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CGNX > SEC Filings for CGNX > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for COGNEX CORP


29-Apr-2013

Quarterly Report


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, expected areas of growth, research and development activities, and strategic plans, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) current and future conditions in the global economy; (2) the cyclicality of the semiconductor and electronics industries; (3) the reliance on revenue from the automotive industry; (4) the inability to penetrate new markets; (5) the inability to achieve significant international revenue;
(6) fluctuations in foreign currency exchange rates; (7) the loss of a large customer; (8) the inability to attract and retain skilled employees; (9) the reliance upon key suppliers to manufacture and deliver critical components for our products; (10) the failure to effectively manage product transitions or accurately forecast customer demand; (11) the inability to design and manufacture high-quality products; (12) the technological obsolescence of current products and the inability to develop new products; (13) the failure to properly manage the distribution of products and services; (14) the inability to protect our proprietary technology and intellectual property; (15) our involvement in time-consuming and costly litigation; (16) the impact of competitive pressures; (17) the challenges in integrating and achieving expected results from acquired businesses; (18) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; (19) exposure to additional tax liabilities; and (20) information security breaches or business system disruptions. 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, 2012. 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.


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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. Our Modular Vision Systems Division (MVSD) specializes in machine vision systems and ID products that are used to automate the manufacture and tracking of discrete items, while our Surface Inspection Systems Division (SISD) specializes in machine vision systems that are used to inspect the surfaces of materials processed in a continuous fashion.

In addition to product revenue derived from the sale of machine vision systems, the Company also generates revenue by providing maintenance and support, training, consulting, and installation services to its customers. Our customers can be classified into three primary markets: factory automation, semiconductor and electronics capital equipment, and surface inspection.

Factory automation customers, who are included in the Company's MVSD segment, purchase Cognex vision products and incorporate them into their manufacturing processes. Virtually every manufacturer can achieve better quality and manufacturing efficiency by using machine vision, and therefore, this market includes a broad base of customers across a variety of industries, including automotive, consumer electronics, food and beverage, pharmaceutical, and medical devices. The factory automation market also includes customers who purchase Cognex vision products for use outside of the assembly process, such as using ID products in logistics automation for package sorting and distribution. Sales to factory automation customers represented approximately 78% of total revenue in the first quarter of 2013.

Semiconductor and electronics capital equipment manufacturers, who are included in the Company's MVSD segment, 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. Sales to semiconductor and electronics capital equipment manufacturers represented approximately 9% of total revenue in the first quarter of 2013.

Surface inspection customers, who comprise the Company's SISD segment, are manufacturers of materials processed in a continuous fashion, such as metals, paper, nonwovens, plastics, and glass. These customers need sophisticated machine vision to detect, classify, and analyze defects on the surfaces of those materials as they are being processed at high speeds. Surface inspection sales represented approximately 13% of total revenue in the first quarter of 2013.

Revenue for the first quarter of 2013 totaled $80,892,000, representing an increase of $3,183,000, or 4%, from the same period in the prior year due primarily to higher sales in the factory automation market. Gross margin increased to 76% of revenue in the first quarter of 2013 from 75% of revenue in the first quarter of 2012 due to the shift in revenue mix to relatively higher-margin factory automation sales, as well as improved service margins. Operating expenses increased by $2,578,000, or 6%, as compared to the first quarter of 2012, due primarily to expenses associated with increased headcount in strategic areas. The Company recorded an operating profit of $17,981,000, or 22% of revenue, in the first quarter of 2013, compared to an operating profit of $17,741,000, or 23% of revenue, in the first quarter of 2012. Net income improved to $15,583,000, or 19% of revenue, in the first quarter of 2013 from $14,282,000, or 18% of revenue, in the same period in the prior year due primarily to a lower effective tax rate. Net income per diluted share also improved to $0.35 in the first quarter of 2013 from $0.33 in the first quarter of 2012.

