COGNEX CORP 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense. These statements are based on our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer order rates and timing of related revenue, future product mix, restructuring and other cost-savings initiatives, research and development activities, new product offerings, capital expenditures, investments, acquisitions, liquidity, dividends and stock repurchases, strategic plans, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the impact, duration, and severity of the COVID-19 pandemic; (2) potential disruptions to our business due to restructuring activities; (3) the loss of, or curtailment of purchases by, large customers in the consumer electronics and logistics industries; (4) the reliance on revenue from the automotive industry; (5) the reliance on key suppliers to manufacture and deliver critical components for our products and potential disruptions to the supply chain; (6) the failure to effectively manage product transitions or accurately forecast customer demand; (7) the inability to design and manufacture high-quality products; (8) the inability to attract and retain skilled employees and maintain our unique corporate culture; (9) the failure to effectively manage our growth; (10) the inability to achieve growth in revenue and profits from the logistics industry; (11) the technological obsolescence of current products and the inability to develop new products; (12) the failure to properly manage the distribution of products and services; (13) the impact of competitive pressures; (14) the challenges in integrating and achieving expected results from acquired businesses; (15) potential disruptions in our business systems; (16) information security breaches; (17) the inability to protect our proprietary technology and intellectual property; (18) potential impairment charges with respect to our investments or acquired intangible assets; (19) exposure to additional tax liabilities; (20) fluctuations in foreign currency exchange rates and the use of derivative instruments; (21) our involvement in time-consuming and costly litigation; (22) unfavorable global economic conditions; and (23) economic, political, and other risks associated with international sales and operations. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by Part II - Item 1A of this Quarterly Report on Form 10-Q. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made. Executive Overview Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks where vision is required. In addition to product revenue derived from the sale of machine vision products, the Company also generates revenue by providing maintenance and support, consulting, and training services to its customers; however, service revenue accounted for less than 10% of total revenue for all periods presented. 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. 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, and medical-related. Cognex products are also used to automate distribution processes in the logistics industry, including for applications in retail distribution and ecommerce to scan, track, and sort goods through distribution centers. Revenue for the first quarter of 2021 totaled $239,027,000, an increase of 43% from the first quarter of 2020. The increase was driven by significantly higher revenue from the ecommerce sector of the logistics industry, in addition to growth in a variety of other industries, most notably automotive, medical-related, semiconductor, and consumer electronics. 23 Gross margin as a percentage of revenue improved to 77% for the first quarter of 2021 from 75% for the first quarter of 2020. The increase was due primarily to cost efficiencies related to higher sales volume, favorable product mix, and the impact of foreign currency exchange rate changes, partially offset by a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins. Operating expenses increased slightly over the same quarter in 2020, as higher incentive compensation costs and the impact of foreign currency exchange rate changes were largely offset by savings from cost-cutting measures implemented in 2020. Operating income expanded to 33% of revenue for the first quarter of 2021 compared to 13% of revenue for the first quarter of 2020, as a result of the revenue growth in the first quarter of 2021. Net income was 29% of revenue compared to 12% of revenue for the first quarters of 2021 and 2020, respectively, and $0.39 per diluted share compared to $0.12 per diluted share for these same periods. Results of Operations Revenue Revenue for the first quarter of 2021 totaled $239,027,000, representing an increase of $71,792,000, or 43%, over the first quarter of 2020. The biggest driver of the increase was higher revenue from the ecommerce sector of the logistics industry, which was our largest and fastest-growing market in the first quarter of 2021. Growth in other industries also contributed to the increase in revenue over the prior year, including higher revenue from customers in the automotive, medical-related, semiconductor, and consumer electronics industries. The increase in medical-related revenue was due in part to COVID-19-related applications for Cognex