Cognex(CGNX) - 2018 Q4 - Annual Report

Part I Business 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] - 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][12] 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] - 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] Risk Factors 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] - The business is highly dependent on capital spending in the consumer electronics and automotive industries, making it vulnerable to downturns in these sectors[33] - 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] - 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] - 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] - Reliance on a single third-party contractor in Indonesia for manufacturing and single-source vendors for certain components creates supply chain risk[40] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[52] Properties 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] - Cognex leases other facilities under agreements that expire at various dates through 2025[52] Legal Proceedings 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] Mine Safety Disclosures This item is not applicable to the company - Not applicable[54] Executive Officers of the Registrant 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 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] 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 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) 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] 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 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] - 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] - 2018 vs. 2017: Operating expenses increased by 19% due to higher personnel-related costs from headcount additions, principally in sales and R&D[79][81] - 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][90] Liquidity and Capital Resources 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][107] 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 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] - 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][118] - 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] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] 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 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 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 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 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 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][246] - 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][295] - 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][298][302] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 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] Controls and Procedures 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] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[324] - During Q3 2018, the company implemented a new ERP system, leading to modifications and additions to its internal controls over financial reporting[326] Other Information There is no other information to report for this item - None[336] Part III Directors, Executive Officers, and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] 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 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] Principal Accounting Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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] Form 10-K Summary This item is not applicable - Not applicable[345]