Cognex Corporation (NASDAQ:CGNX) Q2 2019 Earnings Conference Call July 29, 2019 5:00 PM ET Company Participants Susan Conway - Head of Investor Relations Robert Shillman - Chairman Robert Willett - Chief Executive Officer Laura MacDonald - Vice President and Corporate Controller Christopher Stagno - Treasurer Conference Call Participants Karen Lau - Gordon Haskett Andrew Buscaglia - Joh. Berenberg, Gossler & Co. Joseph Ritchie - Goldman Sachs & Co. LLC Joseph Giordano - Cowen and Company, LLC Richard Eastma ...

PART I FINANCIAL INFORMATION This section presents Cognex Corporation's unaudited interim financial statements, including detailed notes, management's discussion, market risk disclosures, and controls and procedures [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28interim%20periods%20unaudited%29) This section presents Cognex Corporation's unaudited consolidated financial statements, including statements of operations, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed notes on accounting policies, fair value measurements, investments, leases, intangible assets, warranty obligations, derivatives, revenue recognition, stock-based compensation, stock repurchases, and taxes for the periods ended June 30, 2019 [Consolidated Statements of Operations](index=3&type=section&id=Consolidated%20Statements%20of%20Operations) Cognex Corporation reported a decrease in revenue and net income for both the three-month and six-month periods ended June 30, 2019, compared to the prior year. Diluted EPS also declined, while cash dividends per common share increased | Metric | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Revenue | $199,047 | $211,264 | $372,531 | $380,831 | | Net Income | $48,749 | $56,196 | $81,853 | $93,413 | | Diluted EPS | $0.28 | $0.32 | $0.47 | $0.52 | | Cash Dividends per Common Share | $0.050 | $0.045 | $0.100 | $0.090 | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income for the three-month period increased slightly to **$50.015 million** in 2019 from **$49.186 million** in 2018, primarily due to a net unrealized gain on available-for-sale investments, offsetting a decrease in net income and foreign currency translation adjustments. For the six-month period, total comprehensive income decreased to **$85.548 million** in 2019 from **$89.245 million** in 2018 | Metric | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Net Income | $48,749 | $56,196 | $81,853 | $93,413 | | Net change related to available-for-sale investments | $1,929 | $243 | $4,140 | $(971) | | Net change related to foreign currency translation adjustments | $(663) | $(7,253) | $(445) | $(3,197) | | Total Comprehensive Income | $50,015 | $49,186 | $85,548 | $89,245 | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2019, total assets increased to **$1.35 billion** from **$1.29 billion** at December 31, 2018, driven by an increase in non-current investments. Total liabilities also increased slightly, while shareholders' equity grew | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Assets | $1,349,920 | $1,289,667 | | Total Liabilities | $158,280 | $154,404 | | Total Shareholders' Equity | $1,191,640 | $1,135,263 | | Non-current investments | $408,032 | $262,039 | | Operating lease assets | $17,928 | — | | Operating lease liabilities (current) | $5,835 | — | | Non-current operating lease liabilities | $12,149 | — | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly increased to **$120.150 million** for the six-month period ended June 30, 2019, from **$72.616 million** in the prior year. Investing activities resulted in a net cash outflow of **$86.690 million**, a shift from a net inflow of **$73.144 million** in the prior year, primarily due to higher purchases of investments. Financing activities showed a reduced net cash outflow | Metric | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :-------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | $120,150 | $72,616 | | Net cash provided by (used in) investing activities | $(86,690) | $73,144 | | Net cash provided by (used in) financing activities | $(52,419) | $(123,021) | | Purchases of investments | $(664,896) | $(336,189) | | Repurchase of common stock | $(61,690) | $(121,308) | [Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) Total shareholders' equity increased to **$1.19 billion** as of June 30, 2019, from **$1.14 billion** at December 31, 2018. This increase was primarily driven by net income and additional paid-in capital, partially offset by common stock repurchases and dividend payments | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Shareholders' Equity | $1,191,640 | $1,135,263 | | Net Income (6-month) | $81,853 | $93,413 | | Repurchase of common stock (6-month) | $(61,690) | $(121,308) | | Payment of dividends (6-month) | $(17,146) | $(15,524) | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on the company's accounting policies, new pronouncements, fair value measurements, cash and investments, inventories, leases, intangible assets, warranty obligations, derivative instruments, revenue recognition, stock-based compensation, stock repurchase program, taxes, weighted-average shares, and subsequent events [NOTE 1: Summary of Significant Accounting Policies](index=10&type=section&id=NOTE%201:%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's significant accounting policies, emphasizing that these are condensed notes for the interim report. It specifically details the adoption of ASC 842 "Leases" as of January 1, 2019, and its impact on financial reporting - The Company adopted ASC 842 "Leases" as of January 1, 2019, applying it on a prospective basis with a cumulative-effect adjustment to the opening balance sheet[35](index=35&type=chunk)[36](index=36&type=chunk) - Leases are classified as finance or operating based on criteria such as ownership transfer, purchase options, lease term relative to economic life, present value of payments, or specialized nature of the asset[37](index=37&type=chunk) [NOTE 2: New Pronouncements](index=11&type=section&id=NOTE%202:%20New%20Pronouncements) This note discusses recently issued accounting pronouncements, including ASU 2016-13 (Credit Losses), ASU 2017-08 (Premium Amortization on Callable Debt Securities), and ASU 2018-15 (Internal-Use Software). Management does not expect a material impact from these ASUs on the Company's financial statements - Management does not expect ASU 2016-13, "Financial Instruments - Measurement of Credit Losses," to have a material impact on the Company's financial statements and disclosures[40](index=40&type=chunk) - Management does not expect ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs - Premium Amortization on Purchased Callable Debt Securities," to have a material impact on the Company's financial statements and disclosures[40](index=40&type=chunk) - Management does not expect ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software," to have a material impact on the Company's financial statements and disclosures[40](index=40&type=chunk) [NOTE 3: Fair Value Measurements](index=12&type=section&id=NOTE%203:%20Fair%20Value%20Measurements) The company categorizes its financial assets and liabilities measured at fair value into Level 1, Level 2, and Level 3 inputs. Money market instruments are Level 1, debt securities and forward contracts are Level 2, and contingent consideration liabilities are Level 3. No other-than-temporary impairment was recorded for financial assets | Asset/Liability | Fair Value (June 30, 2019, in thousands) | Fair Value Hierarchy Level | | :---------------- | :--------------------------------------- | :------------------------- | | Money market instruments | $3,099 | Level 1 | | Treasury bills | $307,490 | Level 2 | | Corporate bonds | $278,991 | Level 2 | | Asset-backed securities | $145,432 | Level 2 | | Contingent consideration liabilities | $1,691 | Level 3 | - The Company did not record an other-than-temporary impairment of financial assets during the three-month or six-month periods ended June 30, 2019, and July 1, 2018[43](index=43&type=chunk) [NOTE 4: Cash, Cash Equivalents, and Investments](index=14&type=section&id=NOTE%204:%20Cash,%20Cash%20Equivalents,%20and%20Investments) As of June 30, 2019, total cash, cash equivalents, and investments amounted to **$861.623 million**, an increase from **$797.599 million** at December 31, 2018. This was primarily driven by a significant increase in non-current investments, particularly in Treasury bills and corporate bonds | Category | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------- | :--------------------------- | :------------------------------- | | Cash and cash equivalents | $89,104 | $108,212 | | Current investments | $364,487 | $427,348 | | Non-current investments | $408,032 | $262,039 | | Total Cash, Cash Equivalents, and Investments | $861,623 | $797,599 | - The Company's available-for-sale investments include Treasury bills, asset-backed securities, corporate bonds, agency bonds, sovereign bonds, and municipal bonds, all denominated in U.S. Dollars[48](index=48&type=chunk) [NOTE 5: Inventories](index=15&type=section&id=NOTE%205:%20Inventories) Total inventories decreased to **$72.889 million** as of June 30, 2019, from **$83.282 million** at December 31, 2018, primarily due to a reduction in raw materials and finished goods | Inventory Component | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------ | :--------------------------- | :------------------------------- | | Raw materials | $32,545 | $42,738 | | Work-in-process | $4,112 | $3,435 | | Finished goods | $36,232 | $37,109 | | Total Inventories | $72,889 | $83,282 | [NOTE 6: Leases](index=15&type=section&id=NOTE%206:%20Leases) The company adopted ASC 842 "Leases" on January 1, 2019, recognizing lease assets of **$17.522 million** and corresponding current and non-current lease liabilities. All leases are classified as operating leases, with a weighted-average discount rate of **4.8%** and a remaining lease term of **3.6 years** - As of January 1, 2019, the Company recorded lease assets of **$17.522 million**, current lease liabilities of **$4.736 million**, and non-current lease liabilities of **$12.669 million** due to ASC 842 adoption[56](index=56&type=chunk) - All of the Company's leases are classified as operating leases, primarily for leased properties worldwide[58](index=58&type=chunk) | Metric | Three-months Ended June 30, 2019 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | | :----- | :---------------------------------------------- | :-------------------------------------------- | | Total operating lease expense | $1,742 | $3,227 | | Total operating lease cash payments | $1,669 | $3,070 | | Lease expense for leases <= 12 months | $64 | $233 | - The weighted-average discount rate for leases was **4.8%**, and the weighted-average remaining lease term was **3.6 years** as of June 30, 2019[61](index=61&type=chunk) [NOTE 7: Intangible Assets](index=18&type=section&id=NOTE%207:%20Intangible%20Assets) Net carrying value of intangible assets decreased to **$8.575 million** as of June 30, 2019, from **$10.113 million** at December 31, 2018, primarily due to