COGNEX CORPCGNX
COGNEX CORP Income Taxes Disclosure
Income Taxes
In 2025, the Company adopted ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require public business entities to disclose specific categories in their rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. They also require all entities to disclose income taxes paid, net of refunds received, disaggregated by federal, state, and foreign taxes and by individual jurisdictions in which income taxes paid, net of refunds received, is equal to or greater than five percent of total income taxes paid. These changes have been applied prospectively.
Income from continuing operations before income tax expense consisted of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | 73,505 | 35,253 | 16,039 | ||||||||||||||
| Foreign | 109,297 | 96,236 | 119,309 | ||||||||||||||
| 182,802 | 131,489 | 135,348 | |||||||||||||||
Income tax expense consisted of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 4,576 | $ | 28,009 | $ | 29,084 | |||||||||||
| State | 4,440 | 4,524 | 3,544 | ||||||||||||||
| Foreign | 19,647 | 12,795 | 9,207 | ||||||||||||||
| 28,663 | 45,328 | 41,835 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 30,481 | (22,273) | (24,731) | ||||||||||||||
| State | 668 | (1,324) | (5,877) | ||||||||||||||
| Foreign | 8,548 | 3,587 | 10,887 | ||||||||||||||
| 39,697 | (20,010) | (19,721) | |||||||||||||||
| $ | 68,360 | $ | 25,318 | $ | 22,114 | ||||||||||||
Effective Tax Rate Reconciliation
A reconciliation of the U.S. federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, presented in accordance with the prospectively adopted ASU 2023-09, was as follows for the year ended December 31, 2025:
| Year Ended December 31, 2025 | |||||||||||
| $ | % | ||||||||||
| U.S. federal statutory income tax rate | $38,397 | 21.0 | % | ||||||||
State and local tax effects (1) | 3,629 | 2.0 | % | ||||||||
| Foreign tax effects | |||||||||||
| Ireland | |||||||||||
| Foreign rate differential | (4,355) | (2.4) | % | ||||||||
| Transfer pricing adjustment | 2,185 | 1.2 | % | ||||||||
| Other | 594 | 0.3 | % | ||||||||
| Japan | 1,325 | 0.7 | % | ||||||||
| Germany | 1,232 | 0.7 | % | ||||||||
| China | 2,421 | 1.3 | % | ||||||||
| Other jurisdictions | 688 | 0.4 | % | ||||||||
| Tax on Unremitted Foreign Earnings | (414) | (0.2) | % | ||||||||
| Changes in tax rate due to new enacted law | 33,237 | 18.2 | % | ||||||||
| Cross-border tax laws | |||||||||||
| Net CFC Tested Income | 4,112 | 2.2 | % | ||||||||
| Foreign tax credits | (16,257) | (8.9) | % | ||||||||
| Other | 302 | 0.2 | % | ||||||||
| Tax credits | |||||||||||
| R&D tax credits | (3,186) | (1.7) | % | ||||||||
| Valuation allowance changes | 272 | 0.1 | % | ||||||||
| Non-taxable items | |||||||||||
| Share based compensation | 4,370 | 2.4 | % | ||||||||
| Other | 576 | 0.3 | % | ||||||||
| Unrecognized tax benefits | (1,055) | (0.6) | % | ||||||||
| All other adjustments not categorized | 287 | 0.2 | % | ||||||||
| Total worldwide effective tax expense and rate | 68,360 | 37.4 | % | ||||||||
(1) State Taxes in California, Illinois, Massachusetts, Michigan, Minnesota, Pennsylvania, and Tennessee made up the majority (greater than 50%) of tax effect in this category. | |||||||||||
A reconciliation of the U.S. federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows for the years ended December 31, 2024 and December 31, 2023:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Income tax expense at U.S. federal statutory corporate tax rate | 21 | % | 21 | % | |||||||
| State income taxes, net of federal benefit | 2 | 1 | |||||||||
| Foreign tax rate differential | (4) | (6) | |||||||||
| Tax credits | (3) | (3) | |||||||||
| Taxation on multinational operations | (5) | (3) | |||||||||
| Tax reserves | 1 | 3 | |||||||||
| Limitation on deduction for executive compensation | 1 | 2 | |||||||||
| Discrete tax expense related to employee stock-based compensation | 2 | 1 | |||||||||
| Discrete tax benefit for audit settlements | 1 | — | |||||||||
| Discrete tax expense for foreign earnings not indefinitely reinvested | 1 | — | |||||||||
| Discrete tax expense related to tax return filings | — | 2 | |||||||||
| Discrete tax expense related to rate revaluation on state tax assets | — | 2 | |||||||||
| Discrete tax benefit related to GILTI adjustments | — | (2) | |||||||||
| Discrete tax benefit for release of valuation allowance | — | (4) | |||||||||
| Other | 2 | 2 | |||||||||
| Income tax expense | 19 | % | 16 | % | |||||||
Tax Reserves