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


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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 for the first quarter of 2013 increased by $3,183,000, or 4%, from the first quarter of 2012. This increase was due to a $3,980,000 increase in sales to factory automation customers and a $290,000 increase in sales to semiconductor and electronics capital equipment customers, partially offset by a $1,087,000 decrease in sales to surface inspection customers.

Factory Automation Market

Sales to customers in the factory automation market represented 78% of total revenue in the first quarter of 2013 compared to 76% in the first quarter of 2012. Sales to these customers increased by $3,980,000, or 7%, from the first quarter of 2012. Changes in foreign currency exchange rates had little impact on total factory automation revenue, as the unfavorable impact on revenue of a weaker Japanese Yen was largely offset by the favorable impact of a stronger Euro in the first quarter of 2013 compared to the same period in the prior year.

Geographically, increases from the prior year were noted across all major regions except for Japan. However, excluding the impact of foreign currency exchange rate changes, the Japanese market was relatively flat compared to the first quarter of 2012. Revenue in Japan had declined in both 2011 and 2012 since the natural disasters that hit this region early in 2011. The largest increase was noted in Asia, where the Company has made significant investments, particularly in China, to expand its sales and support infrastructure in order to access more of the machine vision market in this high-potential growth region. By product line, the largest increase from the prior year came from sales of the Company's ID Products, which are used in manufacturing applications as well as in the logistics industry for package sorting and distribution. The Company expects its Asia region and its ID Products business to continue to be growth opportunities throughout 2013.

Generally, factory automation revenue declines from the fourth quarter to the first quarter, as many customers consume their remaining annual capital budgets during the last quarter of the year. However, in the first quarter of 2013, sales to factory automation customers increased by $1,150,000, or 2%, from the fourth quarter of 2012. Management expects factory automation revenue to continue to grow in the second quarter of 2013 as compared to the first quarter.

Semiconductor and Electronics Capital Equipment Market

Sales to customers who make automation equipment for the semiconductor and electronics industries represented 9% of total revenue in both the first quarters of 2013 and 2012. Sales to these customers increased by $290,000, or 4%, from the first quarter of 2012 and increased by $1,489,000, or 27%, from the fourth quarter of 2012. Excluding the impact of foreign currency exchange rate changes, a majority of which relates to the Japanese Yen, sales to semiconductor and electronics capital equipment customers increased by $548,000, or 8%, from the first quarter of 2012 and increased $1,694,000, or 31%, from the fourth quarter of 2012. Despite this positive momentum, the semiconductor and electronics capital equipment market has historically been highly cyclical and management has limited visibility regarding future order levels from these customers.

Surface Inspection Market

Sales to customers in the surface inspection market represented 13% of total revenue in the first quarter of 2013 compared to 15% in the first quarter of 2012. Revenue from these customers decreased by $1,087,000, or 9%, from the first quarter of 2012 and decreased by $3,915,000, or 27%, from the fourth quarter of 2012. The impact of foreign currency exchange rate changes on revenue was not significant to the surface inspection market in either period. Surface inspection revenue reported each quarter can vary


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significantly depending upon the timing of customer orders, system deliveries, and installations, as well as the impact of revenue deferrals. Management expects surface inspection revenue to grow in the second quarter of 2013 as compared to the first quarter.

Product Revenue

Product revenue increased by $3,265,000, or 5%, from the first quarter of 2012. This increase was driven by a higher volume of modular vision systems sold than in the prior year, partially offset by a lower average selling price due to the shift in revenue mix to ID Products, which have relatively lower average selling prices. We expect this trend related to ID products to continue throughout 2013. Higher MVSD product revenue was partially offset by lower SISD product revenue.

Service Revenue

Service revenue, which is derived from the sale of maintenance and support, training, consulting, and installation services, was relatively flat compared to the first quarter of 2012 and represented 8% of total revenue in each period presented.

Gross Margin

Gross margin as a percentage of revenue was 76% for the first quarter of 2013 compared to 75% for the first quarter of 2012 due to the shift in revenue mix from surface inspection sales to relatively higher-margin factory automation sales, as well as improved service margins.

