What changed in this filing

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Item 1. Business

2021-02-11 compared with 2020-02-13 · 67 added, 101 removed, 60 unchanged (74% of the section changed)

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Machine vision is the technology that gives computers and automation equipment the ability to see.

Machine vision products are used to automate the manufacture and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires, by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process.

Machine vision products are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires, by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process.

Machine vision is important for applications in which human vision is inadequate to meet requirements for size, accuracy, or speed, or in instances where substantial cost savings are obtained through the reduction of labor or improved product quality.

Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing size of items being manufactured.

What is Machine Vision?

Since the beginning of the Industrial Revolution, human vision has played an indispensable role in the process of manufacturing products.

Human eyes did what no machines could do themselves:

locating and positioning work, tracking the flow of parts, and inspecting output for quality and consistency.

Today, however, the requirements of many manufacturing processes have surpassed the limits of human eyesight.

Manufactured items often are produced too quickly or with tolerances too small to be analyzed by the human eye.

In response to manufacturers’ needs, “machine vision” technology emerged, providing manufacturing equipment with the gift of sight.

Machine vision systems were first widely embraced by manufacturers of electronic components who needed this technology to produce computer chips with decreasing geometries.

However, advances in technology and ease-of-use, combined with the decreasing cost of implementing vision applications, have made machine vision available to a broader range of users.

Machine vision products combine cameras with innovative software to collect images and then answer questions about these images, such as:

Determining the exact physical location and orientation of an object.

Aligning a screen on a smartphone or guiding a robot to put a windshield on a car.

IDENTIFICATION

Identifying an object by analyzing its physical appearance or by reading a serial number or symbol.

Reading a two-dimensional barcode directly marked on an automotive airbag so that it can be tracked and processed correctly through manufacturing.

How good is it?

Inspecting an object for flaws or defects.

Checking for debris to ensure that foreign objects are not present in a product before shipping to consumers.

What size is it?

Determining the dimensions of an object.

Using 3D vision to ensure the cap is secure on a bottle of detergent prior to packaging.

Although Cognex sells to customers in a variety of industries, our largest industries are the consumer electronics, logistics, and automotive industries, which combined represented approximately 70% of our total revenue in 2020.

While we sell to a variety of customers in the automotive industry, we have two large customers in the consumer electronics and logistics industries that each represented a significant portion of revenue in their respective industries and each represented over 10% of our total revenue in 2020.

Our total revenue and quarterly timing of revenue is impacted by the purchasing cycles of these two large customers.

Cognex operates in one segment, machine vision technology.

We offer a variety of machine vision products that have similar economic characteristics, have the same production processes, and are distributed by the same sales channels to the same types of customers.

Machine Vision Market

Cognex machine vision is primarily used to automate manufacturing and distribution processes in a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance.

Virtually every manufacturer can achieve better quality and manufacturing efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including consumer electronics, automotive, consumer products, food and beverage, pharmaceuticals, and medical devices.

Cognex machine vision is used to automate manufacturing and distribution processes in a variety of industries, where the technology is widely recognized as an important component of automated production and quality assurance.

Cognex products are also used to automate distribution processes in the logistics industry for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers.

The Company operates in one segment, machine vision technology.

Information about segments may be found in Note 20 to the Consolidated Financial Statements, appearing in Part II - Item 8 of this Annual Report on Form 10-K.

In 2018 and 2017, direct and indirect revenue from Apple Inc.

accounted for 15% and 20% of total revenue, respectively.

In 2019, no customer accounted for greater than 10% of total revenue.

Although we consider Cognex to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number and relative size of competitors are not readily available.

Our competitors include other vendors of machine vision systems, controllers, and components;

manufacturers of image processing systems, sensors, and components;

and system integrators.

We may also compete with internal engineering departments of current or prospective customers, as well as open source tools available for free by various companies.

In recent years, we have encountered increased competition from low-cost vision providers in China.

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Cognex’s ability to compete depends upon our ability to design, manufacture, and sell high-quality products, as well as our ability to develop new products and functionality that meet evolving customer requirements.

