• Semiconductor and electronics capital equipment manufacturers purchase Cognex vision products and integrate them into the automation equipment that they manufacture and then sell to their customers to either make semiconductor chips or assemble printed circuit boards. Demand from these capital equipment manufacturers has historically been highly cyclical, with periods of investment followed by downturn. This market has been in a prolonged downturn since early 2006. Sales to semiconductor and electronics capital equipment manufacturers represented approximately 6% of total revenue in the first quarter of 2009.

• Surface inspection customers are manufacturers of materials processed in a continuous fashion, such as metals, paper, non-wovens, plastics, and glass. These customers need sophisticated machine vision to detect and classify defects on the surfaces of those materials as they are being processed at high speeds. Surface inspection sales represented approximately 17% of total revenue in the first quarter of 2009.

Revenue for the first quarter of 2009 totaled $42,287,000, representing a 30% decrease from the prior year. This decrease was due to lower sales to customers in the semiconductor and electronics capital equipment and discrete factory automation markets, which have been impacted by the current worldwide economic slowdown. This lower revenue on a relatively flat operating expense base resulted in an operating loss of 15% of revenue in the first quarter of 2009 as compared to operating income of 13% of revenue in the prior year, and a loss per share from continuing operations of $0.09 in the first quarter of 2009 compared to income per share from continuing operations of $0.20 in the first quarter of 2008.
The Company's revenue and profitability have been and will continue to be impacted by worldwide economic conditions, including the slowing global economies, the credit market crisis, and declining business confidence. These factors have contributed to delayed, reduced, or canceled capital spending by many companies, including many of the Company's current and potential customers. While we cannot predict how long the current worldwide economic slowdown will last or how severely it will impact each of the Company's three markets, we do not anticipate a significant recovery of business in 2009. As a result, the Company is taking actions in the second quarter of 2009, including a work force reduction, office closures, and mandatory shutdown days, as well as decreases in other discretionary spending, in order to better align its expenses to the lower revenue expectations for 2009. We believe, however, that unless the business climate improves significantly, these actions are unlikely to be sufficient for the Company to generate a profit in 2009. Results of Operations
Revenue
Revenue for the first quarter of 2009 decreased by $18,226,000, or 30%, from the first quarter of 2008 due to lower sales to customers in the semiconductor and electronics capital equipment and discrete factory automation markets. Sales to manufacturing customers in the discrete factory automation area, which are included in the Company's MVSD segment, represented 77% of total revenue in the first quarter of 2009 compared to 68% in the first quarter of 2008. Sales to these customers decreased by $9,283,000, or 22%, from the prior year. Demand from the Company's factory automation customers continues to be impacted by the worldwide economic slowdown, which first began to impact the Company's orders from these customers in the third quarter of 2008. Revenue in the first quarter of 2009 includes $4,400,000 related to an arrangement with a single customer for which product was shipped over the last two years, but revenue was deferred until the final unit was delivered in the first quarter of 2009. Excluding the recognition of this deferred revenue, all of the Company's product lines and regions experienced a decline in revenue. While we cannot predict how long the current worldwide economic slowdown will last or how severely it will continue to impact the factory automation market, we anticipate revenue for this market will be down for the second quarter of 2009 compared to the first quarter of 2009, which included the $4,400,000 of revenue from a single arrangement, described above, that will not recur.
Sales to customers who make automation equipment for the semiconductor and electronics industries, which are included in the Company's MVSD segment, represented 6% of total revenue in the first quarter

