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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 29, 2019 or

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

Commission File Number 001-34218
COGNEX CORP ORATION

(Exact name of registrant as specified in its charter)

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

One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000

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

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

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

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

|  | Yes | ☒ |  |  |  |  | No | ☐ |  |  |

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

|  | Yes | ☒ |  |  |  |  | No | ☐ |  |  |

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

Large accelerated filer | ☒ |  |  |  |  | Accelerated filer | ☐
Non-accelerated filer | ☐ |  |  |  |  | Smaller reporting company | ☐
|  |  |  |  |  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

|  | Yes | ☐ |  |  |  |  | No | ☒ |  |  |

As of September 29, 2019, there were 170,897,294 shares of Common Stock, $.002 par value per share, of the registrant outstanding.

INDEX

PART I | FINANCIAL INFORMATION | 3
Item 1. | Financial Statements (interim periods unaudited) | 3
| Consolidated Statements of Operations for the three-month and nine-month periods ended September 29, 2019 and September 30, 2018 | 3
| Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 29, 2019 and September 30, 2018 | 4
| Consolidated Balance Sheets as of September 29, 2019 and December 31, 2018 | 5
| Consolidated Statements of Cash Flows for the nine-month periods ended September 29, 2019 and September 30, 2018 | 6
| Consolidated Statements of Shareholders’ Equity for the three-month and nine-month periods ended September 29, 2019 and September 30, 2018 | 7
| Notes to Consolidated Financial Statements | 9
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26
Item 4. | Controls and Procedures | 26
PART II | OTHER INFORMATION |
Item 1. | Legal Proceedings | 27
Item 1A. | Risk Factors | 27
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27
Item 3. | Defaults Upon Senior Securities | 27
Item 4. | Mine Safety Disclosures | 27
Item 5. | Other Information | 27
Item 6. | Exhibits | 28
| Signatures | 29

2

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

| Three-months Ended |  | Nine-months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (unaudited) |  | (unaudited)
Revenue | $ | 183,325 |  |  | $ | 232,221 |  |  | $ | 555,856 |  |  | $ | 613,052 |
Cost of revenue | 47,632 |  |  | 58,860 |  |  | 144,883 |  |  | 153,227 |
Gross margin | 135,693 |  |  | 173,361 |  |  | 410,973 |  |  | 459,825 |
Research, development, and engineering expenses | 28,115 |  |  | 29,700 |  |  | 86,436 |  |  | 87,664 |
Selling, general, and administrative expenses | 64,486 |  |  | 65,817 |  |  | 199,542 |  |  | 196,266 |
Operating income | 43,092 |  |  | 77,844 |  |  | 124,995 |  |  | 175,895 |
Foreign currency gain (loss) | (1,295 | ) |  | (379 | ) |  | (1,403 | ) |  | (708 | )
Investment income | 5,114 |  |  | 3,937 |  |  | 15,242 |  |  | 10,736 |
Other income (expense) | 456 |  |  | (129 | ) |  | 1,239 |  |  | (98 | )
Income before income tax expense | 47,367 |  |  | 81,273 |  |  | 140,073 |  |  | 185,825 |
Income tax expense | 5,682 |  |  | 837 |  |  | 16,535 |  |  | 11,976 |
Net income | $ | 41,685 |  |  | $ | 80,436 |  |  | $ | 123,538 |  |  | $ | 173,849 |
Net income per weighted-average common and common-equivalent share:
Basic | $ | 0.24 |  |  | $ | 0.47 |  |  | $ | 0.72 |  |  | $ | 1.01 |
Diluted | $ | 0.24 |  |  | $ | 0.45 |  |  | $ | 0.71 |  |  | $ | 0.98 |
Weighted-average common and common-equivalent shares outstanding:
Basic | 170,744 |  |  | 172,189 |  |  | 171,053 |  |  | 172,613 |
Diluted | 174,449 |  |  | 177,245 |  |  | 175,164 |  |  | 178,021 |
Cash dividends per common share | $ | 0.050 |  |  | $ | 0.045 |  |  | $ | 0.150 |  |  | $ | 0.135 |

The accompanying notes are an integral part of these consolidated financial statements.
3

COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

| Three-months Ended |  | Nine-months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (unaudited) |  | (unaudited)
Net income | $ | 41,685 |  |  | $ | 80,436 |  |  | $ | 123,538 |  |  | $ | 173,849 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |
Available-for-sale investments: |  |  |  |  |  |  |
Net unrealized gain (loss), net of tax of ($5) and $24 in the three-month periods and net of tax of $502 and ($82) in the nine-month periods, respectively | 265 |  |  | 522 |  |  | 4,827 |  |  | (180 | )
Reclassification of net realized (gain) loss into current operations | (294 | ) |  | (266 | ) |  | (716 | ) |  | (535 | )
Net change related to available-for-sale investments | (29 | ) |  | 256 |  |  | 4,111 |  |  | (715 | )
Foreign currency translation adjustments: |  |  |  |  |  |  |
Foreign currency translation adjustments | (1,099 | ) |  | (1,881 | ) |  | (1,544 | ) |  | (5,078 | )
Net change related to foreign currency translation adjustments | (1,099 | ) |  | (1,881 | ) |  | (1,544 | ) |  | (5,078 | )
Other comprehensive income (loss), net of tax | (1,128 | ) |  | (1,625 | ) |  | 2,567 |  |  | (5,793 | )
Total comprehensive income | $ | 40,557 |  |  | $ | 78,811 |  |  | $ | 126,105 |  |  | $ | 168,056 |

The accompanying notes are an integral part of these consolidated financial statements.
4

COGNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)

| September 29, 2019 |  | December 31, 2018
| (unaudited) |  |
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 121,701 |  |  | $ | 108,212 |
Current investments | 292,072 |  |  | 427,348 |
Accounts receivable, less reserves of $1,874 and $1,646 in 2019 and 2018, respectively | 107,407 |  |  | 119,172 |
Unbilled revenue | 11,210 |  |  | 8,312 |
Inventories | 65,264 |  |  | 83,282 |
Prepaid expenses and other current assets | 28,127 |  |  | 34,000 |
Total current assets | 625,781 |  |  | 780,326 |
Non-current investments | 504,641 |  |  | 262,039 |
Property, plant, and equipment, net | 88,429 |  |  | 91,396 |
Operating lease assets | 15,806 |  |  | — |
Goodwill | 113,208 |  |  | 113,208 |
Intangible assets, net | 7,994 |  |  | 10,113 |
Deferred income taxes | 29,273 |  |  | 28,660 |
Other assets | 5,320 |  |  | 3,925 |
Total assets | $ | 1,390,452 |  |  | $ | 1,289,667 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 12,766 |  |  | $ | 16,230 |
Accrued expenses | 48,561 |  |  | 60,220 |
Accrued income taxes | 4,012 |  |  | 5,062 |
Deferred revenue and customer deposits | 10,431 |  |  | 9,845 |
Operating lease liabilities | 5,445 |  |  | — |
Total current liabilities | 81,215 |  |  | 91,357 |
Non-current operating lease liabilities | 10,722 |  |  | — |
Deferred income taxes | 289 |  |  | 962 |
Reserve for income taxes | 7,151 |  |  | 7,106 |
Non-current accrued income taxes | 51,113 |  |  | 51,113 |
Other liabilities | 744 |  |  | 3,866 |
Total liabilities | 151,234 |  |  | 154,404 |
Shareholders’ equity: |  |  |
Preferred stock, $.01 par value – Authorized: 400 shares in 2019 and 2018, respectively, no shares issued and outstanding | — |  |  | — |
Common stock, $.002 par value – Authorized: 300,000 shares in 2019 and 2018, respectively, issued and outstanding: 170,897 and 170,820 shares in 2019 and 2018, respectively | 342 |  |  | 342 |
Additional paid-in capital | 594,427 |  |  | 529,208 |
Retained earnings | 682,383 |  |  | 646,214 |
Accumulated other comprehensive loss, net of tax | (37,934 | ) |  | (40,501 | )
Total shareholders’ equity | 1,239,218 |  |  | 1,135,263 |
Total liabilities and shareholders' equity | $ | 1,390,452 |  |  | $ | 1,289,667 |