ongoing amortization | Intangible Asset | Net Carrying Value (June 30, 2019, in thousands) | Net Carrying Value (December 31, 2018, in thousands) | | :----------------- | :----------------------------------------------- | :--------------------------------------------------- | | Completed technologies | $5,848 | $7,068 | | Customer relationships | $2,634 | $2,891 | | Non-compete agreements | $93 | $154 | | Total | $8,575 | $10,113 | - Estimated future amortization expense for intangible assets for the remainder of fiscal 2019 is **$1.163 million**[66](index=66&type=chunk) [NOTE 8: Warranty Obligations](index=18&type=section&id=NOTE%208:%20Warranty%20Obligations) The company's warranty obligation increased to **$5.452 million** as of June 30, 2019, from **$4.743 million** at December 31, 2018, reflecting new provisions for warranties issued during the period | Warranty Activity | Amount (in thousands) | | :---------------- | :-------------------- | | Balance as of December 31, 2018 | $4,743 | | Provisions for warranties issued during the period | $2,533 | | Fulfillment of warranty obligations | $(1,824) | | Balance as of June 30, 2019 | $5,452 | [NOTE 9: Derivative Instruments](index=18&type=section&id=NOTE%209:%20Derivative%20Instruments) The company uses foreign currency forward contracts as economic hedges to manage foreign currency risk, with maturities up to 45 days. These are not designated for hedge accounting. As of June 30, 2019, the notional value of outstanding forward contracts was **$32.151 million** (USD equivalent) - The Company enters into economic hedges using foreign currency forward contracts with maturities up to 45 days to manage exposure to foreign currency exchange rate fluctuations[68](index=68&type=chunk) - These economic hedges are not designated as hedging instruments for hedge accounting treatment[71](index=71&type=chunk) | Currency | Notional Value (June 30, 2019, in thousands) | USD Equivalent (June 30, 2019, in thousands) | | :------- | :------------------------------------------- | :------------------------------------------- | | Euro | 19,000 | $21,681 | | Japanese Yen | 400,000 | $3,717 | | Hungarian Forint | 900,000 | $3,178 | | Korean Won | 3,550,000 | $3,072 | | British Pound | 2,400 | $3,055 | | Taiwanese Dollar | 50,000 | $1,617 | | Canadian Dollar | 1,100 | $841 | | Total USD Equivalent | | $32,151 | | Metric | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Gains (losses) recognized in current operations | $(439) | $(354) | $66 | $(665) | [NOTE 10: Revenue Recognition](index=21&type=section&id=NOTE%2010:%20Revenue%20Recognition) Revenue decreased for both the three-month and six-month periods ended June 30, 2019, compared to the prior year. Geographically, Americas revenue increased, while Europe, Greater China, and Other Asia saw declines. Standard products and services remain the largest revenue type | Geographic Area | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :---------------- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Americas | $78,500 | $71,812 | $143,656 | $131,029 | | Europe | $58,881 | $70,366 | $118,538 | $126,569 | | Greater China | $35,782 | $41,175 | $58,592 | $68,334 | | Other Asia | $25,884 | $27,911 | $51,745 | $54,899 | | Total Revenue | $199,047 | $211,264 | $372,531 | $380,831 | | Revenue Type | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :------------- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Standard products and services | $173,368 | $183,627 | $334,420 | $342,026 | | Application-specific customer solutions | $25,679 | $27,637 | $38,111 | $38,805 | | Total Revenue | $199,047 | $211,264 | $372,531 | $380,831 | [Costs to Fulfill a Contract](index=21&type=section&id=Costs%20to%20Fulfill%20a%20Contract) Costs to fulfill a contract, recorded as prepaid expenses and other current assets, increased to **$6.852 million** as of June 30, 2019, from **$3.514 million** at December 31, 2018 | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Costs to Fulfill a Contract | $6,852 | $3,514 | [Accounts Receivable, Contract Assets, and Contract Liabilities](index=21&type=section&id=Accounts%20Receivable,%20Contract%20Assets,%20and%20Contract%20Liabilities) Deferred revenue and customer deposits increased to **$18.332 million** as of June 30, 2019, from **$9.845 million** at December 31, 2018, reflecting increases from new billings/collections and recognition of revenue | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Deferred revenue and customer deposits | $18,332 | $9,845 | - Increases to deferred revenue and customer deposits for the six-month period ended June 30, 2019, totaled **$29.883 million**, while **$21.308 million** of revenue was recognized from these balances[76](index=76&type=chunk) [NOTE 11: Stock-Based Compensation Expense](index=21&type=section&id=NOTE%2011:%20Stock-Based%20Compensation%20Expense) Total stock-based compensation expense for the six-month period ended June 30, 2019, was **$23.248 million**, an increase from **$22.196 million** in the prior year. The company had **14.765 million** stock options outstanding with a weighted-average exercise price of **$36.00** as of June 30, 2019 | Metric | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :-------------------------------------------- | :------------------------------------------- | | Total Stock-Based Compensation Expense | $23,248 | $22,196 | | Related Income Tax Benefit | $4,035 | $3,954 | | Stock Option Activity | Shares (in thousands) | Weighted-Average Exercise Price | | :-------------------- | :-------------------- | :------------------------------ | | Outstanding as of December 31, 2018 | 13,789 | $31.73 | | Granted | 2,821 | $51.37 | | Exercised | (1,239) | $21.32 | | Forfeited or expired | (606) | $40.27 | | Outstanding as of June 30, 2019 | 14,765 | $36.00 | - As of June 30, 2019, total unrecognized compensation expense related to non-vested stock options was **$66.645 million**, expected to be recognized over a weighted-average period of **1.88 years**[86](index=86&type=chunk) [NOTE 12: Stock Repurchase Program](index=23&type=section&id=NOTE%2012:%20Stock%20Repurchase%20Program) Under a **$200 million** repurchase program authorized in October 2018, the company repurchased **1.398 million** shares at a cost of **$61.690 million** during the six-month period ended June 30, 2019. A remaining balance of **$129.688 million** is available for future repurchases - The Board of Directors authorized a **$200 million** common stock repurchase program in October 2018[87](index=87&type=chunk) - During the six-month period ended June 30, 2019, the Company repurchased **1.398 million** shares at a cost of **$61.690 million**[87](index=87&type=chunk) - As of June 30, 2019, **$129.688 million** remained available for repurchase under the program[87](index=87&type=chunk) [NOTE 13: Taxes](index=23&type=section&id=NOTE%2013:%20Taxes) The effective tax rate for the six-month period ended June 30, 2019, was **12%**, primarily influenced by foreign tax rate differentials and discrete tax benefits from stock options. The company increased its reserves for income taxes by **$952 thousand** during the period | Metric | Three-months Ended June 30, 2019 | Three-months Ended July 1, 2018 | Six-months Ended June 30, 2019 | Six-months Ended July 1, 2018 | | :----- | :------------------------------- | :------------------------------ | :----------------------------- | :---------------------------- | | Income tax expense at U.S. federal statutory corporate tax rate | 21% | 21% | 21% | 21% | | State income taxes, net of federal benefit | 1% | 2% | 1% | 2% | | Foreign tax rate differential | (7)% | (7)% | (7)% | (7)% | | Discrete tax benefit related to stock options | (2)% | (1)% | (4)% | (5)% | | Income tax expense (effective rate) | 14% | 16% | 12% | 11% | - During the six-month period ended June 30, 2019, the Company recorded a **$952 thousand** increase in reserves for income taxes, net of deferred tax benefit[91](index=91&type=chunk) - There is a potential for a **$1.250 million** to **$1.350 million** decrease in income tax expense over the next twelve months due to the expiration of certain statutes of limitations related to tax reserves[92](index=92&type=chunk) [NOTE 14: Weighted-Average Shares](index=25&type=section&id=NOTE%2014:%20Weighted-Average%20Shares) Diluted weighted-average common and common-equivalent shares outstanding for the six-month period ended June 30, 2019, were **175.528 million**, slightly lower than **178.418 million** in the prior year | Metric | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Basic weighted-average common shares outstanding | 171,318 | 172,370 | 171,209 | 172,825 | | Effect of dilutive stock options | 4,130 | 4,779 | 4,319 | 5,593 | | Weighted-average common and common-equivalent shares outstanding (Diluted) | 175,448 | 177,149 | 175,528 | 178,418 | - Stock options to purchase **6.113 million** shares (3-month) and **5.503 million** shares (6-month) were anti-dilutive and excluded from diluted net income per share calculation for the periods ended June 30, 2019[93](index=93&type=chunk) [NOTE 15: Subsequent Events](index=25&type=section&id=NOTE%2015:%20Subsequent%20Events) On July 29, 2019, the Board of Directors declared a cash dividend of **$0.050** per share, payable on August 30, 2019 - On July 29, 2019, the Company's Board of Directors declared a cash dividend of **$0.050** per share, payable on August 30, 2019[94](index=94&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance, highlighting a decrease in revenue and net income for Q2 2019 due to lower sales in consumer electronics and automotive, partially offset by strong logistics sales. It also discusses operating expenses, non-operating income, income tax, and liquidity [Forward-Looking Statements](index=26&type=section&id=Forward-Looking%20Statements) This section cautions readers about forward-looking statements, which are based on current estimates and expectations and involve known and unknown risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections[96](index=96&type=chunk) - Key risks include loss of large customers, global economic conditions (e.g., tariffs), reliance on consumer electronics or automotive industries, inability to penetrate new markets, foreign currency fluctuations, and technological obsolescence[96](index=96&type=chunk) [Executive Overview](index=26&type=section&id=Executive%20Overview) Cognex Corporation is a leading provider of machine vision products for manufacturing and distribution automation. Q2 2019 revenue decreased by **6%** year-over-year to **$199.047 million**, primarily due to lower sales in consumer electronics and automotive, despite strong logistics sales. Gross margin remained consistent at **74%**, but operating income and net income percentages declined - Cognex Corporation is a leading worldwide provider of machine vision products for automating tasks in manufacturing and distribution processes[97](index=97&type=chunk) | Metric | Q2 2019 (in thousands) | Q2 2018 (in thousands) | | :----- | :--------------------- | :--------------------- | | Revenue | $199,047 | $211,264 | | Gross