of 2009 compared to 22% in the first quarter of 2008. Sales to these customers decreased by $9,684,000, or 79%, from the prior year due to industry cyclicality as well as competitive market pressures. In recent years, the competitive landscape in this market has changed, and price and flexibility of purchasing hardware from other vendors have become more important factors in our customers' purchasing decisions. The Company has addressed this market change by introducing software-only products; however, the average selling price of these offerings is significantly lower than for a complete vision system, and therefore, we expect this trend to have a negative impact on our revenue in this market. As a result of the continued impact of a prolonged industry downturn and pricing pressure, together with current worldwide economic conditions, we do not expect a significant change in this business in the second quarter of 2009. Sales to surface inspection customers, which comprise the Company's SISD segment, represented 17% of total revenue in the first quarter of 2009 compared to 10% in the first quarter of 2008. Revenue from these customers increased by $741,000, or 12%, from the prior year due to higher SmartView system sales. The increase in revenue from the prior year is primarily due to the timing of customer orders, system deliveries, and installations, as well as the impact of revenue deferrals. While revenue to date from the Company's surface inspection customers has not been significantly impacted by current worldwide economic conditions, long lead times are typical in this business, and therefore, the impact on this market may be delayed.
Product revenue for the first quarter of 2009 decreased by $16,815,000, or 31%, from the first quarter of 2008 primarily due to a lower volume of vision systems sold to customers in the semiconductor and electronics capital equipment and discrete factory automation markets. Product revenue in the first quarter of 2009 includes $4,400,000 related to an arrangement with a single customer for which product was shipped over the last two years, but revenue was deferred until the final unit was delivered in the first quarter of 2009. Excluding the recognition of this deferred revenue, all of the Company's product lines and regions experienced a decline in product revenue.
Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, for the first quarter of 2009 decreased by $1,411,000, or 25%, from the first quarter of 2008 due to lower maintenance and support revenue. Maintenance and support revenue has declined due to the introduction of new products and functionality that make vision easier to use and require less maintenance and support. Service revenue increased as a percentage of total revenue to 10% in the first quarter of 2009 from 9% in the first quarter of 2008.
Gross Margin
Gross margin as a percentage of revenue was 68% for the first quarter of 2009 compared to 72% for the first quarter of 2008. This decrease was primarily due to a higher percentage of total revenue from the sale of surface inspection systems, which have lower margins than the sale of modular vision systems. MVSD gross margin as a percentage of revenue was 74% for the first quarter of 2009 compared to 75% for the first quarter of 2008. The decrease in MVSD margin was primarily due to a lower service margin resulting from declining maintenance and support revenue without a corresponding decrease in service costs. The MVSD product margin remained relatively flat despite lower product revenue, as the impact of higher provisions for excess and obsolete inventory was offset by a higher-than-average margin achieved on the $4,400,000 revenue arrangement recognized in the first quarter of 2009. This arrangement included the transfer of source code, as well as the delivery of product, which resulted in a higher selling price and a higher-than-average margin on the overall arrangement. SISD gross margin as a percentage of revenue was 40% for the first quarter of 2009 compared to 45% for the first quarter of 2008. The decrease in SISD margin was due to both lower product and service margins. The product margin declined because the systems sold in the first quarter of 2009 had a higher material component. The decrease in the service margin was due to higher costs on installations resulting from the start up of a service organization in Asia. Product gross margin as a percentage of revenue was 73% for the first quarter of 2009 compared to 75% for the first quarter of 2008. This decrease was primarily due to a higher percentage of total revenue from the sale of surface inspection systems, which have lower margins than the sale of modular vision systems.