The primary competitive factors affecting the choice of a machine vision system include vendor reputation, product functionality and performance, ease of use, price, and post-sales support.

The importance of each of these factors varies depending upon the specific customer’s needs.

Business Strategy

Our goal is to expand our position as a leading worldwide provider of machine vision products for industrial customers.

We are selective in choosing growth opportunities that we believe will maintain our historically high gross margin percentages, which have ranged in the mid 70s for the past several years and reflect the value our customers place on our innovative products.

Our high gross margins have the potential to provide us with strong operating leverage in our financial model, as any incremental revenue at such margins is able to fall through to operating income at a high ratio.

We are selective in choosing growth opportunities that we believe will maintain our historically high gross margin percentages, which have ranged in the mid 70 percent range for the past several years and reflect the value our customers place on our innovative products.

Our high gross margins have the potential to provide us with strong operating leverage in our financial model, as any incremental revenue at such margins falls through to operating income at a high ratio.

Our strong and unique corporate culture reinforces our values of customer first and innovation, and enables us to attract and retain smart, highly educated, experienced talent who are motivated to solve the most challenging vision tasks.

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We believe that our acquisition of Sualab Co., Ltd.

in the fourth quarter of 2019 will expand our deep learning technology to visual inspection tasks that replace human inspectors and make automated inspection tasks fast, easy, and cost-effective.

where we see opportunity to move beyond barcode reading into vision for applications in retail distribution and ecommerce.

in 2019 will continue to expand our deep learning technology to visual inspection tasks that could replace human inspectors and make automated inspection tasks fast, easy, and cost-effective.

We continue to invest in our core markets, such as consumer electronics and automotive, where we are a leading provider of vision and ID products for factory automation, while making significant investments in the logistics market, where we are moving beyond barcode reading into more complex applications in retail distribution and ecommerce.

We reach a broad base of customers through our worldwide direct sales force that sells to large, strategic customers, as well as through our network of distributors and integrators that sell primarily to smaller customers who may be more geographically remote and may require supplemental technical support or integration assistance.

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Our business strategy includes selective expansion into new machine vision applications and markets through the acquisition of businesses and technologies.

In 2017 and 2016, we completed six small business acquisitions, which were not significant individually or in the aggregate.

The purchase price for each business ranged from $2.5 million to $23 million.

In addition to completed technology and customer relationships, these acquisitions included engineering talent expected to help accelerate the development of future products.

On October 16, 2019, Cognex acquired Sualab Co., Ltd.

(Sualab), a provider of deep learning-based vision software for industrial image analysis based in Korea.

The total consideration of $195 million included cash payments of $171 million upon closing and deferred payments of $24 million that may become payable on the fourth anniversary date of the closing, contingent upon continued employment of key talent.

Sualab's intellectual property, engineering expertise, and market coverage are expected to increase the Company's existing deep learning capabilities.

The total consideration of approximately $194 million included cash payments of $170 million and deferred payments of $24 million that may become payable on the fourth anniversary date of the closing, contingent upon continued employment of key talent.

Sualab's intellectual property, engineering expertise, and market coverage are expected to increase the Company's deep learning capabilities.

Combined with intellectual property acquired from ViDi Systems S.A.

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Cognex offers a full range of machine vision systems and sensors, vision software, and industrial image-based barcode readers designed to meet customer needs at different performance and price points.

Our products range from low-cost vision sensors that conduct simple presence/absence inspections, to deep learning vision software that solves complex applications with unpredictable defects and deviations.

Our products range from low-cost vision sensors that conduct simple presence/absence inspections, to deep learning solutions that

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solve complex applications with unpredictable defects and deviations.

Our products also have a variety of physical forms, depending upon the user's needs.

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Vision Systems and Sensors

Vision systems combine camera, processor, and vision software into a single, rugged package with a simple and flexible user interface for configuring applications.

General-purpose vision systems are designed to be easily programmed to perform a wide range of vision tasks including part location, identification, measurement, assembly verification, and robotic guidance.