products. The COVID-19 outbreak had a modest adverse impact on our business in the first quarter of 2020, primarily near the end of that quarter. From a geographic perspective, revenue from customers based in the Americas increased by 79% from the prior year driven by higher revenue in the logistics industry, and to a lesser extent, from applications in medical-related industries. A significant portion of our logistics business currently comes from customers based in the Americas. Revenue from customers based in Europe increased by 17% from the prior year. Approximately half of this increase resulted from a favorable currency impact, as sales denominated in Euros were translated to U.S. Dollars at a higher rate in the first quarter of 2021 as compared to a year ago. The remaining increase was due to higher revenue from customers in a variety of industries, most notably logistics and automotive. Revenue from customers based in Greater China increased by 45% from the prior year due largely to higher revenue in the consumer electronics and automotive industries, while revenue from other countries in Asia increased by 12% from the prior year due primarily to higher revenue in the semiconductor and automotive industries. As of the date of this report, we expect revenue for the second quarter of 2021 to be higher than the second quarter of 2020, which was negatively impacted by COVID-19, as well as higher than the first quarter of 2021. The anticipated higher revenue in the second quarter of 2021 over the same quarter in the prior year is expected to be broad-based across our regions and major industries. Gross Margin Gross margin as a percentage of revenue was 77% for the first quarter of 2021 compared to 75% for the first quarter of 2020. The increase in the gross margin percentage was primarily due to manufacturing efficiencies related to the higher revenue level, as well as favorable product mix. The favorable impact of foreign currency exchange rates on revenue noted above also contributed to the higher gross margin percentage, as the majority of our cost of revenue is denominated in U.S. Dollars. These increases were partially offset by a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins. As of the date of this report, we expect gross margin as a percentage of revenue for the second quarter of 2021 to be in the mid-70% range, but lower than the 77% reported for the first quarter of 2021. Operating Expenses Research, development, and engineering (RD&E) expenses decreased by $1,841,000, or 5%, from the prior year as detailed in the table below (in thousands). 24 Three-month period RD&E expenses in 2020 $ 35,946 Stock-based compensation expense (1,568) Personnel-related costs (1,287) Foreign currency exchange rate changes 1,350 Other (336) RD&E expenses in 2021 $ 34,105 Stock-based compensation expense decreased from the prior year due to changes in equity awards over time ( e.g. , increased number of restricted stock units, varied vesting schedules, etc.), as well as the cancellation of awards resulting from a workforce reduction in the second quarter of 2020. Personnel-related costs were also lower due to the workforce reduction, partially offset by annual salary increases and higher fringe benefits provided to employees. These decreases were partially offset by the impact of foreign currency exchange rate changes that resulted in a higher level of RD&E expenses as compared to the prior year, as costs denominated in foreign currencies were translated to U.S. Dollars at a higher rate. RD&E expenses as a percentage of revenue were 14% for the first quarter of 2021 compared to 21% for the first quarter of 2020. 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 the time to market for new products to be critical to our revenue growth. This quarterly percentage is impacted by revenue levels and investing cycles. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses increased by $3,286,000, or 5%, from the prior year as detailed in the table below (in thousands). Three-month period SG&A expenses in 2020 $ 69,138 Incentive compensation 5,147 Foreign currency exchange rate changes 2,867 Travel expenses (1,944) Personnel-related costs (1,624) Stock-based compensation expense (1,514) Other 354 SG&A expenses in 2021 $ 72,424 The increase from the prior year was due to higher expenses related to annual incentive compensation plans, which include incentive bonuses and sales commissions. Incentive bonus accruals were higher than the prior year based on management's assessment of the Company's expected performance against relevant full-year goals. Likewise, sales commissions increased due to the higher business levels. In addition, foreign currency exchange rate changes resulted in a higher level of SG&A expenses as compared to the prior year, as costs denominated in foreign currencies were translated to U.S. Dollars at a higher rate. These increases were partially offset by lower travel expenses resulting in part from COVID-19 restrictions. The majority of these savings came from sales activities, which continue to be redirected to online efforts due to customer facility restrictions in certain regions. We expect restrictions to continue for at least the first half of 2021. In addition, personnel-related costs were lower due to a workforce reduction in the second quarter of 2020, partially offset by annual salary increases and higher fringe benefits provided to employees. Stock-based compensation expense also decreased due primarily to the impact of revised forfeiture rates. 