The accompanying notes are an integral part of these consolidated financial statements.
5

COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

| Nine-months Ended
| September 29, 2019 |  | September 30, 2018
| (unaudited)
Cash flows from operating activities: |  |  |
Net income | $ | 123,538 |  |  | $ | 173,849 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Stock-based compensation expense | 33,442 |  |  | 31,339 |
Depreciation of property, plant, and equipment | 15,800 |  |  | 13,474 |
Amortization of intangible assets | 2,119 |  |  | 2,307 |
Amortization of discounts or premiums on investments | (563 | ) |  | 123 |
Realized (gain) loss on sale of investments | (716 | ) |  | (535 | )
Revaluation of contingent consideration | (1,401 | ) |  | (50 | )
Change in deferred income taxes | (1,805 | ) |  | 175 |
Change in operating assets and liabilities: |  |  |
Accounts receivable | 11,387 |  |  | (18,136 | )
Unbilled revenue | (2,900 | ) |  | (6,542 | )
Inventories | 18,019 |  |  | (27,699 | )
Prepaid expenses and other current assets | 5,827 |  |  | (3,437 | )
Accounts payable | (3,398 | ) |  | (1,182 | )
Accrued expenses | (11,827 | ) |  | 2,266 |
Accrued income taxes | (1,043 | ) |  | (17,497 | )
Deferred revenue and customer deposits | 698 |  |  | 4,841 |
Other | (1,863 | ) |  | (1,604 | )
Net cash provided by operating activities | 185,314 |  |  | 151,692 |
Cash flows from investing activities: |  |  |
Purchases of investments | (883,363 | ) |  | (616,047 | )
Maturities and sales of investments | 781,929 |  |  | 635,119 |
Purchases of property, plant, and equipment | (13,518 | ) |  | (27,356 | )
Net cash provided by (used in) investing activities | (114,952 | ) |  | (8,284 | )
Cash flows from financing activities: |  |  |
Issuance of common stock under stock plans | 31,780 |  |  | 25,882 |
Repurchase of common stock | (61,690 | ) |  | (142,262 | )
Payment of dividends | (25,682 | ) |  | (23,283 | )
Payment of contingent consideration | — |  |  | (1,000 | )
Net cash provided by (used in) financing activities | (55,592 | ) |  | (140,663 | )
Effect of foreign exchange rate changes on cash and cash equivalents | (1,281 | ) |  | (1,956 | )
Net change in cash and cash equivalents | 13,489 |  |  | 789 |
Cash and cash equivalents at beginning of period | 108,212 |  |  | 106,582 |
Cash and cash equivalents at end of period | $ | 121,701 |  |  | $ | 107,371 |

The accompanying notes are an integral part of these consolidated financial statements.
6

COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
| Shares |  | Par Value |  |  |  |
Balance as of June 30, 2019 | 170,661 |  |  | $ | 341 |  |  | $ | 578,871 |  |  | $ | 649,234 |  |  | $ | (36,806 | ) |  | $ | 1,191,640 |
Issuance of common stock under stock plans | 236 |  |  | 1 |  |  | 5,362 |  |  | — |  |  | — |  |  | 5,363 |
Stock-based compensation expense | — |  |  | — |  |  | 10,194 |  |  | — |  |  | — |  |  | 10,194 |
Payment of dividends | — |  |  | — |  |  | — |  |  | (8,536 | ) |  | — |  |  | (8,536 | )
Net income | — |  |  | — |  |  | — |  |  | 41,685 |  |  | — |  |  | 41,685 |
Net unrealized gain (loss) on available-for-sale investments, net of tax of ($5) | — |  |  | — |  |  | — |  |  | — |  |  | 265 |  |  | 265 |
Reclassification of net realized (gain) loss on the sale of available-for-sale investments | — |  |  | — |  |  | — |  |  | — |  |  | (294 | ) |  | (294 | )
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | (1,099 | ) |  | (1,099 | )
Balance as of September 29, 2019 (unaudited) | 170,897 |  |  | $ | 342 |  |  | $ | 594,427 |  |  | $ | 682,383 |  |  | $ | (37,934 | ) |  | $ | 1,239,218 |

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
| Shares |  | Par Value |  |  |  |
Balance as of July 1, 2018 | 172,032 |  |  | $ | 344 |  |  | $ | 498,343 |  |  | $ | 619,212 |  |  | $ | (38,767 | ) |  | $ | 1,079,132 |
Issuance of common stock under stock plans | 553 |  |  | 1 |  |  | 11,070 |  |  | — |  |  | — |  |  | 11,071 |
Repurchase of common stock | (394 | ) |  | — |  |  | — |  |  | (20,954 | ) |  | — |  |  | (20,954 | )
Stock-based compensation expense | — |  |  | — |  |  | 9,143 |  |  | — |  |  | — |  |  | 9,143 |
Payment of dividends | — |  |  | — |  |  | — |  |  | (7,759 | ) |  | — |  |  | (7,759 | )
Net income | — |  |  | — |  |  | — |  |  | 80,436 |  |  | — |  |  | 80,436 |
Net unrealized gain (loss) on available-for-sale investments, net of tax of $24 | — |  |  | — |  |  | — |  |  | — |  |  | 522 |  |  | 522 |
Reclassification of net realized (gain) loss on the sale of available-for-sale investments | — |  |  | — |  |  | — |  |  | — |  |  | (266 | ) |  | (266 | )
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | (1,881 | ) |  | (1,881 | )
Balance as of September 30, 2018 (unaudited) | 172,191 |  |  | $ | 345 |  |  | $ | 518,556 |  |  | $ | 670,935 |  |  | $ | (40,392 | ) |  | $ | 1,149,444 |

The accompanying notes are an integral part of these consolidated financial statements.
7

COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
| Shares |  | Par Value |  |  |  |
Balance as of December 31, 2018 | 170,820 |  |  | $ | 342 |  |  | $ | 529,208 |  |  | $ | 646,214 |  |  | $ | (40,501 | ) |  | $ | 1,135,263 |
Issuance of common stock under stock plans | 1,475 |  |  | 3 |  |  | 31,777 |  |  | — |  |  | — |  |  | 31,780 |
Repurchase of common stock | (1,398 | ) |  | (3 | ) |  | — |  |  | (61,687 | ) |  | — |  |  | (61,690 | )
Stock-based compensation expense | — |  |  | — |  |  | 33,442 |  |  | — |  |  | — |  |  | 33,442 |
Payment of dividends | — |  |  | — |  |  | — |  |  | (25,682 | ) |  | — |  |  | (25,682 | )
Net income | — |  |  | — |  |  | — |  |  | 123,538 |  |  | — |  |  | 123,538 |
Net unrealized gain (loss) on available-for-sale investments, net of tax of $502 | — |  |  | — |  |  | — |  |  | — |  |  | 4,827 |  |  | 4,827 |
Reclassification of net realized (gain) loss on the sale of available-for-sale investments | — |  |  | — |  |  | — |  |  | — |  |  | (716 | ) |  | (716 | )
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | (1,544 | ) |  | (1,544 | )
Balance as of September 29, 2019 (unaudited) | 170,897 |  |  | $ | 342 |  |  | $ | 594,427 |  |  | $ | 682,383 |  |  | $ | (37,934 | ) |  | $ | 1,239,218 |