Unlike general-purpose vision systems, vision sensors deliver an easy-to-use, low-cost, reliable solution for simple pass/fail vision applications, such as checking the presence and size of parts.

Cognex offers the In-Sight ® product line of vision systems and sensors in a wide range of models to meet various price and performance requirements.

Cognex also offers a series of 3D vision systems for use in highly demanding applications that require surface feature measurements that go beyond the capabilities of 2D vision technology.

Vision systems combine smart cameras and software to perform a wide range of inspection tasks including part location, identification, measurement, assembly verification, and robotic guidance.

Vision sensors deliver an easy-to-use, low-cost, reliable solution for simple pass/fail inspections, such as checking the presence and size of parts.

In-Sight ® vision systems and sensors, which includes 2D, 3D, alignment, and deep learning models, meet various price and performance requirements for factory automation customers.

Our newest deep learning systems introduced in 2020 automate and solve complex inline inspections that typically require human judgment for defect detection, optical character recognition (OCR), assembly verification, or classification.

Vision Software

Vision software provides users with the most flexibility by combining the full general-purpose library of Cognex vision tools with the cameras, frame grabbers, and peripheral equipment of their choice.

Applications based upon Cognex vision software perform a wide range of vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance.

Vision software offers customers the flexibility of the Cognex vision tools library to use with the cameras, frame grabbers, and peripheral equipment of their choice.

Cognex VisionPro ® software offers an extensive suite of patented vision tools for advanced programming, while Cognex Designer ™ allows customers to build complete vision applications with the simplicity of a graphical, flowchart-based programming environment.

Cognex deep learning vision software solves difficult applications that are too complicated and time-consuming to program and maintain with traditional machine vision rule-based algorithms.

Cognex Deep Learning software solves difficult applications that are too complicated and time-consuming to program and maintain with traditional machine vision rule-based algorithms.

Industrial Image-Based Barcode Readers

Cognex barcode readers quickly and reliably read codes (e.g., one-dimensional barcodes or two-dimensional data matrix codes) that have been applied to, or directly marked on, discrete items during the manufacturing process.

Manufacturers of goods ranging from automotive parts, pharmaceutical items, aircraft components, and medical devices are increasingly using direct part mark (DPM) identification to ensure that the appropriate manufacturing processes are performed in the correct sequence and on the right parts.

In addition, DPM is used to track parts throughout the product lifecycle, and is also used in supply chain management and repair.

Cognex bardcode readers are also used outside of the manufacturing sector to automate distribution processes in the logistics industry for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers, and in airports to read baggage tags.

Cognex offers the DataMan ® product line of image-based barcode readers, which includes both hand-held and fixed-mount models, and barcode verifiers, as well as the MX Series of vision-enabled mobile terminals that allow customers to leverage the latest mobile device technology for industrial barcode reading applications.

Cognex image-based barcode readers quickly and reliably read 1D, 2D, and direct part mark (DPM) codes found in nearly every industry including automotive, consumer products, medical-related, and logistics.

The DataMan® product line, which includes fixed-mount, handheld, and mobile models, as well as barcode verifiers, help organizations optimize performance, increase throughput, and control traceability.

Research, Development, and Engineering

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In addition to internal research and development efforts, we intend to continue our strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate.

As of December 31, 2019 , Cognex employed 563 professionals in RD&E, many of whom are software developers.

Cognex’s RD&E expenses totaled $119,427,000 in 2019 , $116,445,000 in 2018 , and $99,205,000 in 2017 , or approximately 16%, 14%, and 13% of revenue, respectively.

RD&E expenses as a percentage of revenue were 16% in 2020, 16% in 2019, and 14% in 2018.

We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers.

In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth.

Therefore, we expect to continue to make significant RD&E investments in the future.

Therefore, we expect to continue to make significant RD&E investments in the future, and intend to continue our product development plans during periods of lower revenue levels.

At any point in time, we have numerous research and development projects underway.

