary differences.
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
21%
. 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, although the reduced taxes overseas have been partially offset by changes in U.S. tax law. These differences resulted in a decrease in the effective tax rate by
7
percentage points
for the three-month and
nine
-month periods ended
September 30, 2018
, and a decrease in the effective tax rate by
18
percentage points for the three-month and nine-month periods ended
October 1, 2017
.
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
4
and
7
percentage points for the three-month periods ended
September 30, 2018
and
October 1, 2017
, respectively, and a decrease of the effective tax rate by
5
and
13
percentage points for the
nine
-month periods ended
September 30, 2018
and
October 1, 2017
, respectively. Certain reserves for income taxes and other provision-to-return adjustments resulted in a decrease of the effective tax rate by
2
percentage points for both the three-month periods ended September 30, 2018 and October 1, 2017 and a decrease of the effective tax rate by
1
percentage point for both the nine-month periods ended September 30, 2018 and October 1, 2017.
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On January 1, 2018, the Company adopted Accounting Standard Update (ASU) 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory." This Update requires the recognition of deferred income taxes for an intra-entity transfer of an asset other than inventory. As a result of this ASU, the Company recorded
$5,961,000
through a cumulative-effect adjustment directly to retained earnings at the beginning of fiscal year 2018.
During the
nine
-month period ended
September 30, 2018
, the Company recorded a
$204,000
increase in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled
$33,000
for the
nine
-month period ended
September 30, 2018
.
The Company’s reserve for income taxes, including gross interest and penalties, was
$7,674,000
as of
September 30, 2018
, which included
$6,646,000
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
$773,000
. 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
$1,200,000
to
$1,300,000
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. Within the United States, the tax years
2015 through 2017
remain open to examination by the Internal Revenue Service and various state tax authorities. The tax years
2014 through 2017
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
|
|
Nine-months Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
|
September 30, 2018
|
|
October 1, 2017
|
Basic weighted-average common shares outstanding
|
172,189
|
|
|
173,234
|
|
|
172,613
|
|
|
173,052
|
|
Effect of dilutive stock options
|
5,056
|
|
|
6,120
|
|
|
5,408
|
|
|
6,072
|
|
Weighted-average common and common-equivalent shares outstanding
|
177,245
|
|
|
179,354
|
|
|
178,021
|
|
|
179,124
|
|
Stock options to purchase
2,796,000
and
2,353,000
shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 30, 2018, respectively, and
466,000
and
3,108,000
for the same periods in 2017, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.
NOTE 14: Subsequent Events
On October 29, 2018, the Company’s Board of Directors declared a cash dividend of
$0.050
per share. The dividend is payable
November 30, 2018
to all shareholders of record as of the close of business on
November 16, 2018
.
In addition, on October 29, 2018, 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 February 2018 program.