The changes in gross amounts of unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
Balance of reserve for income taxes as of December 31, 2022 | $ | 13,647 | |||
| Reductions as a result of tax positions taken in prior periods | (242) | ||||
| Additions as a result of tax positions taken in prior periods | 12,556 | ||||
| Additions as a result of tax positions taken in the current period | 1,877 | ||||
| Reductions relating to settlements with taxing authorities | (1,230) | ||||
| Reductions as a result of the expiration of the applicable statutes of limitations | (894) | ||||
Balance of reserve for income taxes as of December 31, 2023 | 25,714 | ||||
| Reductions as a result of tax positions taken in prior periods | (39) | ||||
| Additions as a result of tax positions taken in prior periods | 208 | ||||
| Additions as a result of tax positions taken in the current period | 1,935 | ||||
| Reductions relating to settlements with taxing authorities | (2,751) | ||||
| Reductions as a result of the expiration of the applicable statutes of limitations | (1,331) | ||||
Balance of reserve for income taxes as of December 31, 2024 | 23,736 | ||||
| Reductions as a result of tax positions taken in prior periods | (1,597) | ||||
| Additions as a result of tax positions taken in prior periods | 825 | ||||
| Additions as a result of tax positions taken in the current period | 1,853 | ||||
| Reductions relating to settlements with taxing authorities | — | ||||
| Reductions as a result of the expiration of the applicable statutes of limitations | (3,547) | ||||
Balance of reserve for income taxes as of December 31, 2025 | $ | 21,270 | |||
The Company’s reserve for income taxes, including gross interest and penalties, was $27,042,000 as of December 31, 2025, of which $24,269,000 was classified as a non-current liability and $2,773,000 was classified as an offset to deferred tax assets. The Company's reserve for income taxes, including gross interest and penalties, was $28,733,000 as of December 31, 2024, of which $26,365,000 was classified as a non-current liability and $2,368,000 was classified as an offset to deferred tax assets. The amount of gross interest and penalties included in these balances was $5,773,000 and $4,997,000 as of December 31, 2025 and 2024, respectively. 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.
The Company has defined its major tax jurisdictions as the United States, Ireland, China, Japan, and Korea and within the United States, Massachusetts. The statutory tax rate is 12.5% in Ireland, 25% in China, 34.7% in Japan, and 20.9% in Korea, compared to the U.S. federal statutory corporate tax rate of 21%. These differences resulted in a favorable impact to the effective tax rate for all periods presented as shown in the Effective Tax Rate Reconciliation section. Management has determined that earnings from its legal entities in China will be indefinitely reinvested to provide local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested. The Company recorded non-current deferred tax liabilities of $986,000 and $1,400,000 in 2025 and 2024, respectively, with respect to earnings that are not indefinitely reinvested.
In 2023, the Company qualified for a tax holiday in China, which can be renewed every three years. A portion of the Company's business in China operates under this tax incentive program, which expires at the end of fiscal year 2026. This tax incentive may be extended if specific conditions are met. The net impact of this tax incentive program was to increase the Company's net income by approximately $977,000 in 2025 ($0.01 per share, diluted) and by approximately $845,000 in 2024 ($0.01 per share, basic and diluted). The tax effect of this benefit on net income per share for 2023 was not material.
Within the United States, the tax years 2021 through 2024 remain open to examination by the Internal Revenue Service ("IRS") and various state taxing authorities. The tax years 2013 through 2024 remain open to examination by various taxing authorities in foreign jurisdictions in which the Company operates. Management believes the Company is adequately reserved for these audits. The final determination of tax audits could result in favorable or unfavorable changes in our estimates. Any reserves associated with this audit period will not be released until the issue is settled or the audit is concluded.
Interest and penalties included in income tax expense were $1,689,000 in 2025, $2,145,000 in 2024, and $1,032,000 in 2023.