MVSD Margin

MVSD gross margin as a percentage of revenue was 79% for the first quarter of 2013 compared to 80% for the first quarter of 2012. A reduction in product margins due to higher provisions for warranty and for excess and obsolete inventory was partially offset by improvements in consulting service margins.

SISD Margin

SISD gross margin as a percentage of revenue was 54% for the first quarter of 2013 compared to 53% for the first quarter of 2012. The increase in SISD margin was primarily due to improved installation service margins.

Product Margin

Product gross margin as a percentage of revenue was 78% for both the first quarters of 2013 and 2012. A reduction in MVSD product margins due to higher provisions for warranty and for excess and obsolete inventory was offset by a favorable shift in revenue mix to relatively higher-margin MVSD products.

Service Margin

Service gross margin as a percentage of revenue was 52% for the first quarter of 2013 compared to 44% for the first quarter of 2012. The increase in service margin was due to improvements in MVSD consulting service margins, as well as improved installation service margins at SISD.

Operating Expenses

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses for the first quarter of 2013 increased by $960,000, or 9%, from the first quarter of 2012. MVSD RD&E expenses increased by $917,000, or 10%, and SISD RD&E expenses increased by $43,000, or 5%.


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The increase in MVSD RD&E expenses was primarily due to headcount additions, resulting in higher personnel-related costs, such as salaries and fringe benefits ($850,000). The increase in SISD RD&E expenses was primarily due to higher spending on outsourced engineering services ($35,000).

RD&E expenses as a percentage of revenue were 14% in the first quarter of 2013 and 13% in the first quarter of 2012. 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. 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. Although we target our RD&E spending to be between 10% and 15% of revenue, this percentage is impacted by revenue levels.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses for the first quarter of 2013 increased by $1,618,000, or 5%, from the first quarter of 2012. MVSD SG&A expenses increased by $1,342,000, or 6%, while SISD SG&A expenses increased by $153,000, or 5%. Corporate expenses that are not allocated to either division increased by $123,000, or 4%.

The table below (in thousands) details the $1,342,000 net increase in MVSD SG&A in 2013:

                MVSD SG&A balance in 2012                $ 24,148
                Personnel-related costs                       723
                Depreciation expense                          264
                Sales demonstration equipment                 225
                Sales commissions                             198
                Foreign currency exchange rate changes       (298 )
                Other                                         230

                MVSD SG&A balance in 2013                $ 25,490

Personnel-related costs have increased from the prior year due to additional headcount, and to a lesser extent, higher average costs per employee. Over the past year, the Company has continued to increase headcount in strategic areas, principally Sales, resulting in higher personnel-related costs, such as salaries, fringe benefits, commissions, and travel expenses. Average costs per employee have increased over the prior year due primarily to modest wage increases granted early in 2013 and higher fringe benefits, such as health care costs. The Company also recorded higher depreciation expense related principally to business system upgrades, increased spending on sales demonstration equipment, and higher sales commissions resulting from the higher revenue level. Operating expenses in the first quarter of 2013 compared to the first quarter of 2012 were favorably impacted by a weaker Japanese Yen, partially offset by the unfavorable impact of a stronger Euro.

The increase in SISD SG&A expenses was primarily due to increased salaries and fringe benefits expenses ($228,000), partially offset by lower company bonus accruals ($50,000).

The increase in corporate expenses was primarily related to higher company bonus accruals ($170,000) and increased stock-based compensation expense due to a higher valuation of stock options granted in the first quarter of 2013 ($75,000). These increases were partially offset by lower professional fees ($139,000), primarily related to the timing of tax services.

Nonoperating Income (Expense)

The Company recorded a foreign currency gain of $63,000 in the first quarter of 2013 compared to a loss of $638,000 in the first quarter of 2012. The foreign currency gains and losses in each period resulted primarily from the revaluation and settlement of accounts receivable and intercompany balances that are reported in one currency and collected in another. Although a portion of the Company's foreign currency exposure of accounts receivable is 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.