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
| Shares |  | Par Value |  |  |  |
Balance as of December 31, 2017 | 173,507 |  |  | $ | 347 |  |  | $ | 461,338 |  |  | $ | 668,587 |  |  | $ | (34,599 | ) |  | $ | 1,095,673 |
Issuance of common stock under stock plans | 1,434 |  |  | 3 |  |  | 25,879 |  |  | — |  |  | — |  |  | 25,882 |
Repurchase of common stock | (2,750 | ) |  | (5 | ) |  | — |  |  | (142,257 | ) |  | — |  |  | (142,262 | )
Stock-based compensation expense | — |  |  | — |  |  | 31,339 |  |  | — |  |  | — |  |  | 31,339 |
Payment of dividends | — |  |  | — |  |  | — |  |  | (23,283 | ) |  | — |  |  | (23,283 | )
Adjustment as a result of the adoption of ASU 2016-06 "Income Taxes - Intra-Entity Transfers Other than Inventory" | — |  |  | — |  |  | — |  |  | (5,961 | ) |  | — |  |  | (5,961 | )
Net income | — |  |  | — |  |  | — |  |  | 173,849 |  |  | — |  |  | 173,849 |
Net unrealized gain (loss) on available-for-sale investments, net of tax of ($82) | — |  |  | — |  |  | — |  |  | — |  |  | (180 | ) |  | (180 | )
Reclassification of net realized (gain) loss on the sale of available-for-sale investments | — |  |  | — |  |  | — |  |  | — |  |  | (535 | ) |  | (535 | )
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | — |  |  | (5,078 | ) |  | (5,078 | )
Balance as of September 30, 2018 (unaudited) | 172,191 |  |  | $ | 345 |  |  | $ | 518,556 |  |  | $ | 670,935 |  |  | $ | (40,392 | ) |  | $ | 1,149,444 |

The accompanying notes are an integral part of these consolidated financial statements.
8

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: Summary of Significant Accounting Policies
As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles (GAAP). As a result of the adoption of ASC 842 "Leases," Cognex Corporation (the "Company") has provided new disclosures related to leases 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, 2018 for a full description of other 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 29, 2019, and the results of its operations for the three-month and nine-month periods ended September 29, 2019 and September 30, 2018, 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 29, 2019 are not necessarily indicative of the results to be expected for the full year.
Leases
The Company accounts for leases in accordance with Accounting Standard Codification (ASC) 842, "Leases." The core principle of ASC 842 is that a lessee should recognize on the balance sheet the assets and liabilities that arise from leases.
At inception of a contract, the Company determines whether that contract is or contains a lease. The Company determines whether a contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. The Company has control of the asset if it has the right to direct the use of the asset and obtains substantially all of the economic benefits from the use of the asset throughout the period of use.
As a practical expedient, the Company does not recognize a lease asset or lease liability for leases with a lease term of 12 months or less. In the determination of the lease term, the Company considers the existence of extension or termination options and the probability of those options being exercised.
Lease contracts may include lease components and non-lease components, such as common area maintenance and utilities for property leases. As a practical expedient, the Company accounts for the non-lease components together with the lease components as a single lease component for all of its leases.
The Company classifies a lease as a finance lease when it meets any of the following criteria at the lease commencement date: a) the lease transfers ownership of the underlying asset to the Company by the end of the lease term; b) the lease grants the Company an option to purchase the underlying asset that the Company is reasonably certain to exercise; c) the lease term is for the major part of the remaining economic life of the underlying asset (the Company considers a major part to be 75% or more of the remaining economic life of the underlying asset); d) the present value of the sum of the lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset (the Company considers substantially all the fair value to be 90% or more of the fair value of the underlying asset amount); or e) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. When none of the criteria above are met, the Company classifies the lease as an operating lease.
On the lease commencement date, the Company records a lease asset and lease liability on the balance sheet. The lease asset consists of: 1) the amount of the initial lease liability; 2) any lease payments made to the lessor at or before the lease commencement date, minus any lease incentives received; and 3) any initial direct cost incurred by the Company. Initial direct costs are incremental costs of a lease that would not have been incurred if the lease had not been obtained and are capitalized as part of the lease asset.
The lease liability equals the present value of the future cash payments discounted using the Company's incremental borrowing rate. The Company’s incremental borrowing rate is the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments over a similar term, which is the three-month London Interbank Offered Rate (LIBOR) plus a 2.5% credit risk spread.
9

Operating lease expense equals the total cash payments recognized on a straight-line basis over the lease term. The amortization of the lease asset is calculated as the straight-line lease expense less the accretion of the interest on the lease liability each period. The lease liability is reduced by the cash payment less the interest each period.
NOTE 2: New Pronouncements
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 U.S. 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 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. As of the date of this report, management is in the process of completing the implementation of this ASU, including finalizing the internal credit losses policy and the related processes, internal control, and disclosures. 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 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 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) 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 statements and disclosures.
10

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3: Fair Value Measurements
Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following table summarizes the financial assets and liabilities required to be measured at fair value on a recurring basis as of September 29, 2019 (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 | $ | 16,081 |  |  | $ | — |  |  | $ | — |
Treasury bills | — |  |  | 362,069 |  |  | — |
Corporate bonds | — |  |  | 255,207 |  |  | — |
Asset-backed securities | — |  |  | 146,392 |  |  | — |
Sovereign bonds | — |  |  | 22,300 |  |  | — |
Agency bonds | — |  |  | 5,905 |  |  | — |
Municipal bonds | — |  |  | 4,840 |  |  | — |
Economic hedge forward contracts | — |  |  | 19 |  |  | — |
Liabilities: |  |  |  |  |
Economic hedge forward contracts | — |  |  | 70 |  |  | — |
Contingent consideration liabilities | — |  |  | — |  |  | 1,153 |

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 three-month or nine-month periods ended September 29, 2019 and 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 29, 2019 (in thousands):

Balance as of December 31, 2018 | $ | 2,554 |
Fair value adjustment to GVi contingent consideration | (1,646 | )
Fair value adjustment to Chiaro contingent consideration | 245 |
Balance as of September 29, 2019 | $ | 1,153 |

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 three-month or nine-month periods ended September 29, 2019 and September 30, 2018.
11

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4: Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of the following (in thousands):

| September 29, 2019 |  | December 31, 2018
Cash | $ | 105,620 |  |  | $ | 104,655 |
Money market instruments | 16,081 |  |  | 3,557 |
Cash and cash equivalents | 121,701 |  |  | 108,212 |
Treasury bills | 105,454 |  |  | 198,477 |
Asset-backed securities | 89,576 |  |  | 78,407 |
Corporate bonds | 87,209 |  |  | 137,871 |
Sovereign bonds | 6,300 |  |  | 8,101 |
Municipal bonds | 3,533 |  |  | 4,492 |
Current investments | 292,072 |  |  | 427,348 |
Treasury bills | 256,615 |  |  | 32,760 |
Corporate bonds | 167,998 |  |  | 162,566 |
Asset-backed securities | 56,816 |  |  | 53,631 |
Sovereign bonds | 16,000 |  |  | 6,316 |
Agency bonds | 5,905 |  |  | 5,921 |
Municipal bonds | 1,307 |  |  | 845 |
Non-current investments | 504,641 |  |  | 262,039 |
| $ | 918,414 |  |  | $ | 797,599 |