Margin % | 74% | 74% | | Operating Income % of Revenue | 26% | 30% | | Net Income % of Revenue | 24% | 27% | | Net Income per Diluted Share | $0.28 | $0.32 | - The **6%** decrease in Q2 2019 revenue was due to lower sales in the consumer electronics and automotive industries, and unfavorable foreign currency exchange rates, partially offset by strong sales in the logistics industry[97](index=97&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) This section details the financial performance for the three-month and six-month periods, covering revenue, gross margin, operating expenses (RD&E, SG&A), non-operating income/expense, and income tax expense [Revenue](index=27&type=section&id=Revenue) Revenue decreased by **6%** for the three-month period and **2%** for the six-month period, significantly impacted by foreign currency exchange rates (approx. **3 percentage points** decrease). On a constant-currency basis, revenue decreased by **3%** for three months and increased by **1%** for six months. Strong logistics sales were offset by declines in consumer electronics and automotive across Europe and Asia - Revenue decreased by **$12.217 million** (**6%**) for the three-month period and **$8.300 million** (**2%**) for the six-month period[100](index=100&type=chunk) - Changes in foreign currency exchange rates accounted for approximately a **3 percentage point** decrease in revenue for both periods[100](index=100&type=chunk) - On a constant-currency basis, revenue decreased by **3%** for the three-month period and increased by **1%** for the six-month period[100](index=100&type=chunk) - Sales to customers in the Americas increased by **9%** (3-month) and **10%** (6-month) due to higher logistics sales, while sales in Europe, Greater China, and Other Asia declined, primarily due to lower consumer electronics sales[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) - Revenue for Q3 2019 is expected to decrease from both Q2 2019 and Q3 2018, driven by significantly lower consumer electronics revenue (smartphone manufacturing), delays/reductions in capital spending (automotive), and seasonal softness, partially offset by logistics growth[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk) [Gross Margin](index=27&type=section&id=Gross%20Margin) Gross margin as a percentage of revenue remained consistent at **74%** for the three-month periods in both 2019 and 2018. For the six-month period, it slightly declined from **75%** in 2018 to **74%** in 2019, mainly due to unfavorable absorption of manufacturing overhead and negative foreign currency impacts - Gross margin as a percentage of revenue was **74%** for both the three-month periods in 2019 and 2018[107](index=107&type=chunk) - For the six-month period, gross margin percentage declined from **75%** in 2018 to **74%** in 2019, primarily due to unfavorable absorption of manufacturing overhead costs and the unfavorable impact of foreign currency exchange rates[107](index=107&type=chunk) - The gross margin percentage for Q3 2019 is expected to be in the **mid-70s range**, slightly lower than Q2 2019[107](index=107&type=chunk) [Operating Expenses](index=28&type=section&id=Operating%20Expenses) Operating expenses increased due to higher personnel-related costs from headcount additions, partially offset by lower incentive compensation and favorable foreign currency exchange rates [Research, development, and engineering (RD&E) expenses](index=28&type=section&id=Research,%20development,%20and%20engineering%20%28RD%26E%29%20expenses) RD&E expenses increased by **4%** for the three-month period and **1%** for the six-month period, driven by higher personnel costs from headcount additions for new product initiatives. These increases were partially offset by lower incentive compensation and favorable foreign currency impacts. RD&E as a percentage of revenue was **14%** (3-month) and **16%** (6-month) in 2019 | Metric | Three-month period (in thousands) | Six-month period (in thousands) | | :----- | :-------------------------------- | :------------------------------ | | RD&E expenses in 2018 | $26,888 | $57,964 | | Personnel-related costs | $1,099 | $2,198 | | Incentive compensation plans | $(1,086) | $(1,344) | | Foreign currency exchange rate changes | $(537) | $(1,266) | | RD&E expenses in 2019 | $28,079 | $58,321 | - RD&E expenses as a percentage of revenue were **14%** and **16%** for the three-month and six-month periods in 2019, respectively, compared to **13%** and **15%** for the same periods in 2018[110](index=110&type=chunk) - The Company targets RD&E spending to be between **10%** and **15%** of revenue on an annual basis[110](index=110&type=chunk) [Selling, General, and Administrative Expenses](index=28&type=section&id=Selling,%20General,%20and%20Administrative%20Expenses) SG&A expenses increased by **2%** for the three-month period and **4%** for the six-month period, mainly due to higher personnel-related costs from sales headcount additions. This was partially offset by lower incentive compensation, reduced ERP project costs (as the system was implemented in mid-2018), and favorable foreign currency impacts | Metric | Three-month period (in thousands) | Six-month period (in thousands) | | :----- | :-------------------------------- | :------------------------------ | | SG&A expenses in 2018 | $66,752 | $130,449 | | Personnel-related costs | $6,093 | $13,878 | | Foreign currency exchange rate changes | $(1,931) | $(3,616) | | Incentive compensation plans | $(2,117) | $(3,097) | | ERP project costs | $(1,422) | $(2,667) | | SG&A expenses in 2019 | $68,245 | $135,056 | - The increase in SG&A expenses was primarily due to higher personnel-related costs from headcount additions, principally sales personnel[112](index=112&type=chunk) - These increases were partially offset by lower incentive compensation, reduced ERP project costs (system placed into service mid-2018), and favorable foreign currency exchange rates[112](index=112&type=chunk) [Non-operating Income (Expense)](index=28&type=section&id=Non-operating%20Income%20%28Expense%29) The company reported a foreign currency gain of **$140 thousand** for the three-month period and a loss of **$108 thousand** for the six-month period in 2019. Investment income significantly increased by **47%** (3-month) and **49%** (6-month) due to higher yields and additional funds. Other income (expense) included fair value adjustments of contingent consideration liabilities | Metric | Three-months Ended June 30, 2019 (in thousands) | Three-months Ended July 1, 2018 (in thousands) | Six-months Ended June 30, 2019 (in thousands) | Six-months Ended July 1, 2018 (in thousands) | | :----- | :---------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Foreign currency gain (loss) | $140 | $(195) | $(108) | $(329) | | Investment income | $5,223 | $3,559 | $10,128 | $6,799 | | Other income (expense) | $(144) | $(246) | $783 | $31 | - Investment income increased by **$1.664 million** (**47%**) for the three-month period and **$3.329 million** (**49%**) for the six-month period, driven by higher yields on debt securities and additional funds available for investment[115](index=115&type=chunk) [Income Tax Expense](index=29&type=section&id=Income%20Tax%20Expense) The effective tax rate was **14%** for the three-month period and **12%** for the six-month period in 2019, compared to **16%** and **11%** in 2018, respectively. This includes significant discrete tax benefits from stock option exercises. Excluding these benefits, the effective tax rate was **17%** for both three-month periods and **16%** for both six-month periods | Metric | Three-months Ended June 30, 2019 | Three-months Ended July 1, 2018 | Six-months Ended June 30, 2019 | Six-months Ended July 1, 2018 | | :----- | :------------------------------- | :------------------------------ | :----------------------------- | :---------------------------- | | Effective Tax Rate | 14% | 16% | 12% | 11% | | Decrease in tax expense from stock options | $1,248k | $654k | $3,978k | $5,589k | - Excluding the impact of discrete tax events, the effective tax rate was **17%** for both three-month periods and **16%** for both six-month periods[117](index=117&type=chunk) - The Company's foreign effective tax rate is lower than U.S. statutory rates due to international intellectual property held by a subsidiary in a jurisdiction that does not tax this income[117](index=117&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position with **$861.623 million** in cash and investments as of June 30, 2019. Operating cash flow increased significantly, funding stock repurchases, dividends, and capital expenditures. The company has no long-term debt and expects existing cash and operations to meet future needs - The Company's accumulated cash and investment balance was **$861.623 million** as of June 30, 2019[118](index=118&type=chunk) - Net cash provided by operations for the six months ended June 30, 2019, was **$120.150 million**, primarily funding stock repurchases (**$61.690 million**), dividend payments (**$17.146 million**), and capital expenditures (**$8.969 million**)[118](index=118&type=chunk) - The Company has no long-term debt and believes its existing cash and investment balances, along with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months[118](index=118&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) [New Pronouncements](index=30&type=section&id=New%20Pronouncements) This section refers to Note 2 for a full description of recently issued accounting pronouncements, their expected adoption dates, and their anticipated impact on the company's financial position and results of operations - Refer to Part I - Note 2 for a full description of recently issued accounting pronouncements, including expected adoption dates and impact on financial position and results of operations[121](index=121&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There have been no material changes to the company's exposures to market risk since December 31, 2018 - No material changes to the Company's exposures to market risk have occurred since December 31, 2018[121](index=121&type=chunk) [Item 4. Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the Chief Executive Officer and the Principal Financial & Accounting Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2019. No material changes to internal control over financial reporting occurred during the quarter - The Chief Executive Officer and Principal Financial & Accounting Officer concluded that disclosure controls and procedures were effective as of June 30, 2019[123](index=123&type=chunk) - There was no material change in the Company's internal control over financial reporting during the quarter ended June 30, 2019[123](index=123&type=chunk) PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety disclosures, other information, and a list of exhibits [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened, but management believes any liability arising from them will not have a material adverse effect on the company's financial position, liquidity, or results of operations - Various claims and legal proceedings are pending or threatened, generally incidental to the normal course of business[125](index=125&type=chunk) - Management believes any liability from these matters will not have a material adverse effect on the Company's financial position, liquidity, or results of operations[125](index=125&type=chunk) [Item 1A. Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the detailed discussion of risk factors in Part I—Item 1A of the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - For a list of factors that could affect the Company's business, results of operations, and financial condition, refer to the risk factors discussion in Part I—Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[126](index=126&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the three-month period ended June 30, 2019, the company repurchased **1.398 million** shares of common stock at an average price of **$44.10** per share under its **$200 million** repurchase program. As of June 30, 2019, **$129.688 million** remained available under the program | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------- | | April 1 - April 28, 2019 | — | — | $191,378,000 | | April 29 - May 26, 2019 | 639,221 | $45.54 | $162,267,000 | | May 27 - June 30, 2019 | 759,600 | $42.89 | $129,688,000 | | Total (3-month period) | 1,398,821 | $44.10 | $129,688,000 | - The repurchases were made under a **$200 million** program authorized in October 2018[127](index=127&type=chunk) [Item 3. Defaults Upon Senior Securities](index=32&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - The Company reported no defaults upon senior securities[127](index=127&type=chunk) [Item 4. Mine Safety Disclosures](index=32&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Mine Safety Disclosures are not applicable to the Company[127](index=127&type=chunk) [Item 5. Other Information](index=32&type=section&id=Item%205.%20Other%20Information) No other information was reported under this item - No other information was reported under this item[127](index=127&type=chunk) [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including various agreements, certifications (CEO, CFO), and XBRL-related documents - Exhibits include Letter Agreement, Stock Option Agreement, Certifications of Principal Executive Officer and Principal Financial Officer, and various XBRL documents[129](index=129&type=chunk) SIGNATURES This section contains the official signatures certifying the submission of the report [Signatures](index=34&type=section&id=Signatures) The report is signed by Robert J. Willett, President and Chief Executive Officer, and Laura A. MacDonald, Vice President and Corporate Controller, on July 29, 2019, certifying its submission - The report was signed on July 29, 2019, by Robert J. Willett, President and Chief Executive Officer, and Laura A. MacDonald, Vice President and Corporate Controller[132](index=132&type=chunk)

Financial Data and Key Metrics Changes - Q1 revenue was $173.5 million, representing a year-on-year growth of 5% when excluding foreign exchange impacts, with logistics showing strong growth despite weaknesses in Greater China and the automotive sector in the Americas [20][22] - Gross margin decreased to 73% from 76% in Q1 2018, primarily due to unfavorable absorption of manufacturing overhead costs [20] - Operating margin was 17% in Q1 2019 compared to 20% in Q1 2018, with a slight increase in operating expenses negatively impacting the margin [21] Business Line Data and Key Metrics Changes - Consumer electronics revenue is expected to decline by approximately one-third in 2019, marking the second consecutive down year for this segment [8][65] - Automotive revenue is relatively flat due to lower sales in China and the Americas, with manufacturers scaling back on large automation projects [10] - Logistics continued to show strong year-on-year growth, driven by e-commerce and automation needs in distribution centers [12] Market Data and Key Metrics Changes - Europe experienced low-double-digit growth year-on-year, contributing the largest growth in absolute dollars and percentage terms, despite a 6-point negative impact from currency exchange rates [22] - The Americas also grew by low double digits, primarily due to higher revenue from logistics customers, offset by lower automotive revenue [22] - Greater China saw a decline in revenue year-on-year, with a significant negative impact from currency exchange rates contributing to the downturn [23] Company Strategy and Development Direction - Cognex aims to reallocate resources to high-potential areas during market slowdowns, focusing on logistics, deep learning, 3D vision, mobile terminals, and life sciences for long-term growth [13] - New product introductions, such as the DataMan 370 series and advanced 3D vision systems, are expected to enhance Cognex's competitive position in the market [14][16] Management's Comments on Operating Environment and Future Outlook - Management anticipates a slight overall revenue decline in 2019 due to market conditions, particularly in consumer electronics and automotive sectors [7][26] - There is confidence in long-term growth potential in China, despite current softness, as automation adoption continues to rise across various industries [33][81] Other Important Information - Cognex has a strong balance sheet with $864 million in cash and investments and no debt, with inventory decreasing by 5% from the end of 2018 [24] - The company plans to resume share buybacks in Q2 2019 after pausing in Q1 [72] Q&A Session Summary Question: Insights on the Chinese market and potential recovery - Management acknowledges the current softness in China but believes in the long-term growth potential, with capital expenditures expected to rebound if confidence returns [31][33] Question: Competition in 3D vision and logistics - Cognex recognizes increased competition but sees significant growth potential in 3D vision applications within logistics, with new product launches enhancing their market position [35][36] Question: Automotive market outlook - Management sees potential for sequential growth in the automotive sector, contingent on resolving uncertainties in consumer spending and trade [52] Question: Consumer electronics market dynamics - The company expects a decline in consumer electronics revenue due to deferred investments by large customers, focusing instead on upgrading existing lines [64][65] Question: Deep learning integration into products - While Cognex is excited about deep learning capabilities, specific product launch details remain undisclosed [68][69] Question: Acquisition strategy and market opportunities - Cognex is continuously evaluating acquisition opportunities, focusing on small technology companies that align with their culture and growth strategy [78][79]

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q) This section details Cognex Corporation's Form 10-Q filing, confirming its large accelerated filer status for the period ended March 31, 2019 [General Information](index=1&type=section&id=General%20Information) This section provides general filing details for Cognex Corporation's Form 10-Q, including its large accelerated filer status and reporting period - Type of Report: **Quarterly Report on Form 10-Q** for the period ended March 31, 2019[2](index=2&type=chunk) - Registrant Status: **Large accelerated filer**[5](index=5&type=chunk) - Common Stock Outstanding (March 31, 2019): **171,536,645 shares**[7](index=7&type=chunk) [PART I: FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This part presents the unaudited consolidated financial statements and management's discussion and analysis for the interim period [Item 1. Financial Statements (interim periods unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(interim%20periods%20unaudited)) This section presents Cognex Corporation's unaudited interim consolidated financial statements, including operations, balance sheets, cash flows, and detailed notes [Consolidated Statements of Operations](index=3&type=section&id=Consolidated%20Statements%20of%20Operations) For Q1 2019, revenue increased 2% year-over-year, but net income and diluted EPS decreased, with gross margin declining to 73% Consolidated Statements of Operations (Three-months Ended) | Metric (in thousands, except per share) | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :-------------------------------------- | :------------- | :------------ | :------------- | | Revenue | $173,484 | $169,567 | 2.3% | | Cost of revenue | $46,284 | $40,198 | 15.1% | | Gross margin | $127,200 | $129,369 | -1.7% | | Gross margin % | 73.3% | 76.3% | -3.0 pp | | Operating income | $30,147 | $34,596 | -12.9% | | Net income | $33,104 | $37,217 | -11.0% | | Basic EPS | $0.19 | $0.21 | -9.5% | | Diluted EPS | $0.19 | $0.21 | -9.5% | | Cash dividends per common share | $0.050 | $0.045 | 11.1% | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income decreased 11.3% year-over-year in Q1 2019, driven by lower net income and reduced foreign currency translation adjustments Consolidated Statements of Comprehensive Income (Three-months Ended) | Metric (in thousands) | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :--------------------------------------------------- | :------------- | :------------ | :------------- | | Net income | $33,104 | $37,217 | -11.0% | | Net change related to available-for-sale investments | $2,211 | ($1,214) | N/A | | Net change related to foreign currency translation | $218 | $4,056 | -94.6% | | Other comprehensive income (loss), net of tax | $2,429 | $2,842 | -14.5% | | Total comprehensive income | $35,533 | $40,059 | -11.3% | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2019, total assets increased 5% due to non-current investments, with liabilities and shareholders' equity also showing growth Consolidated Balance Sheets (as of) | Metric (in thousands) | March 31, 2019 | December 31, 2018 | Change (%) | | :------------------------------------- | :------------- | :---------------- | :--------- | | **ASSETS** | | | | | Total current assets | $773,245 | $780,326 | -0.9% | | Non-current investments | $317,054 | $262,039 | 21.8% | | Total assets | $1,353,772 | $1,289,667 | 5.0% | | **LIABILITIES** | | | | | Total current liabilities | $93,045 | $91,357 | 1.8% | | Total liabilities | $164,913 | $154,404 | 6.8% | | **SHAREHOLDERS' EQUITY** | | | | | Total shareholders' equity | $1,188,859 | $1,135,263 | 4.7% | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Q1 2019 saw an 11.8% increase in operating cash flow, a shift to net cash used in investing, and a change in financing activities due to reduced stock repurchases Consolidated Statements of Cash Flows (Three-months Ended) | Metric (in thousands) | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :------------------------------------------ | :------------- | :------------ | :------------- | | Net cash provided by operating activities | $61,261 | $54,786 | 11.8% | | Net cash provided by (used in) investing activities | ($70,102) | $12,959 | N/A |\ | Net cash provided by (used in) financing activities | $5,782 | ($65,866) | N/A |\ | Net change in cash and cash equivalents | ($2,916) | $2,990 | N/A |\ | Cash and cash equivalents at end of period | $105,296 | $109,572 | -3.9% | [Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity increased to $1,188,859 thousand as of March 31, 2019, driven by net income and stock issuances, partially offset by dividends Consolidated Statements of Shareholders' Equity (Three-months Ended) | Metric (in thousands) | March 31, 2019 | December 31, 2018 | | :--------------------------------------------------- | :------------- | :---------------- | | Balance as of December 31, 2018 | N/A | $1,135,263 | | Issuance of common stock under stock plans | $14,346 | N/A | | Stock-based compensation expense | $12,281 | N/A | | Payment of dividends | ($8,564) | N/A | | Net income | $33,104 | N/A | | Net unrealized gain (loss) on available-for-sale investments, net of tax | $2,251 | N/A |\ | Reclassification of net realized (gain) loss | ($40) | N/A | | Foreign currency translation adjustment | $218 | N/A | | Balance as of March 31, 2019 | $1,188,859 | N/A | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide detailed explanations for the consolidated financial statements, covering accounting policies, fair value, cash, investments, leases, and revenue [NOTE 1: Summary of Significant Accounting Policies](index=9&type=section&id=NOTE%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines significant accounting policies, including the adoption of ASC 842 'Leases' from January 1, 2019, for interim financial statements - Interim financial statements are condensed, unaudited, and include normal, recurring adjustments[29](index=29&type=chunk) - Adopted **ASC 842 "Leases"** on January 1, 2019, recognizing lease assets and liabilities on the balance sheet[29](index=29&type=chunk)[30](index=30&type=chunk) - Leases are classified as finance or operating based on specific criteria, with operating lease expense recognized on a straight-line basis[31](index=31&type=chunk)[33](index=33&type=chunk) [NOTE 2: New Pronouncements](index=10&type=section&id=NOTE%202%3A%20New%20Pronouncements) This note discusses new accounting pronouncements, including ASUs on credit losses, callable debt, and internal-use software, with no material impact expected - ASU 2016-13 (Credit Losses) effective after December 15, 2019; no material impact expected[34](index=34&type=chunk) - ASU 2017-08 (Premium Amortization on Callable Debt Securities) effective after December 15, 2019; no material impact expected[34](index=34&type=chunk) - ASU 2018-15 (Internal-Use Software) effective after December 15, 2019; no material impact expected[35](index=35&type=chunk) [NOTE 3: Fair Value Measurements](index=11&type=section&id=NOTE%203%3A%20Fair%20Value%20Measurements) This note details fair value measurements for financial assets and liabilities, categorized into Level 1, 2, and 3, with Level 3 contingent consideration liabilities Financial Assets and Liabilities Measured at Fair Value (March 31, 2019, in thousands) | Asset/Liability | Level 1 (Quoted Prices) | Level 2 (Observable Inputs) | Level 3 (Unobservable Inputs) | | :------------------------------- | :---------------------- | :-------------------------- | :---------------------------- | | Money market instruments | $10,883 | — | — | | Treasury bills | — | $295,106 | — | | Corporate bonds | — | $289,873 | — | | Asset-backed securities | — | $140,370 | — | | Sovereign bonds | — | $21,791 | — | | Agency bonds | — | $5,913 | — | | Municipal bonds | — | $5,338 | — | | Economic hedge forward contracts | — | $34 | — | | Economic hedge forward contracts | — | $31 | — | | Contingent consideration liabilities | — | — | $1,569 | - Contingent consideration liabilities are Level 3, valued using probability-adjusted present values and unobservable inputs like revenue milestone likelihood[38](index=38&type=chunk) [NOTE 4: Cash, Cash Equivalents, and Investments](index=11&type=section&id=NOTE%204%3A%20Cash%2C%20Cash%20Equivalents%2C%20and%20Investments) Cash, cash equivalents, and investments totaled $863,687 thousand as of March 31, 2019, an increase from year-end 2018, primarily in debt securities Cash, Cash Equivalents, and Investments (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :---------------------- | :------------- | :---------------- | | Cash and cash equivalents | $105,296 | $108,212 | | Current investments | $441,337 | $427,348 | | Non-current investments | $317,054 | $262,039 | | Total | $863,687 | $797,599 | - As of March 31, 2019, the Company had **$758,391 thousand** in available-for-sale investments, with gross unrealized gains of **$1,253 thousand** and gross unrealized losses of **$705 thousand**[39](index=39&type=chunk) - The Company does not intend to sell, and is unlikely to be required to sell, any available-for-sale investments in an unrealized loss position before their effective maturity or market price recovery[41](index=41&type=chunk) [NOTE 5: Inventories](index=13&type=section&id=NOTE%205%3A%20Inventories) Inventories decreased to $79,208 thousand as of March 31, 2019, primarily due to reductions in raw materials and work-in-process Inventories (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :---------------- | :------------- | :---------------- | | Raw materials | $37,491 | $42,738 | | Work-in-process | $2,891 | $3,435 | | Finished goods | $38,826 | $37,109 | | Total Inventories | $79,208 | $83,282 | [NOTE 6: Leases](index=13&type=section&id=NOTE%206%3A%20Leases) The Company adopted ASC 842 'Leases' on January 1, 2019, recognizing lease assets and liabilities for its operating leases, primarily for properties - Adopted ASC 842 on January 1, 2019, recording **$17,522 thousand** in lease assets and **$17,405 thousand** in lease liabilities[42](index=42&type=chunk) - All leases are classified as operating leases, primarily for properties across different worldwide locations[46](index=46&type=chunk) - Total operating lease expense for the three months ended March 31, 2019, was **$1,485 thousand**, with a weighted-average discount rate of **4.8%** and a remaining lease term of **4.1 years**[47](index=47&type=chunk)[49](index=49&type=chunk) [NOTE 7: Intangible Assets](index=14&type=section&id=NOTE%207%3A%20Intangible%20Assets) Net intangible assets decreased to $9,344 thousand as of March 31, 2019, primarily due to amortization, with completed technologies and customer relationships as key Amortized Intangible Assets (in thousands) | Category | Gross Carrying Value (March 31, 2019) | Accumulated Amortization (March 31, 2019) | Net Carrying Value (March 31, 2019) | Net Carrying Value (Dec 31, 2018) | | :----------------------- | :------------------------------------ | :---------------------------------------- | :---------------------------------- | :-------------------------------- | | Distribution networks | $38,060 | $38,060 | $— | $— | | Completed technologies | $13,687 | $7,230 | $6,457 | $7,068 | | Customer relationships | $8,607 | $5,844 | $2,763 | $2,891 | | Non-compete agreements | $370 | $246 | $124 | $154 | | Total | $60,724 | $51,380 | $9,344 | $10,113 | - Estimated future amortization expense for intangible assets is **$1,932 thousand** for the remainder of fiscal 2019 and **$2,185 thousand** for 2020[53](index=53&type=chunk) [NOTE 8: Warranty Obligations](index=15&type=section&id=NOTE%208%3A%20Warranty%20Obligations) Warranty obligations are estimated at the time of sale based on historical claims and are recorded within 'Accrued expenses' - Warranty obligations are estimated at the time of sale based on historical costs and are included in "Accrued expenses"[54](index=54&type=chunk) [NOTE 9: Derivative Instruments](index=15&type=section&id=NOTE%209%3A%20Derivative%20Instruments) Cognex uses foreign currency forward contracts as economic hedges for foreign currency risk from receivables and payables, without hedge accounting designation - The Company uses foreign currency forward contracts as economic hedges to manage foreign currency risk, primarily from foreign-denominated receivables and payables[55](index=55&type=chunk) - These economic hedges are not designated for hedge accounting treatment[58](index=58&type=chunk) - For the three months ended March 31, 2019, the Company recognized a foreign currency gain of **$505 thousand** from derivatives, compared to a loss of **$310 thousand** in the prior year[58](index=58&type=chunk) [NOTE 10: Revenue Recognition](index=17&type=section&id=NOTE%2010%3A%20Revenue%20Recognition) Total revenue for Q1 2019 was $173,484 thousand, with Americas growth offset by declines in Greater China and Other Asia, primarily from standard products Disaggregated Revenue by Geographic Area (Three-months Ended, in thousands) | Geographic Area | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :-------------- | :------------- | :------------ | :------------- | | Americas | $65,156 | $59,217 | 10.0% | | Europe | $59,657 | $56,203 | 6.1% | | Greater China | $22,810 | $27,159 | -16.0% | | Other Asia | $25,861 | $26,988 | -4.2% | | Total | $173,484 | $169,567 | 2.3% | Disaggregated Revenue by Revenue Type (Three-months Ended, in thousands) | Revenue Type | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :-------------------------------- | :------------- | :------------ | :------------- | | Standard products and services | $161,052 | $158,399 | 1.7% | | Application-specific customer solutions | $12,432 | $11,168 | 11.3% |\ | Total | $173,484 | $169,567 | 2.3% | - Deferred revenue and customer deposits increased from **$9,845 thousand** at December 31, 2018, to **$16,625 thousand** at March 31, 2019[62](index=62&type=chunk) [NOTE 11: Stock-Based Compensation Expense](index=17&type=section&id=NOTE%2011%3A%20Stock-Based%20Compensation%20Expense) Stock-based compensation expense decreased to $12,281 thousand in Q1 2019, with 2,761 thousand stock options granted at a weighted-average exercise price of $51.49 Stock Option Activity (Three-months Ended March 31, 2019, in thousands) | Metric | Shares | Weighted-Average Exercise Price | | :-------------------------------------- | :----- | :------------------------------ | | Outstanding as of December 31, 2018 | 13,789 | $31.73 | | Granted | 2,761 | $51.49 | | Exercised | (717) | $20.03 | | Forfeited or expired | (139) | $41.73 | | Outstanding as of March 31, 2019 | 15,694 | $35.65 | | Exercisable as of March 31, 2019 | 6,289 | $24.86 | - Total unrecognized compensation expense related to non-vested stock options was **$75,985 thousand** as of March 31, 2019, expected to be recognized over **2.14 years**[72](index=72&type=chunk) Stock-Based Compensation Expense by Caption (Three-months Ended, in thousands) | Caption | March 31, 2019 | April 1, 2018 | | :------------------------------------- | :------------- | :------------ | | Cost of revenue | $451 | $797 | | Research, development, and engineering | $4,467 | $4,815 | | Selling, general, and administrative | $7,363 | $7,582 | | Total | $12,281 | $13,194 | [NOTE 12: Stock Repurchase Program](index=19&type=section&id=NOTE%2012%3A%20Stock%20Repurchase%20Program) The Board authorized a $200 million stock repurchase program in October 2018, with no repurchases in Q1 2019, leaving $191,378 thousand