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Investment income for the first quarter of 2013 decreased $580,000, or 60%, from the first quarter of 2012, due to declining yields on the Company's portfolio of debt securities, as well as a $368,000 unrealized loss recorded in current operations on a corporate stock holding designated as a trading security.

The Company recorded other income of $117,000 in the first quarter of 2013 compared to $3,000 in the first quarter of 2012. The Company recorded $354,000 and $141,000 of other income in the first quarters of 2013 and 2012, respectively, due to the expiration of the statutes of limitations relating to tax holidays, 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

The Company's effective tax rate was 16% in the first quarter of 2013 compared to 21% in the first quarter of 2012. The effective tax rate for the first quarter of 2013 was impacted by one discrete event related to the retroactive application of the 2012 R&D credit passed by Congress under the American Taxpayer Relief Act of 2012, which reduced tax expense by $555,000. Although the provisions under this law were made retroactive to January 1, 2012, the law was signed on January 1, 2013, and therefore, the financial impact of any retroactive provision has been recorded as a discrete event in the current quarter. Excluding this discrete event, the effective tax rate for the first quarter of 2013 was 19%. There were no discrete events in the first quarter of 2012. In addition to the discrete event discussed above, the remaining decrease in the effective tax rate was primarily due to a higher proportion of pre-tax income earned in relatively lower tax jurisdictions.

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, cash equivalent, and investment balance of $413,652,000 as of March 31, 2013. 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 first quarter of 2013 were met with its existing cash balances, cash from investment maturities, positive cash flows from operations, and the proceeds from stock option exercises. Cash requirements primarily consisted of operating activities, purchases of investments, and capital expenditures. Capital expenditures for the first quarter of 2013 totaled $1,908,000 and consisted primarily of expenditures for computer hardware and software, as well as manufacturing test equipment related to new product introductions.

In June 2000, the Company became a Limited Partner in Venrock Associates III, L.P. (Venrock), a venture capital fund. The Company has committed to a total investment in the limited partnership of up to $20,500,000, with the commitment period expiring on December 31, 2013. The Company does not have the right to withdraw from the partnership prior to December 31, 2013. As of March 31, 2013, the Company had contributed $19,886,000 to the partnership. No contributions were made and no distributions were received in the first quarter of 2013. The remaining commitment of $614,000 can be called by Venrock in any period through December 31, 2013.

Beginning in the third quarter of 2003, the Company's Board of Directors had declared and paid a cash dividend in each quarter. In December 2012, the Company declared and paid an $0.11 dividend that would normally be declared in the first quarter of 2013 in conjunction with the 2012 earnings release. A special dividend of $1.00 was also declared and paid in the fourth quarter of 2012 to replace expected quarterly dividend declarations for the next eight quarters, beginning in 2013. The additional $0.11 dividend and the $1.00 dividend were accelerated due to the anticipated increase in the federal tax on dividends paid after December 31, 2012. Due to these accelerated payments, no dividends were declared or paid in the first quarter of 2013. 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.


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In April 2008, the Company's Board of Directors authorized the repurchase of up to $50,000,000 of the Company's common stock, primarily as a means to reduce the dilutive effect of employee stock options. As of March 31, 2013, the Company had repurchased 1,375,875 shares at a cost of $30,000,000 under this program. In November 2011, the Company's Board of Directors authorized the repurchase of up to $80,000,000 of the Company's common stock. This new authorization will commence once the Company completes the $50,000,000 program noted above. The Company did not purchase any shares under these programs during the first quarter of 2013. The Company may repurchase shares under these programs in future periods depending upon a variety of factors, including, among other things, stock price, share availability, and cash reserve requirements.

The Company believes that its existing cash, cash equivalent, 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 March 31, 2013, the Company had approximately $409,912,000 in cash, cash equivalents, debt securities, or equity securities that could be converted into cash. In addition, Cognex has no 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.

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