Treasury bills consist of debt securities issued by the U.S. government; asset-backed securities consist of debt securities collateralized by pools of receivables or loans with credit enhancement; corporate bonds consist of debt securities issued by both domestic and foreign companies; sovereign bonds consist of direct debt issued by foreign governments; municipal bonds consist of debt securities issued by state and local government entities; 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.
The following table summarizes the Company’s available-for-sale investments as of September 29, 2019 (in thousands):

| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Current: |  |  |  |  |  |  |
Treasury bills | $ | 105,254 |  |  | $ | 212 |  |  | $ | (12 | ) |  | $ | 105,454 |
Asset-backed securities | 89,226 |  |  | 359 |  |  | (9 | ) |  | 89,576 |
Corporate bonds | 86,990 |  |  | 222 |  |  | (3 | ) |  | 87,209 |
Sovereign bonds | 6,286 |  |  | 14 |  |  | — |  |  | 6,300 |
Municipal bonds | 3,535 |  |  | — |  |  | (2 | ) |  | 3,533 |
Non-current: |  |  |  |  |  |  |
Treasury bills | 255,441 |  |  | 1,253 |  |  | (79 | ) |  | 256,615 |
Corporate bonds | 167,464 |  |  | 584 |  |  | (50 | ) |  | 167,998 |
Asset-backed securities | 56,636 |  |  | 195 |  |  | (15 | ) |  | 56,816 |
Sovereign bonds | 15,969 |  |  | 43 |  |  | (12 | ) |  | 16,000 |
Agency bonds | 5,930 |  |  | — |  |  | (25 | ) |  | 5,905 |
Municipal bonds | 1,300 |  |  | 7 |  |  | — |  |  | 1,307 |
| $ | 794,031 |  |  | $ | 2,889 |  |  | $ | (207 | ) |  | $ | 796,713 |

12

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 29, 2019 (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 | $ | 108,863 |  |  | $ | (91 | ) |  | $ | — |  |  | $ | — |  |  | $ | 108,863 |  |  | $ | (91 | )
Corporate bonds | 23,263 |  |  | (17 | ) |  | 20,713 |  |  | (36 | ) |  | 43,976 |  |  | (53 | )
Asset-backed securities | 11,149 |  |  | (15 | ) |  | 8,093 |  |  | (9 | ) |  | 19,242 |  |  | (24 | )
Sovereign bonds | 11,558 |  |  | (12 | ) |  | — |  |  | — |  |  | 11,558 |  |  | (12 | )
Agency bonds | 5,905 |  |  | (25 | ) |  | — |  |  | — |  |  | 5,905 |  |  | (25 | )
Municipal bonds | — |  |  | — |  |  | 343 |  |  | (2 | ) |  | 343 |  |  | (2 | )
| $ | 160,738 |  |  | $ | (160 | ) |  | $ | 29,149 |  |  | $ | (47 | ) |  | $ | 189,887 |  |  | $ | (207 | )

As of September 29, 2019, 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 $361,000 and $67,000, respectively, during the three-month period ended September 29, 2019 and $283,000 and $17,000, respectively, during the three-month period ended September 30, 2018. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $818,000 and $103,000, respectively, during the nine-month period ended September 29, 2019 and $646,000 and $111,000, respectively, during the nine-month period ended September 30, 2018. These gains and losses are included in "Investment income" on the Consolidated Statements of Operations. Prior to the sale of these securities, unrealized gains and losses for these debt securities, net of tax, are recorded in shareholders’ equity as accumulated other comprehensive loss.
The following table presents the effective maturity dates of the Company’s available-for-sale investments as of September 29, 2019 (in thousands):

| <1 year |  | 1-2 Years |  | 2-3 Years |  | 3-4 Years |  | 4-5 Years |  | Total
Treasury bills | $ | 105,454 |  |  | $ | 188,398 |  |  | $ | 68,217 |  |  | $ | — |  |  | $ | — |  |  | $ | 362,069 |
Corporate bonds | 87,209 |  |  | 115,941 |  |  | 47,842 |  |  | 1,348 |  |  | 2,867 |  |  | 255,207 |
Asset-backed securities | 89,576 |  |  | 21,425 |  |  | 26,142 |  |  | 7,633 |  |  | 1,616 |  |  | 146,392 |
Sovereign bonds | 6,300 |  |  | 16,000 |  |  | — |  |  | — |  |  | — |  |  | 22,300 |
Agency bonds | — |  |  | — |  |  | 5,905 |  |  | — |  |  | — |  |  | 5,905 |
Municipal bonds | 3,533 |  |  | — |  |  | 1,307 |  |  | — |  |  | — |  |  | 4,840 |
| $ | 292,072 |  |  | $ | 341,764 |  |  | $ | 149,413 |  |  | $ | 8,981 |  |  | $ | 4,483 |  |  | $ | 796,713 |

NOTE 5: Inventories
Inventories consisted of the following (in thousands):

| September 29, 2019 |  | December 31, 2018
Raw materials | $ | 30,283 |  |  | $ | 42,738 |
Work-in-process | 4,848 |  |  | 3,435 |
Finished goods | 30,133 |  |  | 37,109 |
| $ | 65,264 |  |  | $ | 83,282 |

NOTE 6: Leases
On January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842, “Leases,” using the transition method of adoption, which allowed the Company to apply the standard on a prospective basis with a cumulative-effect adjustment to the opening balance sheet as of the adoption date. Accordingly, the Company recorded lease assets
13

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of $17,522,000, current lease liabilities of $4,736,000, and non-current lease liabilities of $12,669,000 on its Consolidated Balance Sheet as of January 1, 2019.
As part of the adoption, the Company elected a practical expedient package to be applied to all of its leases upon transition, and as a result, the Company did not reassess: 1) whether any expired or existing contracts contain leases; 2) the lease classification for any expired or existing leases; and 3) the accounting for initial direct costs for any existing leases.
The Company's leases are primarily leased properties across different worldwide locations where the Company conducts its operations. All of these leases are classified as operating leases. Certain leases may contain options to extend or terminate the lease at the Company's sole discretion. There were no options to extend or terminate that were included in the determination of the lease term for the leases outstanding as of September 29, 2019. Certain leases contain leasehold improvement incentives, retirement obligations, escalating clauses, rent holidays, and variable payments tied to a consumer price index. There were no restrictions or covenants for the leases outstanding as of September 29, 2019.
The total operating lease expense for the three-month and nine-month periods ended September 29, 2019 was $1,749,000 and $4,976,000, respectively. The total operating lease cash payments for the three-month and nine-month periods ended September 29, 2019 was $1,708,000 and $4,778,000, respectively. The total lease expense for leases with a term of twelve months or less for which the Company elected not to recognize a lease asset or lease liability was $22,000 and $255,000 for the three-month and nine-month periods ended September 29, 2019, respectively.
Future operating lease cash payments are as follows (in thousands):

Year Ended December 31, |  | Amount
Remainder of fiscal 2019 |  | $ | 1,650 |
2020 |  | 5,628 |
2021 |  | 4,314 |
2022 |  | 2,831 |
2023 |  | 1,988 |
2024 |  | 831 |
Thereafter |  | 309 |
|  | $ | 17,551 |