Service gross margin as a percentage of revenue was 26% for the first quarter of 2009 compared to 45% for the first quarter of 2008. Although support costs declined from the prior year due to improvements in product ease of use, service revenue declined at a greater rate.
Operating Expenses
MVSD research, development, and engineering (RD&E) expenses for the first quarter of 2009 decreased by $94,000, or 1%, from the first quarter of 2008, while SISD RD&E expenses remained flat.
MVSD RD&E expenses were relatively flat with the first quarter of 2008 because lower company bonus accruals ($296,000) and stock-based compensation expense ($275,000) were partially offset by an increase in personnel-related costs such as salaries and fringe benefits ($383,000). The decrease in stock-based compensation expense was due to a higher forfeiture rate and a decline in the number and value of shares granted. Although headcount was flat between the two periods, salaries and fringe benefits increased due to the impact of 2008 wage increases. In April 2009, the Company announced a number of cost-cutting measures intended to reduce MVSD RD&E expenses for the remainder of 2009 in response to lower revenue expectations for 2009.
RD&E expenses as a percentage of revenue were 21% in the first quarter of 2009 and 15% in the first quarter of 2008. 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, and therefore, we expect to continue to make RD&E investments in the future in strategic areas, such as the ID Products business and the development of a "Vision System on a Chip." In addition, we consider our ability to accelerate time to market for new products critical to our ability to maintain and gain market share. Although we target our RD&E spending to be between 10% and 15% of revenue, this percentage is impacted by revenue levels and the Company anticipates RD&E spending as a percentage of revenue will be higher than these targets during 2009 despite the actions taken by the Company to reduce RD&E expenses for the remainder of the year.
Selling, general, and administrative (SG&A) expenses for the first quarter of 2009 decreased by $385,000, or 1%, from the first quarter of 2008. MVSD SG&A expenses decreased $113,000, or 1%, from the prior year, while SISD SG&A expenses increased $453,000, or 19%, from the prior year. Corporate expenses that are not allocated to either division were $725,000, or 20%, lower than the first quarter of 2008.
MVSD SG&A expenses were relatively flat with the first quarter of 2008 because decreases in discretionary spending and the favorable impact of changes in foreign currency exchange rates were offset by an intangible asset impairment charge incurred in the first quarter of 2009 ($1,000,000 - refer to Note 6 to the Consolidated Financial Statements), as well as higher personnel-related costs ($477,000), stock-based compensation expense ($364,000), and bad debt provisions ($326,000). Decreases in discretionary spending included costs related to the Company's annual sales kick-off meetings ($609,000), marketing and promotional expenses ($362,000), sales demonstration equipment ($267,000), Company bonuses ($233,000), and travel and entertainment expenses ($171,000). The U.S. Dollar was stronger relative to the Euro in the first quarter of 2009 compared to the first quarter of 2008, resulting in lower SG&A costs when expenses of the Company's European operations were translated to U.S. Dollars ($528,000). Although ending headcount was flat between the two periods, personnel-related costs increased due to a higher average headcount and the impact of 2008 wage increases. These increases were partially offset by lower commission expenses related to the lower revenue achieved in the first quarter of 2009. Stock-based compensation expense was higher in the first quarter of 2009 due to the vesting of options granted in the first quarter of 2008, as well as a lower credit recorded in the first quarter of 2009 related to forfeited stock options. In April 2009, the Company announced a number of cost-cutting measures intended to reduce MVSD SG&A expenses for the remainder of 2009 in response to lower revenue expectations for 2009.

The increase in SISD SG&A was primarily due to higher personnel-related costs, such as salaries and fringe benefits, commissions, and travel. Salaries and fringe benefits ($121,000) were higher due to the impact of 2008 wage increases and additional sales personnel intended to grow the SISD business in emerging markets within Asia. The increase in commissions ($81,000) was due to timing, while travel expenses ($48,000) were higher due to a worldwide sales kick-off meeting held in the first quarter of 2009. In addition, marketing expenses ($98,000) were higher due to the timing of promotional activities.
The decrease in corporate expenses was due to lower tax service fees related to a Japanese tax audit ($224,000) and lower Company bonus accruals ($187,000). In addition, fewer employees were dedicated to corporate activities in the first quarter of 2009 ($248,000).
Restructuring Charge
In November 2008, the Company announced the closure of its facility in Duluth, Georgia scheduled for mid-2009, which the Company anticipates will result in long-term cost savings. This facility included a distribution center for MVSD customers located in the Americas, an engineering group dedicated to supporting the Company's MVSD Vision Systems products, and a sales training and support group, as well as a team of finance support staff. The distribution center will be consolidated into the Company's headquarters in Natick, Massachusetts resulting in a single distribution center for MVSD customers located in the Americas. Although a portion of the engineering and sales training and support positions will be transferred to other locations, the majority of these positions, and all of the finance positions, will be eliminated. The Company anticipates that the restructuring costs will offset the expense savings in 2009; however, beginning in 2010, the Company expects to achieve expense savings of approximately $2,500,000 per year. These savings will be realized in "Cost of revenue," "Research, development, and engineering expenses," and "Selling, general, and administrative expenses" on the Consolidated Statements of Operations.
The Company estimates the total restructuring charge to be approximately $1,250,000, of which $555,000 has been recorded to date and included in "Restructuring charge" on the Consolidated Statements of Operations in the MVSD reporting segment. The remainder of the cost will be recognized during the second quarter of 2009. The following table summarizes the restructuring plan (in thousands):

                                                                                                          Cumulative Amount
                                                          Total Amount           Incurred in the          Incurred through
                                                         Expected to be           Quarter Ended             Quarter Ended
                                                            Incurred              April 5, 2009             April 5, 2009
One-time termination benefits                           $            577        $             210        $               464
Contract termination costs                                           307                        -                          -
Other associated costs                                               366                       87                         91

                                                        $          1,250        $             297        $               555

One-time termination benefits include severance and retention bonuses for 33 employees who were either terminated or notified that they will be terminated at a future date. Severance and retention bonuses for these employees will be recognized over the service period. Contract termination costs include rental payments for the Duluth, Georgia facility that will be incurred after the distribution activities are transferred to Natick, Massachusetts, for which the Company will not receive an economic benefit. These contract termination costs will be recognized when the Company ceases to use the Duluth, Georgia facility. Other associated costs include travel and transportation expenses between Georgia and Massachusetts related to closure of the Georgia facility and relocation costs related to employees transferred to other locations, as well as outplacement services for the terminated employees. These costs will be recognized when the services are performed.