available - Board authorized a **$200 million** stock repurchase program in October 2018[73](index=73&type=chunk) - As of March 31, 2019, **$8,622 thousand** was used to repurchase **203,000 shares**; **$191,378 thousand** remains authorized. No shares were repurchased in Q1 2019[73](index=73&type=chunk) [NOTE 13: Taxes](index=19&type=section&id=NOTE%2013%3A%20Taxes) The effective tax rate increased to 7% in Q1 2019, influenced by foreign tax rate differentials and discrete tax benefits from stock option exercises Effective Tax Rate Reconciliation (Three-months Ended) | Factor | March 31, 2019 | April 1, 2018 | | :---------------------------------------------- | :------------- | :------------ | | Income tax expense at U.S federal statutory rate | 21% | 21% | | State income taxes, net of federal benefit | 1% | 1% | | Foreign tax rate differential | (9)% | (7)% | | Discrete tax benefit from stock option exercises | (8)% | (13)% | | Other | 2% | 1% | | Income tax expense (Effective Tax Rate) | 7% | 2% | - Major tax jurisdictions include the United States, Ireland (**12.5% statutory rate**), and China (**25% statutory rate**)[77](index=77&type=chunk) - A potential release of **$1,250,000 to $1,350,000** in income tax reserves is possible over the next twelve months due to the expiration of certain statutes of limitations[77](index=77&type=chunk) [NOTE 14: Weighted-Average Shares](index=20&type=section&id=NOTE%2014%3A%20Weighted-Average%20Shares) Diluted weighted-average shares outstanding decreased to 175,607 thousand in Q1 2019 from 179,641 thousand in the prior year Weighted-Average Shares (in thousands) | Metric | March 31, 2019 | April 1, 2018 | | :---------------------------------------------- | :------------- | :------------ | | Basic weighted-average common shares outstanding | 171,098 | 173,280 | | Effect of dilutive stock options | 4,509 | 6,361 | | Diluted weighted-average shares outstanding | 175,607 | 179,641 | - Stock options to purchase **4,832,000 shares** (2019) and **1,339,000 shares** (2018) were anti-dilutive and excluded from diluted EPS calculation[78](index=78&type=chunk) [NOTE 15: Subsequent Events](index=20&type=section&id=NOTE%2015%3A%20Subsequent%20Events) On April 29, 2019, the Board declared a cash dividend of $0.050 per share, payable on May 31, 2019 - A cash dividend of **$0.050 per share** was declared on April 29, 2019, payable on May 31, 2019[79](index=79&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2019 financial performance, highlighting revenue growth from logistics, declines in automotive and Greater China, and changes in key financial metrics [Forward-Looking Statements](index=21&type=section&id=Forward-Looking%20Statements) This section cautions that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations - Statements regarding business trends, future financial performance, customer orders, growth areas, product mix, R&D, investments, and strategic plans are forward-looking[81](index=81&type=chunk) - Risks include loss of large customers, global economic conditions (tariffs/export controls), reliance on consumer electronics/automotive, inability to penetrate new markets, foreign currency fluctuations, cybersecurity breaches, and inability to retain skilled employees[81](index=81&type=chunk) [Executive Overview](index=21&type=section&id=Executive%20Overview) Cognex, a machine vision leader, saw Q1 2019 revenue increase 2% driven by logistics, offset by automotive and Greater China declines, with reduced profitability - Cognex is a leading worldwide provider of machine vision products for automating tasks in manufacturing and logistics[82](index=82&type=chunk) Q1 2019 Performance Overview | Metric | Q1 2019 | Q1 2018 | YoY Change | | :---------------------- | :------ | :------ | :--------- | | Revenue | $173,484K | $169,567K | +2% | | Gross Margin % | 73% | 76% | -3 pp | | Operating Income % | 17% | 20% | -3 pp | | Net Income % | 19% | 22% | -3 pp | | Net Income per Diluted Share | $0.19 | $0.21 | -9.5% | - Strong sales in the logistics industry were partially offset by slowing order trends in the automotive industry in the Americas and lower demand from customers in Greater China[82](index=82&type=chunk) [Results of Operations](index=22&type=section&id=Results%20of%20Operations) This section analyzes Q1 2019 financial performance, detailing revenue, gross margin, operating expenses, non-operating items, and income tax expense [Revenue](index=22&type=section&id=Revenue) Q1 2019 revenue increased 2% to $173,484 thousand (5% constant-currency), driven by Americas and Europe logistics, despite a 16% decline in Greater China Revenue Performance (Three-months Ended) | Metric | March 31, 2019 | April 1, 2018 | YoY Change | Constant-Currency Change | | :------------------------------------ | :------------- | :------------ | :--------- | :----------------------- | | Total Revenue | $173,484K | $169,567K | +2% | +5% | | Americas Sales Growth | +10% | N/A | N/A | N/A | | Europe Sales Growth | +6% | N/A | +12% | N/A | | Greater China Sales Growth | -16% | N/A | -10% | N/A | | Other Asia Sales Growth | -4% | N/A | N/A | N/A | - Foreign currency exchange rates decreased revenue by approximately **3%**[85](index=85&type=chunk) - Full-year 2019 revenue is expected to be slightly lower than 2018, with higher logistics revenue offset by significantly lower consumer electronics revenue[87](index=87&type=chunk) [Gross Margin](index=22&type=section&id=Gross%20Margin) Gross margin declined to 73% in Q1 2019 due to unfavorable manufacturing overhead, negative foreign currency, and a shift to lower-margin logistics sales Gross Margin Percentage | Period | Gross Margin % | | :----- | :------------- | | Q1 2019 | 73% | | Q1 2018 | 76% | - Decline due to unfavorable absorption of manufacturing overhead, negative foreign currency impact, and product mix shift to lower-margin logistics sales[88](index=88&type=chunk) - Gross margin percentage is expected to be in the **mid-70s range** for Q2 2019[88](index=88&type=chunk) [Operating Expenses](index=22&type=section&id=Operating%20Expenses) Total operating expenses increased 2% year-over-year, with RD&E slightly down due to reduced outsourced services, and SG&A up due to higher personnel costs [Research, development, and engineering (RD&E) expenses](index=22&type=section&id=Research%2C%20development%2C%20and%20engineering%20(RD%26E)%20expenses) RD&E expenses decreased 3% to $30,242 thousand in Q1 2019, as higher personnel costs were offset by reduced outsourced services and prototyping RD&E Expenses (Three-month period, in thousands) | Metric | Q1 2018 | Personnel-related costs | Outsourced engineering services | Prototyping materials | Foreign currency exchange rate changes | Other | Q1 2019 | | :------------------------------------ | :------ | :---------------------- | :------------------------------ | :-------------------- | :------------------------------------- | :---- | :------ | | RD&E expenses | $31,076 | $1,099 | ($394) | ($485) | ($729) | ($325) | $30,242 | - RD&E expenses as a percentage of revenue were **17%** in Q1 2019, down from **18%** in Q1 2018[92](index=92&type=chunk) - The Company targets RD&E spending to be between **10% and 15% of revenue** annually[92](index=92&type=chunk) [Selling, General, and Administrative (SG&A) Expenses](index=23&type=section&id=Selling%2C%20General%2C%20and%20Administrative%20(SG%26A)%20Expenses) SG&A expenses increased 5% to $66,811 thousand in Q1 2019, driven by higher personnel costs, partially offset by lower ERP project costs and favorable foreign currency SG&A Expenses (Three-month period, in thousands) | Metric | Q1 2018 | Personnel-related costs | ERP project costs | Foreign currency exchange rate changes | Other | Q1 2019 | | :------------------------------------ | :------ | :---------------------- | :---------------- | :------------------------------------- | :---- | :------ | | SG&A expenses | $63,697 | $7,785 | ($1,245) | ($1,685) | ($1,741) | $66,811 | - Increase driven by headcount additions, principally sales personnel, and related costs like commissions and travel[93](index=93&type=chunk) - Partially offset by the absence of ERP project costs incurred in Q1 2018[93](index=93&type=chunk) [Non-operating Income (Expense)](index=23&type=section&id=Non-operating%20Income%20(Expense)) Q1 2019 saw increased foreign currency losses, a 51% rise in investment income to $4,905 thousand, and higher other income from contingent consideration revaluation Non-operating Income (Expense) (Three-months Ended, in thousands) | Metric | March 31, 2019 | April 1, 2018 | YoY Change (%) | | :--------------------------- | :------------- | :------------ | :------------- | | Foreign currency gain (loss) | ($248) | ($134) | -85.1% | | Investment income | $4,905 | $3,240 | 51.4% | | Other income (expense) | $927 | $277 | 234.6% | - Investment income increase due to higher yields on debt securities and additional funds for investment[94](index=94&type=chunk) - Other income included a net benefit from revaluation of contingent consideration liabilities (**$985K** in Q1 2019 vs. **$442K** in Q1 2018)[94](index=94&type=chunk) [Income Tax Expense](index=23&type=section&id=Income%20Tax%20Expense) The effective tax rate increased to 7% in Q1 2019 from 2% in Q1 2018, with a consistent 15% rate excluding discrete stock option tax events Income Tax Expense and Effective Tax Rate | Metric | March 31, 2019 | April 1, 2018 | | :---------------------------------------------- | :------------- | :------------ | | Income tax expense (in thousands) | $2,627 | $762 | | Effective tax rate | 7% | 2% | | Effective tax rate (excluding discrete tax events) | 15% | 15% | - Discrete tax benefits from stock option exercises decreased the effective tax rate by **8 percentage points** in Q1 2019 and **13 percentage points** in Q1 2018[95](index=95&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) The Company maintains strong liquidity with $863,687 thousand in cash and investments, with operating cash flows funding Q1 2019 requirements and expected to be sufficient - Total cash and investment balance was **$863,687 thousand** as of March 30, 2019[98](index=98&type=chunk) - Q1 2019 cash requirements were met by positive cash flows from operations, which included a reduction in accounts receivable and inventory levels[98](index=98&type=chunk) - Capital expenditures totaled **$5,078 thousand** in Q1 2019[98](index=98&type=chunk) - The Company paid **$8,564 thousand** in cash dividends in Q1 2019[98](index=98&type=chunk) - No shares were repurchased under the **$200 million** stock repurchase program in Q1 2019; **$191,378 thousand** remains authorized[98](index=98&type=chunk) - Management believes existing cash and investments, along with operating cash flow, will be sufficient for the next twelve months[98](index=98&type=chunk) [New Pronouncements](index=24&type=section&id=New%20Pronouncements) This section refers to Note 2 for details on new accounting pronouncements, their adoption dates, and anticipated impact on financial statements - Refer to Note 2 for details on new accounting pronouncements and their expected