The discounted present value of the future lease cash payments resulted in a lease liability of $16,167,000 as of September 29, 2019.
The weighted-average discount rate was 4.8% for the leases outstanding as of September 29, 2019. The weighted-average remaining lease term was 3.6 years for the leases outstanding as of September 29, 2019. The Company did not have any leases that have not yet commenced but that create significant rights and obligations as of September 29, 2019.
The Company owns a building adjacent to its corporate headquarters that is partially occupied with a tenant who has a lease agreement that will expire in 2022. Rental income was $76,000 and $77,000 for the three-month period ended September 29, 2019 and September 30, 2018, respectively. Rental income was $234,000 and $236,000 for the nine-month period ended September 29, 2019 and September 30, 2018, respectively.
Future minimum rental receipts under non-cancelable lease agreements are as follows (in thousands):

Year Ended December 31, |  | Amount
Remainder of fiscal 2019 |  | $ | 77 |
2020 |  | 307 |
2021 |  | 307 |
2022 |  | 307 |
|  | $ | 998 |

14

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 |  |  | 8,261 |  |  | 5,426 |
Customer relationships | 8,607 |  |  | 6,101 |  |  | 2,506 |
Non-compete agreements | 370 |  |  | 308 |  |  | 62 |
Balance as of September 29, 2019 | $ | 60,724 |  |  | $ | 52,730 |  |  | $ | 7,994 |
| Gross Carrying Value |  | Accumulated Amortization |  | Net Carrying Value
Distribution networks | $ | 38,060 |  |  | $ | 38,060 |  |  | $ | — |
Completed technologies | 13,687 |  |  | 6,619 |  |  | 7,068 |
Customer relationships | 8,607 |  |  | 5,716 |  |  | 2,891 |
Non-compete agreements | 370 |  |  | 216 |  |  | 154 |
Balance as of December 31, 2018 | $ | 60,724 |  |  | $ | 50,611 |  |  | $ | 10,113 |

As of September 29, 2019, estimated future amortization expense related to intangible assets is as follows (in thousands):

Year Ended December 31, |  | Amount
Remainder of fiscal 2019 |  | $ | 582 |
2020 |  | 2,185 |
2021 |  | 2,017 |
2022 |  | 1,691 |
2023 |  | 989 |
2024 |  | 422 |
Thereafter |  | 108 |
|  | $ | 7,994 |

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, 2018 | $ | 4,743 |
Provisions for warranties issued during the period | 3,301 |
Fulfillment of warranty obligations | (2,770 | )
Balance as of September 29, 2019 | $ | 5,274 |

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 economic hedges to manage this risk. The economic hedges utilize foreign currency forward contracts with maturities of up to 45 days to manage the exposure
15

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Company had the following outstanding forward contracts (in thousands):

| September 29, 2019 |  | December 31, 2018
Currency | Notional Value |  | USD Equivalent |  | Notional Value |  | USD Equivalent
Derivatives Not Designated as Hedging Instruments: |  |  |  |
Euro | 18,000 |  |  | $ | 19,697 |  |  | 23,000 |  |  | $ | 26,330 |
Japanese Yen | 600,000 |  |  | 5,563 |  |  | 380,000 |  |  | 3,459 |
Mexican Peso | 90,000 |  |  | 4,560 |  |  | — |  |  | — |
British Pound | 2,550 |  |  | 3,149 |  |  | 2,500 |  |  | 3,204 |
Korean Won | 3,660,000 |  |  | 3,053 |  |  | 3,125,000 |  |  | 2,808 |
Hungarian Forint | 840,000 |  |  | 2,739 |  |  | 750,000 |  |  | 2,685 |
Taiwanese Dollar | 45,700 |  |  | 1,478 |  |  | 55,000 |  |  | 1,807 |
Canadian Dollar | 1,100 |  |  | 830 |  |  | 990 |  |  | 726 |
Singapore Dollar | — |  |  | — |  |  | 700 |  |  | 514 |

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 29, 2019 |  | December 31, 2018 |  | Sheet Location |  | September 29, 2019 |  | December 31, 2018
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |
Economic hedge forward contracts | Prepaid expenses and other current assets |  | $ | 19 |  |  | $ | 1 |  |  | Accrued expenses |  | $ | 70 |  |  | $ | 106 |

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 29, 2019 |  | December 31, 2018 |  |  |  | September 29, 2019 |  | December 31, 2018
Gross amounts of recognized assets |  | $ | 19 |  |  | $ | 1 |  |  | Gross amounts of recognized liabilities |  | $ | 70 |  |  | $ | 106 |
Gross amounts offset |  | — |  |  | — |  |  | Gross amounts offset |  | — |  |  | — |
Net amount of assets presented |  | $ | 19 |  |  | $ | 1 |  |  | Net amount of liabilities presented |  | $ | 70 |  |  | $ | 106 |

16

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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Derivatives Not Designated as Hedging Instruments: |  |  |
Gains (losses) recognized in current operations | Foreign currency gain (loss) |  | $ | 469 |  |  | $ | 299 |  |  | $ | 535 |  |  | $ | (366 | )

NOTE 10: Revenue Recognition
The following table summarizes disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands):

|  | Three-months Ended |  | Nine-months Ended
|  | September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Americas |  | $ | 65,253 |  |  | $ | 57,020 |  |  | $ | 208,909 |  |  | $ | 187,991 |
Europe |  | 64,209 |  |  | 118,810 |  |  | 182,747 |  |  | 245,437 |
Greater China |  | 27,854 |  |  | 31,068 |  |  | 86,446 |  |  | 99,402 |
Other Asia |  | 26,009 |  |  | 25,323 |  |  | 77,754 |  |  | 80,222 |
|  | $ | 183,325 |  |  | $ | 232,221 |  |  | $ | 555,856 |  |  | $ | 613,052 |

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

|  | Three-months Ended |  | Nine-months Ended
|  | September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Standard products and services |  | $ | 139,887 |  |  | $ | 150,993 |  |  | $ | 473,610 |  |  | $ | 493,019 |
Application-specific customer solutions |  | 43,438 |  |  | 81,228 |  |  | 82,246 |  |  | 120,033 |
|  | $ | 183,325 |  |  | $ | 232,221 |  |  | $ | 555,856 |  |  | $ | 613,052 |

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 $4,792,000 and $3,514,000 as of September 29, 2019 and December 31, 2018, 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 29, 2019 and September 30, 2018, 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.
17

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the deferred revenue and customer deposits activity for the nine-month period ended September 29, 2019 (in thousands):

Balance as of December 31, 2018 | $ | 9,845 |
Increases to deferred revenue and customer deposits | 37,351 |
Recognition of revenue | (36,517 | )
Foreign exchange rate changes | (248 | )
Balance as of September 29, 2019 | $ | 10,431 |

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 11: Stock-Based Compensation Expense
The Company’s share-based payments that result in compensation expense consist of stock option grants and restricted stock units (RSUs). As of September 29, 2019, the Company had 17,350,152 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. RSUs generally vest upon three years of continuous employment or incrementally over such three-year period. Participants are not entitled to dividends on RSUs.
Stock Options
The following table summarizes the Company’s stock option activity for the nine-month period ended September 29, 2019:

| Shares (in thousands) |  | Weighted- Average Exercise Price |  | Weighted- Average Remaining Contractual Term (in years) |  | Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2018 | 13,789 |  |  | $ | 31.73 |  |  |  |  |
Granted | 2,879 |  |  | 51.22 |  |  |  |  |
Exercised | (1,475 | ) |  | 21.53 |  |  |  |  |
Forfeited or expired | (726 | ) |  | 41.79 |  |  |  |  |
Outstanding as of September 29, 2019 | 14,467 |  |  | $ | 36.14 |  |  | 7.19 |  | $ | 203,774 |
Exercisable as of September 29, 2019 | 5,714 |  |  | $ | 25.33 |  |  | 5.73 |  | $ | 134,913 |
Options vested or expected to vest as of September 29, 2019 (1) | 13,116 |  |  | $ | 34.90 |  |  | 7.04 |  | $ | 199,066 |