The following table summarizes the activity in the Company's restructuring reserve, which is included in "Accrued expenses" on the Consolidated Balance Sheets (in thousands):

                     Balance as of December 31, 2008   $  207
                     Restructuring charges                354
                     Cash payments                       (152 )
                     Restructuring adjustments            (57 )

                     Balance as of April 5, 2009       $  352

Restructuring adjustments are primarily due to the forfeiture of one-time termination benefits, including severance and retention bonuses by certain employees who voluntarily terminated their employment prior to the end of the communicated service period. The impact of revisions to the service period for certain employees entitled to severance and retention bonuses is included in the restructuring adjustment.
In April 2009, the Company announced a variety of additional cost-cutting measures, including a further work force reduction and office closures, intended to more closely align the Company's cost structure with the current lower levels of business resulting from worldwide economic conditions. The Company estimates the total restructuring charge from these actions to be approximately $4,000,000, which will be recorded in "Restructuring charge" on the Consolidated Statements of Operations in the MVSD reporting segment. The majority of these costs will be recognized during the second quarter of 2009.
The restructuring plan from these additional actions includes approximately $3,200,000 in one-time termination benefits and $800,000 in contract termination costs. One-time termination benefits include severance for approximately 80 employees who either were terminated or were notified they will be terminated at a future date. Severance for these employees will be recognized over the service period. Contract termination costs include lease termination payments or rental payments for the closed facilities incurred after the Company ceases using these facilities and for which the Company will not receive an economic benefit. These contract termination costs will be recognized when the Company ceases to use these facilities.
Nonoperating Income
The Company recorded a foreign currency loss of $392,000 in the first quarter of 2009 compared to a gain of $1,118,000 for the first quarter of 2008. The foreign currency gains and losses in each period resulted primarily from the revaluation and settlement of accounts receivable balances that are reported in one currency and collected in another. Although the foreign currency exposure of these accounts receivable is largely mitigated through the use of forward contracts, this program depends upon forecasts of sales and collections, and therefore, gains or losses on the underlying receivables may not perfectly offset losses or gains on the contracts.
In the first quarter of 2009, the U.S. Dollar strengthened versus the Euro resulting in foreign currency gains on the Company's Irish subsidiary's books when U.S. Dollar accounts receivable were revalued and collected. Losses on forward contracts intended to offset these exposures exceeded gains on the underlying receivables.
In the first quarter of 2008, the Japanese Yen strengthened versus the U.S. Dollar and the Euro, resulting in foreign currency gains on the Company's Irish and U.S. subsidiary's books when Japanese Yen accounts receivable were revalued and collected. Gains from the revaluation and settlement of intercompany balances that are reported in one currency and collected or paid in another also contributed to the foreign currency gain in the first quarter of 2008. Investment income for the first quarter of 2009 decreased $1,092,000, or 55%, from the first quarter of 2008. The decrease was due to both a decrease in the average invested balance resulting from cash outlays related primarily to the Company's stock repurchase program and dividend payments and declining yields on the Company's portfolio of debt securities.
The Company recorded other income of $1,800,000 in the first quarter of 2009 compared to $355,000 in the first quarter of 2008. The Company recorded $2,003,000 and $425,000 of other income in the first quarter of 2009 and 2008, respectively, upon the expiration of the applicable statute of limitations relating to a tax holiday, during which time the Company collected value-added taxes from customers that were not required to be remitted to the government authority. Other income (expense) also includes rental income, net of associated expenses, from leasing buildings adjacent to the Company's corporate headquarters.

Income Tax Expense on Continuing Operations The Company's effective tax rate on continuing operations for the first quarter of 2009 was a benefit of 18% compared to a provision of 25% for the first . . .