We rely on the technical expertise, creativity, and knowledge of our personnel, and therefore, we utilize patent, trademark, copyright, and trade secret protection to maintain our competitive position and protect our proprietary rights in our products and technology.

While our intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on any particular patent, trademark, copyright, or other intellectual property right.

Manufacturing and Order Fulfillment

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The contract manufacturers use specified components sourced from a vendor list approved by Cognex and assembly/test documentation created and controlled by Cognex.

Certain components are presently sourced from a single vendor that is selected based upon price and performance considerations.

Certain components are presently sourced from a single vendor that is selected based on price and performance considerations.

In the event of a supply disruption from a single-source vendor, these components may be purchased from alternative vendors.

After the completion of initial testing, a fully assembled product from the contract manufacturers is routed to our facility in Cork, Ireland or Natick, Massachusetts, USA, where trained Cognex personnel load Cognex software onto the product and perform quality control procedures.

Finished product for customers in the Americas is then shipped from our Natick, Massachusetts facility, while finished product for customers outside of the Americas is shipped from our Cork, Ireland facility.

After the completion of initial testing, a fully-assembled product from the contract manufacturers is routed to our distribution centers in Cork, Ireland or Natick, Massachusetts, USA, where trained Cognex personnel load Cognex software onto the product and perform quality control procedures.

Fully-configured finished products for customers in the Americas, with the exception of certain products stocked locally in Mexico, are then shipped from our Natick,

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Massachusetts distribution center, while finished products for customers outside of the Americas are shipped from our Cork, Ireland distribution center.

In 2020, the Company began stocking certain fully-configured finished products in its Mexico facility in order to provide faster delivery to local customers.

Sales Channels and Support Services

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Our distribution partners provide sales and local support to help Cognex reach the many prospects for our products in factories around the world, and our integration partners are experts in vision and complementary technologies that can provide turnkey solutions for complex automation projects using vision.

As of December 31, 2019, Cognex’s sales force consisted of 980 professionals, and our partner network consisted of 425 authorized distributors and active integrators.

Sales engineers call directly on targeted accounts, with the assistance of application engineers, and manage the activities of our distribution and integration partners within their territories in order to provide an advantageous sales model for our products.

Cognex has sales and support personnel located throughout the Americas, Europe, and Asia.

The majority of our sales engineers are degreed engineers.

Sales to customers based outside of the United States represented approximately 66% of total revenue in 2019 compared to approximately 71% of total revenue in 2018.

In 2019, approximately 31% of our total revenue came from customers based in Europe, 16% from customers based in Greater China, 5% from customers based in Japan, and 14% from customers based in other regions outside the United States.

Sales to customers based in Europe are

denominated in Euros and U.S.

Sales to customers based outside of the United States represented approximately 65% of our total revenue in 2020, with approximately 26% from customers based in Europe, 21% from customers based in Greater China, and 18% from customers based in other regions outside the United States.

Sales to customers based in Europe are denominated in Euros and U.S.

Dollars, sales to customers based in Greater China are denominated in Yuan for sales within Mainland China and U.S.

Dollars in other territories, sales to customers based in Japan are denominated in Yen, and sales to customers based in other regions are denominated in U.S.

Financial information about geographic areas may be found in Note 20 to the Consolidated Financial Statements, appearing in Part II - Item 8 of this Annual Report on Form 10-K.

Dollars in other territories, and sales to customers based in other regions are denominated in U.S.

Dollars, Japanese Yen, Korean Won, and Mexican Pesos.

Cognex’s service offerings represent less than 10% of our total revenue and include maintenance and support, consulting, and training services.

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Application support is provided by technical support personnel located at Cognex regional offices, as well as by field service engineers that provide support at the customer’s production site.

We provide consulting services that range from a specific area of functionality to a completely integrated vision application or installed ID application.

Training services include a variety of product courses that are available at our offices worldwide, at customer facilities, and online at www.cognex.com.

Intellectual Property

As of December 31, 2019 , Cognex owned 686 patents issued worldwide and had another 514 patent applications pending worldwide.