(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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Risk-free rate | 2.7 | % |  | 2.9 | % |  | 2.7 | % |  | 2.9 | %
Expected dividend yield | 0.39 | % |  | 0.32 | % |  | 0.39 | % |  | 0.32 | %
Expected volatility | 37 | % |  | 39 | % |  | 37 | % |  | 39 | %
Expected term (in years) | 5.1 |  |  | 5.4 |  |  | 5.2 |  |  | 5.3 |

18

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Risk-free rate
The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.
Expected dividend yield
Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date.
Expected volatility
The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.
Expected term
The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.
The weighted-average grant-date fair values of stock options granted during the three-month periods ended September 29, 2019 and September 30, 2018 were $18.42 and $22.52, respectively. The weighted-average grant-date fair values of stock options granted during the nine-month periods ended September 29, 2019 and September 30, 2018 were $18.58 and $21.70, respectively.
The total intrinsic values of stock options exercised for the three-month periods ended September 29, 2019 and September 30, 2018 were $5,746,000 and $17,985,000, respectively. The total intrinsic values of stock options exercised for the nine-month periods ended September 29, 2019 and September 30, 2018 were $42,545,000 and $50,975,000, respectively. The total fair values of stock options vested for the three-month periods ended September 29, 2019 and September 30, 2018 were $1,213,000 and $997,000, respectively. The total fair values of stock options vested for the nine-month periods ended September 29, 2019 and September 30, 2018 were $32,072,000 and $27,557,000, respectively.
Restricted Stock Units (RSUs)
The fair values of RSUs 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.
The following table summarizes the Company's RSUs activity for the nine-month period ended September 29, 2019:

| Shares (in thousands) |  | Weighted-Average Grant Date Fair Value
Nonvested as of December 31, 2018 | — |  |  | $ | — |
Granted | 75 |  |  | 45.20 |
Vested | — |  |  | — |
Forfeited or expired | — |  |  | — |
Nonvested as of September 29, 2019 | 75 |  |  | $ | 45.20 |

The weighted-average grant-date fair values of RSUs granted during the three-month and nine-month periods ended September 29, 2019 were $45.20. There were no RSUs vested for the three or nine-month periods ended September 29, 2019. There were no RSUs granted or vested in 2018.
Stock-Based Compensation Expense
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 9% to all equity awards 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 a decrease to compensation expense of $499,000 in 2019 and an increase to compensation expense of $1,283,000 in 2018.
As of September 29, 2019, total unrecognized compensation expense related to non-vested stock awards, including stock options and RSUs, was $59,708,000, which is expected to be recognized over a weighted-average period of 1.60 years.
19

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended September 29, 2019 were $10,194,000 and $1,804,000, respectively, and for the three-month period ended September 30, 2018 were $9,143,000 and $1,654,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended September 29, 2019 were $33,442,000 and $5,839,000, respectively, and for the nine-month period ended September 30, 2018 were $31,339,000 and $5,608,000, respectively. No compensation expense was capitalized as of September 29, 2019 or December 31, 2018.
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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Cost of revenue | $ | 334 |  |  | $ | 544 |  |  | $ | 1,114 |  |  | $ | 1,898 |
Research, development, and engineering | 3,616 |  |  | 3,197 |  |  | 11,633 |  |  | 11,166 |
Selling, general, and administrative | 6,244 |  |  | 5,402 |  |  | 20,695 |  |  | 18,275 |
| $ | 10,194 |  |  | $ | 9,143 |  |  | $ | 33,442 |  |  | $ | 31,339 |

NOTE 12: Stock Repurchase Program
In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of September 29, 2019, the Company repurchased 1,601,000 shares at a cost of $70,312,000 under this program, including 1,398,000 shares at a cost of $61,690,000 during the nine-month period ended September 29, 2019. The Company may repurchase shares under this program in future periods, up to the remaining balance of $129,688,000, 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.
NOTE 13: 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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Income tax expense at U.S. federal statutory corporate tax rate | 21 | % |  | 21 | % |  | 21 | % |  | 21 | %
State income taxes, net of federal benefit | 1 | % |  | 1 | % |  | 1 | % |  | 1 | %
Foreign tax rate differential | (7 | )% |  | (7 | )% |  | (7 | )% |  | (7 | )%
Tax credit | (1 | )% |  | — | % |  | (1 | )% |  | — | %
Discrete tax benefit related to Tax Act 2017 | — | % |  | (9 | )% |  | — | % |  | (4 | )%
Discrete tax benefit related to stock options | (1 | )% |  | (4 | )% |  | (3 | )% |  | (5 | )%
Other discrete tax events | (3 | )% |  | (2 | )% |  | (1 | )% |  | (1 | )%
Other | 2 | % |  | 1 | % |  | 2 | % |  | 1 | %
Income tax expense | 12 | % |  | 1 | % |  | 12 | % |  | 6 | %

Management has determined that earnings from its legal entity in China will be indefinitely reinvested to provide sufficient local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested. The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United
20

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 all periods presented.
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 in the effective tax rate by 1 and 4 percentage points for the three-month periods ended September 29, 2019 and September 30, 2018, respectively, and a decrease in the effective tax rate by 3 and 5 percentage points for the nine-month periods ended September 29, 2019 and September 30, 2018, respectively.
During the nine-month period ended September 29, 2019, the Company recorded a $37,000 increase in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled $50,000 for the nine-month period ended September 29, 2019.
The Company’s reserve for income taxes, including gross interest and penalties, was $8,179,000 as of September 29, 2019, which included $7,151,000 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 $918,000. 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 $1,300,000 to $1,400,000 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 2016 through 2018 remain open to examination by the Internal Revenue Service and various state tax authorities. The tax years 2015 through 2018 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.
NOTE 14: Weighted-Average Shares
Weighted-average shares were calculated as follows (in thousands):

| Three-months Ended |  | Nine-months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Basic weighted-average common shares outstanding | 170,744 |  |  | 172,189 |  |  | 171,053 |  |  | 172,613 |
Effect of dilutive equity awards | 3,705 |  |  | 5,056 |  |  | 4,111 |  |  | 5,408 |
Weighted-average common and common-equivalent shares outstanding | 174,449 |  |  | 177,245 |  |  | 175,164 |  |  | 178,021 |

Equity awards to purchase 6,078,000 and 5,695,000 shares of common stock, on a weighted-average basis, were outstanding during the three-month and nine-month periods ended September 29, 2019, respectively, and 2,796,000 and 2,353,000 for the same periods in 2018, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.
NOTE 15: Subsequent Events
On October 16, 2019, the Company acquired Sualab Co., Ltd. (Sualab), a provider of deep learning-based vision software for industrial image analysis based in Korea for approximately $195 million. The total consideration included cash payments of approximately $171 million upon closing. The remaining consideration consists of deferred payments of approximately $24 million that may become payable on the fourth anniversary date of the closing, contingent upon the continued employment of key talent, and will be recorded as compensation expense over this four-year period. Given the timing of this acquisition, the Company is in the process of completing the purchase price allocation for the $171 million of consideration that is not related to employment. Transaction costs incurred to date were not material and were expensed as incurred. The financial results of Sualab prior to the acquisition date are not material to the consolidated financial results of the Company.
On October 28, 2019, the Company’s Board of Directors declared a cash dividend of $0.055 per share. The dividend is payable on November 29, 2019 to all shareholders of record as of the close of business on November 15, 2019.
21