Cash paid for income taxes for the year ended December 31, 2025 was as follows:
| 2025 | ||||||||
| U.S. federal | $ | 23,586 | ||||||
| State and local | 2,417 | |||||||
| Japan | 6,669 | |||||||
| China | 2,106 | |||||||
| Other | 7,553 | |||||||
| Total income taxes paid | $ | 42,331 | ||||||
Cash paid for income taxes totaled $59,849,000 in 2024 and $56,618,000 in 2023.
Deferred Tax Assets and Liabilities
The tax effects of temporary differences and attributes that give rise to deferred income tax assets and liabilities as of December 31, 2025 and December 31, 2024 were as follows (in thousands):
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Intangible asset in connection with change in tax structure | $ | 361,385 | $ | 369,474 | |||||||
| Capitalization of R&D expenses | 26,620 | 35,948 | |||||||||
| Stock-based compensation expense | 21,617 | 22,428 | |||||||||
| Tax credit carryforwards | 10,849 | 10,186 | |||||||||
| Inventory and revenue related | 8,583 | 8,355 | |||||||||
| Bonuses, commissions, and other compensation | 8,894 | 6,949 | |||||||||
| Depreciation | — | 2,877 | |||||||||
| Foreign net operating losses | 645 | 1,306 | |||||||||
| Other | 1,607 | 4,624 | |||||||||
| Total deferred tax assets | 440,200 | 462,147 | |||||||||
| Valuation allowance | (2,737) | (2,515) | |||||||||
| $ | 437,463 | $ | 459,632 | ||||||||
| Deferred tax liabilities: | |||||||||||
| NCTI (formerly GILTI) tax basis differences in connection with change in tax structure | $ | (274,026) | $ | (254,213) | |||||||
| Amortization | (27,958) | (29,008) | |||||||||
| Depreciation | (1,744) | — | |||||||||
| Reserve for unremitted foreign earnings | (986) | (1,400) | |||||||||
| $ | (304,714) | $ | (284,621) | ||||||||
| Net deferred taxes | $ | 132,749 | $ | 175,011 | |||||||
Change in Tax Structure and Net CFC Tested Income
In 2019, the Company made changes to its international tax structure due to legislation by the European Union regarding low tax structures that resulted in an intercompany sale of intellectual property. As a result, the Company recorded an associated deferred tax asset of $437,500,000 in Ireland based on the fair value of the intellectual property that is being realized over fifteen years as future tax deductions. From a United States perspective, the sale was disregarded, and any future deductions claimed in Ireland are added back to taxable income as part of Net CFC Tested Income ("NCTI", formerly, Global Intangible Low-Taxed Income) minimum tax. The Company recorded an associated deferred tax liability of $350,000,000, representing the NCTI minimum tax related to the fair value of the intellectual property. On July 4, 2025, tax legislation known as One Big Beautiful Bill Act ("OBBBA") was enacted in the United States. OBBBA modified certain international tax provisions such as NCTI. As a result of this legislation, in 2025, the Company accrued a discrete tax expense of $33,237,000 to increase its NCTI deferred tax liability.
Other Deferred Tax Assets and Liabilities
Beginning in 2022, the Tax Cuts and Jobs Act eliminated the option to deduct research and development expenditures in the period incurred and required taxpayers to capitalize and amortize such expenditures over five or fifteen years, as applicable, pursuant to Section 174 of the Internal Revenue Code. Accordingly, the Company recorded deferred tax assets resulting from the capitalization of research and development expenditures. OBBBA modified the provisions contained in the Tax Cuts and Jobs Act to allow the deduction of domestic research and development expenditures in the period incurred beginning January 1, 2025. The Company has modified its deferred tax position accordingly.
As of December 31, 2025, the Company had foreign net operating loss carryforwards of $645,000, state tax credit carryforwards of $8,019,000 that will begin to expire for the 2033 tax return, and foreign tax credit carryforwards of $2,830,000, that will begin to expire for the 2028 tax return. As of December 31, 2024, the Company had foreign net operating loss carryforwards of $1,306,000, state tax credit carryforwards of $7,619,000, and foreign tax credit carryforwards of $2,567,000.
As of December 31, 2025, the Company had a valuation allowance for foreign net operation loss carryforwards of $549,000 and a valuation allowance for foreign tax credits of $2,188,000 that were not considered to be realized. As of December 31, 2024, the Company had a valuation allowance for foreign net operation loss carryforwards of 599,000 and a valuation allowance for foreign tax credits of $1,916,000 that was not considered to be realized. Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future income tax liabilities.
While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to current operations in the period of determination.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.