impact[99](index=99&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=24&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes to the Company's market risk exposures have occurred since December 31, 2018 - No material changes to market risk exposures since December 31, 2018[100](index=100&type=chunk) [Item 4. Controls and Procedures](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during Q1 - Disclosure controls and procedures were effective as of March 31, 2019[101](index=101&type=chunk) - No material changes in internal control over financial reporting during Q1 2019[101](index=101&type=chunk) [PART II: OTHER INFORMATION](index=25&type=section&id=PART%20II%20OTHER%20INFORMATION) This part includes other information such as legal proceedings, risk factors, equity sales, defaults, and exhibits [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) Pending legal claims are not expected to have a material adverse effect on the Company's financial position, liquidity, or results of operations - Pending legal proceedings are incidental to normal business, and any liability is not expected to have a material adverse effect on financial position, liquidity, or results of operations[103](index=103&type=chunk) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the Annual Report on Form 10-K for a comprehensive discussion of risk factors affecting the Company's business and financial condition - For a comprehensive list of risk factors, refer to Part I—Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018[104](index=104&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=25&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No common stock was repurchased in Q1 2019 under the authorized program, leaving $191,378 thousand available for future repurchases Common Stock Purchases (Three-month period ended March 31, 2019) | Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--------------------------- | :------------------------------- | :---------------------- | :------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | January 1 - January 27, 2019 | — | $— | — | $191,378,000 | | January 28 - February 24, 2019 | — | $— | — | $191,378,000 | | February 25 - March 31, 2019 | — | $— | — | $191,378,000 | | Total | — | $— | — | $191,378,000 | - No shares were repurchased during the first quarter of 2019 under the **$200 million** stock repurchase program authorized in October 2018[105](index=105&type=chunk) [Item 3. Defaults Upon Senior Securities](index=25&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities[105](index=105&type=chunk) [Item 4. Mine Safety Disclosures](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Company's operations - Not applicable[105](index=105&type=chunk) [Item 5. Other Information](index=25&type=section&id=Item%205.%20Other%20Information) The Shareholder Rights Agreement expired on December 5, 2018, and Series E Preferred Stock was eliminated effective April 26, 2019 - Shareholder Rights Agreement and associated rights expired on December 5, 2018[105](index=105&type=chunk) - Series E Junior Participating Cumulative Preferred Stock was eliminated effective April 26, 2019[105](index=105&type=chunk) [Item 6. Exhibits](index=26&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, CEO/CFO certifications, and XBRL financial data - Includes organizational documents (Restated Articles of Organization, Articles of Amendment), CEO/CFO certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. 1350), and XBRL financial data[107](index=107&type=chunk) [Signatures](index=27&type=section&id=Signatures) The report is signed by the President and CEO, and SVP of Finance and CFO, on April 29, 2019, certifying its submission - Report signed by Robert J. Willett (President and CEO) and John J. Curran (SVP of Finance and CFO) on April 29, 2019[110](index=110&type=chunk)

Cognex Corporation (NASDAQ:CGNX) Q4 2018 Earnings Conference Call February 14, 2019 5:00 PM ET Company Participants John Curran - CFO Bob Shillman - Chairman Rob Willett - President and CEO Conference Call Participants Josh Pokrzywinski - Morgan Stanley Richard Eastman - Robert W. Baird & Company Joe Ritchie - Goldman Sachs Jim Ricchiuti - Needham & Company Paul Coster - JP Morgan Joe Giordano - Cowen and Company Matt Summerville - DA Davidson Andrew Buscaglia - Berenberg Capital Markets Ben Rose - Battle R ...

Part I [Business](index=3&type=section&id=ITEM%201.%20BUSINESS) Cognex is a leading global provider of machine vision products, automating manufacturing and logistics, driven by R&D and reliant on key customers - Cognex is a **leading provider** of **machine vision products** that automate tasks in manufacturing by locating, identifying, inspecting, and measuring discrete items[8](index=8&type=chunk) - The company's business strategy focuses on expanding its market leadership through **significant investment in R&D**, targeting **high-growth markets** like consumer electronics, automotive, and logistics, and utilizing a dual direct and indirect sales channel[11](index=11&type=chunk)[12](index=12&type=chunk) Revenue Concentration from Apple Inc. | Year | Percentage of Total Revenue | | :--- | :--- | | 2018 | **15%** | | 2017 | **20%** | | 2016 | **17%** | Research, Development, and Engineering (RD&E) Expenses | Year | RD&E Expense (in thousands) | % of Revenue | | :--- | :--- | :--- | | 2018 | **$116,445** | **14%** | | 2017 | **$99,205** | **13%** | | 2016 | **$78,269** | **15%** | - Product manufacturing is **primarily outsourced** to a **third-party contract manufacturer** located in Indonesia, with final software loading and quality control performed at Cognex facilities in Ireland and the USA[20](index=20&type=chunk) - As of December 31, 2018, Cognex employed **2,124 people**, with **1,246** in sales, marketing, and service roles and **508** in R&D[27](index=27&type=chunk) [Risk Factors](index=8&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces multiple risks from customer concentration, industry downturns, international operations, ERP system disruptions, and supply chain reliance - The loss of a **single large customer**, which represented **15% of total revenue** in 2018, could materially and adversely affect operating results[31](index=31&type=chunk) - The business is **highly dependent** on **capital spending** in the **consumer electronics** and **automotive industries**, making it vulnerable to downturns in these sectors[33](index=33&type=chunk) - **International sales** accounted for approximately **71% of revenue** in 2018, exposing the company to risks such as **trade tariffs**, **export controls**, **political instability**, and **foreign currency fluctuations**[35](index=35&type=chunk) - The company faces risks from **information security breaches** and potential disruptions from its new **Enterprise Resource Planning (ERP) system**, which was implemented in mid-2018[37](index=37&type=chunk) - **Rapid growth**, evidenced by a **headcount increase** from **1,771** to **2,124** employees in 2018, presents challenges in **attracting, training, and retaining skilled personnel** while maintaining corporate culture[40](index=40&type=chunk) - Reliance on a single **third-party contractor** in Indonesia for manufacturing and single-source vendors for certain components creates **supply chain risk**[40](index=40&type=chunk) [Unresolved Staff Comments](index=15&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reports no unresolved staff comments from the SEC - **None**[52](index=52&type=chunk) [Properties](index=15&type=section&id=ITEM%202.%20PROPERTIES) Cognex owns its corporate headquarters and a distribution center, while leasing other global facilities through 2025 - The company owns its corporate headquarters in Natick, Massachusetts, and a distribution facility in Cork, Ireland[52](index=52&type=chunk) - Cognex leases other facilities under agreements that expire at various dates through **2025**[52](index=52&type=chunk) [Legal Proceedings](index=15&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company is involved in routine legal proceedings not expected to materially impact its financial position or operations - The company states that pending legal proceedings are not expected to have a **material adverse effect** on its financial position, liquidity, or results of operations[53](index=53&type=chunk) [Mine Safety Disclosures](index=15&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - **Not applicable**[54](index=54&type=chunk) [Executive Officers of the Registrant](index=15&type=section&id=ITEM%204A.%20EXECUTIVE%20OFFICERS%20OF%20THE%20REGISTRANT) This section lists Cognex's executive officers as of December 31, 2018, including their names, ages, and titles Executive Officers as of December 31, 2018 | Name | Age | Title | | :--- | :--- | :--- | | Robert J. Shillman | **72** | Chairman of the Board of Directors and Chief Culture Officer | | Robert J. Willett | **51** | President and Chief Executive Officer | | John J. Curran | **52** | Senior Vice President of Finance and Chief Financial Officer | | Sheila M. DiPalma | **52** | Senior Vice President of Employee Services | Part II [Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](index=16&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%2C%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Cognex common stock trades on NASDAQ, with active stock repurchase programs, including a new $200 million authorization in 2018 - In October **2018**, the Board of Directors authorized a **new $200,000,000 stock repurchase program**. As of December **31**, **2018**, **$191,378,000** remained available under this program[59](index=59&type=chunk) Share Repurchases in Q4 2018 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 29 - Nov 25, 2018 | **937,000** | **$43.62** | | Nov 26 - Dec 31, 2018 | **493,403** | **$41.92** | | **Total Q4 2018** | **1,430,403** | **$43.04** | [Selected Financial Data](index=18&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section provides a five-year summary of key financial data, including statements of operations, balance sheet figures, and per-share data Five-Year Selected Financial Data (In thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenue** | **$806,338** | **$766,083** | **$529,515** | **$470,991** | **$461,006** | | **Operating Income** | **$221,142** | **$258,861** | **$154,066** | **$121,441** | **$135,484** | | **Net Income** | **$219,267** | **$176,712** | **$143,694** | **$187,004** | **$128,163** | | **Diluted EPS** | **$1.24** | **$0.98** | **$0.83** | **$1.06** | **$0.72** | | **Total Assets** | **$1,289,667** | **$1,287,753** | **$1,038,361** | **$877,421** | **$821,399** | | **Shareholders' Equity** | **$1,135,263** | **$1,095,673** | **$963,385** | **$832,331** | **$743,171** | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=20&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) The MD&A covers 2018 revenue growth, margin decline, increased operating expenses, improved net income from tax benefits, and strong liquidity - The company adopted the new revenue recognition standard **ASC 606** on January **1**, **2018**, using the **full retrospective method**, and