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense. These statements are based upon our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance, customer order rates and timing of related revenue, expected areas of growth, emerging markets, future product mix, research and development activities, investments, strategic plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the loss of a large customer; (2) current and future conditions in the global economy, including the imposition of tariffs or export controls; (3) the reliance on revenue from the consumer electronics or automotive industries; (4) the inability to penetrate new markets; (5) the inability to achieve significant international revenue; (6) fluctuations in foreign currency exchange rates and the use of derivative instruments; (7) information security breaches or business system disruptions; (8) the inability to attract and retain skilled employees; (9) the failure to effectively manage our growth; (10) the reliance upon key suppliers to manufacture and deliver critical components for our products; (11) the failure to effectively manage product transitions or accurately forecast customer demand; (12) the inability to design and manufacture high-quality products; (13) the technological obsolescence of current products and the inability to develop new products; (14) the failure to properly manage the distribution of products and services; (15) the inability to protect our proprietary technology and intellectual property; (16) our involvement in time-consuming and costly litigation; (17) the impact of competitive pressures; (18) the challenges in integrating and achieving expected results from acquired businesses, including the recent acquisition of Sualab; (19) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; and (20) exposure to additional tax liabilities. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.
Executive Overview
Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. In addition to product revenue derived from the sale of machine vision products, the Company also generates revenue by providing maintenance and support, consulting, and training services to its customers; however, service revenue accounted for less than 10% of total revenue for all periods presented.
Cognex machine vision is primarily used to automate manufacturing and distribution processes in a variety of industries where the technology is widely recognized as an important component of automated production and quality assurance. Virtually every manufacturer can achieve better quality and manufacturing efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including consumer electronics, automotive, consumer products, food and beverage, pharmaceuticals, and medical devices. Cognex products are also used to automate distribution processes in the logistics industry for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers.
Revenue for the third quarter of 2019 totaled $183,325,000, representing a decrease of 21% from the third quarter of 2018 driven by significantly lower revenue in the consumer electronics industry. Gross margin as a percentage of revenue declined to 74% for the third quarter of 2019 from 75% for the third quarter of 2018 due primarily to the impact of the lower sales volume. Operating expenses in the third quarter of 2019 decreased by 3% over the third quarter of 2018 due principally to lower expenses related to incentive compensation plans. Operating income was 24% of revenue in the third quarter of 2019 compared to 34% of revenue in the third quarter of 2018; net income was 23% of revenue in the third quarter of 2019 compared to 35% of revenue in the third quarter of 2018; and net income per diluted share was $0.24 in the third quarter of 2019 compared to $0.45 in the third quarter of 2018.
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Results of Operations
As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. We also use results on a constant-currency basis as one measure to evaluate our performance. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange rate changes. Results on a constant-currency basis are not in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S. GAAP.
Revenue
Revenue decreased by $48,896,000, or 21%, for the three-month period and decreased by $57,196,000, or 9%, for the nine-month period. Changes in foreign currency exchange rates did not have a material impact on revenue for either period presented.
The decrease in revenue for both periods was driven by significantly lower revenue in the consumer electronics industry, primarily related to smartphone manufacturing. Delays and reductions in capital spending from customers in a variety of other factory automation industries, including the automotive industry, also contributed to the decrease in revenue. These decreases were only partially offset by strong sales in the logistics industry.
Sales to customers based in the Americas increased by 14% for the three-month period and 11% for the nine-month period driven by higher sales in the logistics industry, partially offset by lower sales in the automotive industry. Sales to customers based in Europe decreased by 46% for the three-month period and 26% for the nine-month period driven by lower sales in the consumer electronics industry, and to a lessor extent, the automotive industry. Sales to customers based in Greater China decreased by 10% for the three-month period and 13% for the nine-month period due to lower sales across a variety of industries. The decline would have been larger in Greater China, and less extreme in Europe, if not for procurement changes made by certain consumer electronics customers, shifting their purchases to China from Europe. Sales to customers based in other regions in Asia were relatively flat for both periods.
As of the date of this report, we expect revenue for the fourth quarter of 2019 to be lower than both the third quarter of 2019 and the fourth quarter of 2018. The sequential decrease is anticipated to come primarily from lower sales in the consumer electronics industry due to the seasonal timing of this business, while the decrease from the prior year is anticipated to come from a broad base of customers in a variety of industries, particularly in China and Europe. While the Company experienced strong sales in the logistics industry in the third quarter of 2019 over the prior year, we expect logistics revenue to be lower in the fourth quarter of 2019 compared to the prior year due primarily to a major customer delaying delivery of large orders for new sites.
Gross Margin
Gross margin as a percentage of revenue was 74% for both the three-month and nine-month periods in 2019 compared to 75% for the same periods in 2018. The decline in the gross margin percentage was due primarily to the unfavorable absorption of manufacturing overhead costs over the lower level of revenue.
As of the date of this report, we expect gross margin as a percentage of revenue for the fourth quarter of 2019 to be relatively consistent with the gross margin reported in the third quarter of 2019.
Operating Expenses
Research, development, and engineering (RD&E) expenses decreased by $1,585,000, or 5%, for the three-month period and $1,228,000, or 1%, for the nine-month period as detailed in the table below (in thousands).
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| Three-month period |  | Nine-month period
RD&E expenses in 2018 | $ | 29,700 |  |  | $ | 87,664 |
Personnel-related costs | 898 |  |  | 3,096 |
Incentive compensation plans | (2,302 | ) |  | (3,646 | )
Foreign currency exchange rate changes | (310 | ) |  | (1,576 | )
Other | 129 |  |  | 898 |
RD&E expenses in 2019 | $ | 28,115 |  |  | $ | 86,436 |

RD&E expenses decreased due to lower expenses related to incentive compensation plans resulting from lower levels of achievement on performance plans that were set at the beginning of the year. Changes in foreign currency exchange rates also resulted in a lower level of expenses, as costs denominated in foreign currencies were translated to U.S. Dollars at a lower rate. These decreases were offset by higher personnel-related costs resulting primarily from headcount additions to support new product initiatives.
RD&E expenses as a percentage of revenue were 15% and 16% for the three-month and nine-month periods in 2019, respectively, compared to 13% and 14% for the same periods in 2018. We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers. In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant RD&E investments in the future, and currently intend to continue our product development plans during periods of lower revenue levels. Furthermore, the acquisition of Sualab on October 16, 2019 is anticipated to result in a higher level of RD&E investment in future periods, as the majority of operating expenses from this acquisition are expected to be classified as RD&E expenses. Accordingly, we expect RD&E expenses as a percentage of revenue to be higher in the fourth quarter of 2019 than the percentage reported for the nine-month period ended September 29, 2019.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses decreased by $1,331,000, or 2%, for the three-month period and increased by $3,276,000, or 2%, for the nine-month period as detailed in the table below (in thousands).

| Three-month period |  | Nine-month period
SG&A expenses in 2018 | $ | 65,817 |  |  | $ | 196,266 |
Personnel-related costs | 4,813 |  |  | 18,691 |
Incentive compensation plans | (3,762 | ) |  | (6,859 | )
Foreign currency exchange rate changes | (806 | ) |  | (4,422 | )
ERP project costs | (1,586 | ) |  | (4,253 | )
Other | 10 |  |  | 119 |
SG&A expenses in 2019 | $ | 64,486 |  |  | $ | 199,542 |