Cognex has used, registered, or applied to register a number of trademark registrations in the United States and in other countries.

Cognex’s trademark and servicemark portfolio includes various registered marks, including, among others, Cognex ® , In-Sight ® , VisionPro ® , and DataMan ® , as well as many common-law marks.

Compliance with Environmental Provisions

Cognex’s capital expenditures, earnings, and competitive position are not materially affected by compliance with federal, state, and local environmental provisions which have been enacted or adopted to regulate the distribution of materials into the environment.

The machine vision market is highly fragmented and competitive.

Our competitors include other vendors of machine vision systems, controllers, and components;

manufacturers of image processing systems, sensors, and components;

and system integrators.

In addition, in the semiconductor and electronics capital equipment market, and with machine builders in the factory automation market, we compete with the internal engineering departments of current or prospective customers.

In the identification and logistics markets, we compete with manufacturers of automatic identification systems.

In the deep learning market, we compete with other industrially-focused machine vision companies, deep learning software companies, and engineering teams that use open source tools to solve applications.

Key competitors in geographies worldwide include Keyence Corporation, Sick AG, Datalogic, and Omron Corporation.

Any of these competitors may have greater financial and other resources than Cognex.

The primary competitive factors affecting the choice of a machine vision or identification system include vendor reputation, product functionality and performance, ease of use, price, and post-sales support.

The importance of each of these factors varies depending upon the specific customer’s needs.

As of December 31, 2019 , backlog, which includes deferred revenue, totaled $74,857,000, compared to $65,408,000 as of December 31, 2018 .

Backlog reflects customer purchase orders for products scheduled for shipment primarily within 120 days for customers in the logistics industry and primarily within 60 days for customers in all other industries.

The level of backlog at any particular date is not necessarily indicative of future revenue.

Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties.

As of December 31, 2019 , Cognex employed 2,267 persons, including 1,295 in sales, marketing, and service activities;

We provide consulting services that range from a specific area of functionality to a completely integrated installed application.

Training services include a variety of product courses that are available at our offices worldwide, at customer facilities, and online.

Human Capital

At Cognex, we refer to our employees as "Cognoids." As of December 31, 2020, Cognex employed 2,055 Cognoids, including 1,149 in sales, marketing, and service activities;

537 in research, development, and engineering;

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and 205 in information technology, finance, and administration.

Of our 2,267 employees, 1,349 are based outside of the United States.

Of our 2,055 Cognoids, 1,247 are based outside of the United States.

We have not experienced any work stoppages due to labor disputes.

We believe that our employee relations are good.

We have a strong and unique corporate culture to guide the actions and behaviors of our Cognoids.

Our culture is defined by our ten values - Customer First, Excellence, Perseverance, Enthusiasm, Creativity, Pride, Integrity, Recognition, Sharing, and Fun - and is represented by our motto - Work Hard, Play Hard, Move Fast .

We believe our culture enables us to attract and retain smart, energetic, and creative talent, and is critical to our ability to execute on our operating plans and strategic initiatives.

To preserve and enhance our culture, we have a global team of Cognoids who serve as Ministers of Culture and are led by our Chief Culture Officer, Robert J.

Shillman, our Founder and Chairman of the Board of Directors.

We have a robust talent development process that focuses on identifying and developing high-potential employees, as well as succession planning for key positions.

Our compensation programs are based on pay-for-performance, with a greater percentage of total compensation tied to variable incentive programs, such as performance-based bonuses and stock-based awards, as Cognoids advance to more senior positions.

Regulatory Compliance

Available Information

Cognex maintains a website on the World Wide Web at www.cognex.com.

We make available, free of charge, on our website in the “Company” section under the caption “Investor Information” followed by “Financial Information” and then “SEC FiIings,” our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.

Cognex maintains a website at www.cognex.com.

We make available, free of charge, on our website in the “Company” section under the caption “Investor Information” followed by “Financial Reports” and then “SEC FiIings,” our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed

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with, or furnished to, the SEC.

Cognex’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business