25 Non-operating Income (Expense) The Company recorded foreign currency losses of $1,008,000 and $3,003,000 for the first quarters of 2021 and 2020, respectively. Foreign currency gains and losses result primarily from the revaluation and settlement of accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collected in another. The loss in the first quarter of 2020 was largely due to the revaluation of an intercompany balance that was created by the migration of acquired intellectual property from one subsidiary to another, which was settled in 2020. Investment income decreased by $3,675,000, or 70%, from the prior year. The decrease was due primarily to lower yields on the Company's portfolio of debt securities. The Company recorded other expense of $168,000 and $183,000 for the first quarters of 2021 and 2020, respectively. Other income (expense) includes fair value adjustments of contingent consideration liabilities arising from business acquisitions. Income Tax Expense The Company’s effective tax rate was 11% of pre-tax income for both the first quarters of 2021 and 2020. The effective tax rate included a decrease in tax expense of $5,207,000 and $1,680,000 for the first quarters of 2021 and 2020, respectively, related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises. The Company cannot accurately predict the level of stock option exercises by employees in future periods. Other discrete tax items included an increase in tax expense of $242,000 for the first quarter of 2020 from the final true-up of the prior year's tax accrual upon filing the related tax return. Excluding the impact of these discrete items, the Company’s effective tax rate was 18% of pre-tax income for the first quarter of 2021 compared to 17% for the first quarter of 2020. The increase in the effective tax rate, excluding the impact of discrete items, was due to a higher percentage of the Company's pre-tax income being earned and taxed in higher tax jurisdictions. Liquidity and Capital Resources The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $876,284,000 as of April 4, 2021. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity. The Company’s cash requirements for the first quarter of 2021 were primarily met with positive cash flows from operations and the proceeds from stock option exercises. Cash requirements consisted of operating activities, the payment of dividends, the repurchase of common stock, and capital expenditures. Cash outlays in the first quarter of 2021 included incentive compensation payments that were earned and accrued in 2020. Capital expenditures for the first quarter of 2021 totaled $2,436,000 and consisted primarily of computer hardware and software, as well as manufacturing test equipment related to new product introductions. In 2021, the Company is making investments in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities, which are expected to be placed into service in the first quarter of 2022. In October 2018, the Company's Board of Directors authorized the repurchase of $200,000,000 of the Company's common stock. As of April 4, 2021, the Company repurchased 2,897,000 shares at a cost of $127,827,000 under this program, including 80,000 shares at a cost of $6,479,000 during the three-month period ended April 4, 2021, leaving a remaining balance of $72,173,000. During the three-month period ended March 29, 2020, 1,215,000 shares were repurchased at a cost of $51,036,000 under this October 2018 program. On March 12, 2020, the Company's Board of Directors authorized the repurchase of an additional $200,000,000 of the Company's common stock. Purchases under this March 2020 program will commence upon completion of the October 2018 program. The Company may repurchase shares under this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions. 26 The Company’s Board of Directors declared and paid cash dividends of $0.060 per share in the first quarter of 2021, totaling $10,595,000. Future dividends will be declared at the discretion of the Company's Board of Directors and will depend upon such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations. The Company believes that its existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. As of April 4, 2021, the Company had $876,284,000 in cash and investments. In addition, the Company has no long-term debt and does not anticipate needing debt financing in the near future. We believe that our strong cash position has put us in a relatively good position with respect to our longer-term liquidity needs. New Pronouncements Refer to Part I - Note 2 within this Form 10-Q, for a full description of recently issued accounting pronouncements including the expected dates of adoption and the expected impact on the financial position and results of operations of the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company’s exposures to market risk since December 31, 2020.