SG&A expenses decreased due to lower expenses related to incentive compensation plans resulting from lower levels of achievement on performance plans that were set at the beginning of the year. Expenses were also lower due to project costs incurred in 2018 related to the Company's new Enterprise Resource Planning (ERP) system. This system was placed into service during the third quarter of 2018, and therefore, similar costs were not incurred in 2019. Changes in foreign currency exchange rates also resulted in a lower level of expenses, as costs denominated in foreign currencies were translated to U.S. Dollars at a lower rate. These decreases were offset by higher personnel-related costs resulting primarily from headcount additions, principally sales personnel. In addition to salaries and fringe benefits, these personnel-related costs included sales commissions and travel expenses related to the additional headcount.
Non-operating Income (Expense)
The Company recorded foreign currency losses of $1,295,000 and $1,403,000 for the three-month and nine-month periods in 2019, respectively, compared to $379,000 and $708,000 for the same periods in 2018. Foreign currency gains and losses result primarily from the revaluation and settlement of accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collected in another. A higher level of foreign currency losses was recorded in the third quarter of 2019 from the revaluation of intercompany payables denominated in U.S. Dollars on the company's China entity.
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Investment income increased by $1,177,000, or 30%, for the three-month period and $4,506,000, or 42%, for the nine-month period. The increase was due to higher yields on the Company's portfolio of debt securities, and to a lesser extent additional funds available for investment.
The Company recorded other income of $456,000 and $1,239,000 for the three-month and nine-month periods in 2019, respectively, compared to other expense of $129,000 and $98,000 for the same periods in 2018. Other income (expense) includes fair value adjustments of contingent consideration liabilities arising from business acquisitions. A higher level of fair value adjustments to income was recorded in 2019 related to the Company's GVi acquisition resulting from a lower level of revenue in the Americas' automotive industry.
Income Tax Expense
The Company’s effective tax rate was 12% of pre-tax income for the three-month and nine-month periods in 2019, respectively, compared to 1% and 6% for the same periods in 2018.
The effective tax rate included a decrease in tax expense of $569,000 and $4,547,000 for the three-month and nine-month periods in 2019, respectively, and $2,811,000 and $8,400,000 for the same periods in 2018 primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises. The Company cannot predict the level of stock option exercises by employees in future periods.
In addition, the effective tax rate included a decrease in tax expense of $1,327,000 for the three-month period and $1,330,000 for the nine-month period in 2019, respectively, consisting primarily of the expiration of the statutes of limitations for certain reserves for income tax uncertainties.
Excluding the impact of these discrete tax events, the Company’s effective tax rate was 16% of pre-tax income for all periods presented.
The Company is tax resident in numerous jurisdictions around the world and has identified its major tax jurisdictions as the United States, Ireland, and China. The statutory tax rate is 12.5% in Ireland and 25% in China, compared to the U.S. federal statutory corporate tax rate of 21%. 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 lower than the above mentioned statutory rates, although the reduced taxes overseas have been partially offset by changes in U.S. tax law.
The European Union has initiated a series of tax reform legislation over the past few years regarding hybrid tax structures. The Company plans to make changes to its tax structure in the fourth quarter of 2019 as a result of this legislation. Management is currently evaluating the financial impact of these changes and expects to record a discrete tax benefit of between $100 million and $125 million in the fourth quarter of 2019. Management also expects its current effective tax rate excluding discrete items of 16% to increase slightly in future years as a result of this change.
On October 16, 2019, the Company acquired Sualab, a provider of deep learning-based vision software for industrial image analysis based in Korea for approximately $195 million. The Company plans to migrate acquired intellectual property to certain subsidiaries in the fourth quarter of 2019. Management is currently evaluating the financial impact of this migration and expects to record a discrete tax expense of between $27 million and $33 million in the fourth quarter of 2019.
Liquidity and Capital Resources
The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $918,414,000 as of September 29, 2019. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.
The Company’s cash requirements during the nine months ended September 29, 2019 were primarily met with positive cash flows from operations. Cash requirements consisted of operating activities, the repurchase of common stock, the payment of dividends, and capital expenditures. Operating cash inflows included a reduction in accounts receivable from the collection of a significant amount due from a material customer in the consumer electronics industry, as well as a reduction in inventory levels. Operating cash outflows included the payment of company bonuses that were earned and accrued in 2018.
Capital expenditures during the nine months ended September 29, 2019 totaled $13,518,000 and consisted of computer hardware and software, manufacturing test equipment related to new product introductions, and improvements made to the Company's headquarters building in Natick, Massachusetts and various leased facilities.
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In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of September 29, 2019, the Company repurchased 1,601,000 shares at a cost of $70,312,000 under this program, including 1,398,000 shares at a cost of $61,690,000 during the nine months ended September 29, 2019. The Company may repurchase shares under this program in future periods, up to the remaining balance of $129,688,000, depending on a variety of factors, including, among other things, the impact of dilution from employee stock options, stock price, share availability, and cash requirements.
The Company’s Board of Directors declared and paid a cash dividend of $0.05 per share in each quarter of 2019, amounting to $25,682,000 in the aggregate for the nine-month period ended September 29, 2019. Future dividends will be declared at the discretion of the Company’s Board of Directors and will depend upon such factors as the Board deems relevant including, among other things, the Company’s ability to generate positive cash flows from operations.
On October 16, 2019, the Company acquired Sualab for total cash consideration of approximately $171 million upon closing and deferred payments of approximately $24 million that may become payable on the fourth anniversary date of the closing. The Company plans to migrate acquired intellectual property to certain subsidiaries in the fourth quarter of 2019, which is expected to result in a foreign tax payment of between $35 million to $37 million payable in early 2020.
The Company believes that its existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. As of September 29, 2019, the Company had $918,414,000 in cash and investments. In addition, the Company has no long-term debt and does not anticipate needing debt financing in the near future. We believe that our strong cash position has put us in a relatively good position with respect to our longer-term liquidity needs.
New Pronouncements
Refer to Part I - Note 2 within this Form 10-Q, for a full description of recently issued accounting pronouncements including the expected dates of adoption and the expected impact on the financial position and results of operations of the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company’s exposures to market risk since December 31, 2018.
ITEM 4: CONTROLS AND PROCEDURES
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Principal Financial & Accounting Officer, the effectiveness of its disclosure controls and procedures (as defined in such rules) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Principal Financial & Accounting Officer concluded that such disclosure controls and procedures were effective as of that date. From time to time, the Company reviews its disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.
There was no change in the Company's internal control over the financial reporting that occurred during the quarter ended September 29, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations.
ITEM 1A. RISK FACTORS
For a list of factors that could affect the Company’s business, results of operations, and financial condition, see the risk factors discussion provided in Part I—Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information with respect to purchases by the Company of shares of its common stock during the three-month period ended September 29, 2019:

| Total Number of Shares Purchased |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |  | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - July 28, 2019 | — |  |  | $ | — |  |  | — |  |  | $ | 129,688,000 |
July 29 - August 25, 2019 | — |  |  | — |  |  | — |  |  | 129,688,000 |
August 26 - September 29, 2019 | — |  |  | — |  |  | — |  |  | 129,688,000 |
Total | — |  |  | $ | — |  |  | — |  |  | $ | 129,688,000 |

(1) In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. Purchases under this program commenced in October 2018.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS

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

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

Date: | October 28, 2019 |  | COGNEX CORPORATION
|  |  | By: | /s/ Robert J. Willett
|  |  |  | Robert J. Willett
|  |  |  | President and Chief Executive Officer
|  |  |  | (Principal Executive Officer)
|  |  | By: | /s/ Laura A. MacDonald
|  |  |  | Laura A. MacDonald
|  |  |  | Vice President and Corporate Controller
|  |  |  | (Principal Financial and Accounting Officer)

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