has restated prior period results accordingly[71](index=71&type=chunk) 2018 Financial Highlights vs. 2017 | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Revenue | **$806.3M** (**+5%**) | **$766.1M** | | Gross Margin | **74.4%** | **75.6%** | | Operating Income as % of Revenue | **27%** | **34%** | | Net Income as % of Revenue | **27%** | **23%** | | Diluted EPS | **$1.24** | **$0.98** | [Results of Operations](index=21&type=section&id=RESULTS%20OF%20OPERATIONS) This section details 2018 revenue growth from logistics, gross margin decline, increased operating expenses, and a lower effective tax rate - **2018 vs. 2017:** Revenue increased **5%**, driven by **over 50% growth** in the **logistics industry**, which offset lower revenue from large customers in OLED display and smartphone manufacturing[75](index=75&type=chunk) - **2018 vs. 2017:** Gross margin decreased to **74.4%** from **75.6%** due to a **higher percentage of revenue** from the **logistics industry**, which has **lower gross margins**[76](index=76&type=chunk) - **2018 vs. 2017:** **Operating expenses increased by 19%** due to **higher personnel-related costs** from headcount additions, principally in **sales and R&D**[79](index=79&type=chunk)[81](index=81&type=chunk) - **2017 vs. 2016:** **Revenue increased by 45%** due to higher volume of **machine vision products** sold in all regions, with **strong contributions** from the logistics and consumer electronics industries[88](index=88&type=chunk)[90](index=90&type=chunk) [Liquidity and Capital Resources](index=25&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company maintains strong liquidity with $797.6 million in cash and investments, funding operations, capital expenditures, stock repurchases, and dividends - As of December **31**, **2018**, the company had **$797.6 million** in **cash and investments** and **no long-term debt**[102](index=102&type=chunk)[107](index=107&type=chunk) 2018 Cash Uses | Activity | Amount (in thousands) | | :--- | :--- | | **Stock Repurchases** | **$203,822** | | **Dividends Paid** | **$31,865** | | **Capital Expenditures** | **$37,095** | Material Contractual Obligations (in thousands) | Obligation Type | Total | Within 1 Year | | :--- | :--- | :--- | | **Purchase Commitments** | **$11,097** | **$11,097** | | **Leases** | **$22,747** | **$7,086** | [Critical Accounting Policies and Estimates](index=27&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) This section outlines critical accounting policies requiring significant judgment, including revenue recognition, investment valuation, impairment testing, and income tax accounting - **Revenue for application-specific customer solutions** is recognized at the point in time when the solution is validated, which requires judgment to determine that agreed-upon specifications have been met[115](index=115&type=chunk) - The company's **investment portfolio of debt securities**, totaling **$689.4 million**, is reported at **fair value**. Management must monitor for **other-than-temporary impairments**, which requires **significant judgment**[116](index=116&type=chunk)[118](index=118&type=chunk) - Management evaluates **goodwill for impairment annually**. The company operates as a **single reporting unit** and uses a **qualitative assessment**, concluding it was not more likely than not that the fair value was less than the carrying amount[124](index=124&type=chunk) - The company recorded an estimated **one-time transition tax** of **$101.4 million** in **2017** due to the Tax Act. In **2018**, this estimate was revised, resulting in a **decrease in tax expense** of **$11.0 million**[132](index=132&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company faces foreign currency exchange rate risk, partially hedged, and unhedged interest rate risk on its investment portfolio - The company faces **significant foreign currency risk**, as approximately **43%** of its **2018** sales were invoiced in currencies other than the U.S. Dollar. It uses **forward contracts** to hedge some of this exposure[139](index=139&type=chunk) - The **investment portfolio of debt securities**, valued at **$689.4 million** as of December **31**, **2018**, is exposed to **interest rate risk**. The company does **not currently hedge this risk**[140](index=140&type=chunk) Interest Rate Risk Sensitivity Analysis (in thousands) | Change in Interest Rates | Change in Fair Value | | :--- | :--- | | **+100 basis points** | **$(3,317)** | | **+50 basis points** | **$(1,658)** | | **-50 basis points** | **$1,658** | | **-100 basis points** | **$3,317** | [Financial Statements and Supplementary Data](index=35&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the company's audited consolidated financial statements for 2018, including operations, balance sheets, cash flows, equity, and notes [Consolidated Statements of Operations](index=37&type=section&id=Consolidated%20Statements%20of%20Operations) The Consolidated Statements of Operations detail the company's financial performance for 2018, 2017, and 2016, including revenue, operating income, net income, and diluted EPS Key Operating Results (in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Revenue | **$806,338** | **$766,083** | **$529,515** | | Gross Margin | **$600,286** | **$578,794** | **$398,445** | | Operating Income | **$221,142** | **$258,861** | **$154,066** | | Net Income | **$219,267** | **$176,712** | **$143,694** | | Diluted EPS | **$1.24** | **$0.98** | **$0.83** | [Consolidated Balance Sheets](index=40&type=section&id=Consolidated%20Balance%20Sheets) The Consolidated Balance Sheets present the company's financial position as of December 31, 2018 and 2017, detailing assets, liabilities, and shareholders' equity Key Balance Sheet Data (in thousands) | Metric | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | **$108,212** | **$106,582** | | Total Investments | **$689,387** | **$721,402** | | Total current assets | **$780,326** | **$629,991** | | Total assets | **$1,289,667** | **$1,287,753** | | Total current liabilities | **$91,357** | **$112,635** | | Total liabilities | **$154,404** | **$192,080** | | Total shareholders' equity | **$1,135,263** | **$1,095,673** | [Consolidated Statements of Cash Flows](index=42&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The Consolidated Statements of Cash Flows summarize cash generated from operations and cash used in investing and financing activities for 2018, 2017, and 2016 Summary of Cash Flows (in thousands) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | **$223,454** | **$224,323** | **$182,081** | | Net cash used in investing activities | **$(10,827)** | **$(105,555)** | **$(121,832)** | | Net cash used in financing activities | **$(209,904)** | **$(100,121)** | **$(29,231)** | | **Net change in cash and cash equivalents** | **$1,630** | **$26,941** | **$27,666** | [Notes to Consolidated Financial Statements](index=44&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on accounting policies, including revenue recognition, segment information, revenue concentration, and business acquisitions - **Note 13:** The company adopted **ASC 606** using the **full retrospective method**, which resulted in restating **2017** revenue up by **$18.1 million** and **2016** revenue up by **$8.8 million**[245](index=245&type=chunk)[246](index=246&type=chunk) - **Note 19:** The company operates in a **single reportable segment**, machine vision technology. A single customer accounted for **15%** of **2018** revenue, **20%** of **2017** revenue, and **17%** of **2016** revenue[294](index=294&type=chunk)[295](index=295&type=chunk) - **Note 21:** The company completed **six business acquisitions** in **2017** and **2016**, which were not significant individually or in the aggregate. Key acquisitions included ViDi Systems S.A. for deep learning software and GVi Ventures, Inc. for automotive vision solutions[297](index=297&type=chunk)[298](index=298&type=chunk)[302](index=302&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=80&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reports no disagreements with its accountants on accounting or financial disclosure matters during 2018 or 2017 - There were **no disagreements** with accountants on accounting or financial disclosure during **2018** or **2017**[322](index=322&type=chunk) [Controls and Procedures](index=80&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2018, post-ERP implementation - The CEO and CFO concluded that **disclosure controls and procedures were effective** as of December **31**, **2018**[323](index=323&type=chunk) - Management concluded that the company's **internal control over financial reporting was effective** as of December **31**, **2018**[324](index=324&type=chunk) - During Q3 **2018**, the company implemented a **new ERP system**, leading to **modifications and additions to its internal controls** over financial reporting[326](index=326&type=chunk) [Other Information](index=82&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) There is no other information to report for this item - **None**[336](index=336&type=chunk) Part III [Directors, Executive Officers, and Corporate Governance](index=82&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%2C%20AND%20CORPORATE%20GOVERNANCE) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is **incorporated by reference** from the company's **definitive Proxy Statement**[337](index=337&type=chunk) [Executive Compensation](index=82&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is **incorporated by reference** from the company's **definitive Proxy Statement**[338](index=338&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=82&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Information on security ownership is incorporated by reference from the Proxy Statement, detailing equity compensation plan securities - Information regarding security ownership is **incorporated by reference** from the company's **definitive Proxy Statement**[339](index=339&type=chunk) Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by shareholders | **13,446,631** | **$32.3592** | **19,578,752** | | Not approved by shareholders | **341,943** | **$6.9819** | — | | **Total** | **13,788,574** | **$31.7298** | **19,578,752** | [Certain Relationships and Related Transactions, and Director Independence](index=83&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is **incorporated by reference** from the company's **definitive Proxy Statement**[342](index=342&type=chunk) [Principal Accounting Fees and Services](index=83&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) Information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is **incorporated by reference** from the company's **definitive Proxy Statement**[343](index=343&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=83&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item lists the financial statements and exhibits filed with the Form **10-K**[345](index=345&type=chunk) [Form 10-K Summary](index=83&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) This item is not applicable - **Not applicable**[345](index=345&type=chunk)