What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 92 added, 67 removed, 77 unchanged (67% of the section changed)

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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.

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, 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:

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(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;

(5) the reliance on key suppliers to manufacture and deliver critical components for our products and potential disruptions to the supply chain, which could impact timely delivery of customer orders;

(6) the failure to effectively manage product transitions or accurately forecast customer demand;

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(17) the inability to protect our proprietary technology and intellectual property;

(18) potential impairment charges with respect to our investments or acquired intangible assets;

(18) potential impairment charges with respect to our investments or acquired intangible

(19) exposure to additional tax liabilities;

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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.

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.

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

The second quarter of 2020 was marked by a disruption to our business precipitated by the COVID-19 pandemic.

In response, the Company's Board of Directors approved a restructuring plan intended to reduce the Company's operating costs and optimize its business model.

As a result of this plan, Cognex recorded restructuring, intangible asset impairment, and excess and obsolete inventory charges totaling over $42 million in the second quarter of 2020.

Unless indicated otherwise, these charges are reflected in applicable year-on-year comparisons.

Additional detail on these charges can be found by referring to the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Revenue for the second quarter of 2021 totaled $269,158,000, an increase of 59% from the second quarter of 2020, which was adversely impacted by global economic conditions related to the COVID-19 pandemic.

The increase came from a broad base of industries, and most notably from the logistics, automotive, and consumer electronics industries.

Gross margin as a percentage of revenue improved to 75% for the second quarter of 2021 from 70% for the second quarter of 2020, primarily due to lower provisions for excess and obsolete inventories.

Operating expenses decreased by $16,774,000, or 13%, for the second quarter of 2021 compared to the same quarter in 2020, as restructuring and intangible asset impairment charges of $34,369,000 recorded in the second quarter of 2020 did not repeat.

Excluding these charges, operating expenses increased by $17,595,000, or 19%, primarily due to higher incentive compensation costs and the impact of foreign currency exchange rate changes, partially offset by savings from cost-cutting measures implemented in 2020.

Operating income expanded to 34% of revenue for the second quarter of 2021 compared to an operating loss of 4% of revenue for the second quarter of 2020.

Net income was 29% of revenue for the second quarter of 2021, or $0.43 per diluted share, compared to net loss of 1% of revenue for the second quarter of 2020, or $0.01 per diluted share.

Results of Operations

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 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.

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.

Revenue increased by $100,061,000, or 59%, for the three-month period and increased by $171,853,000, or 51%, for the six-month period.

This increase reflected a broad-based recovery from the COVID-19 pandemic, which most significantly impacted our business in the second quarter of 2020.

Although revenue increased from the prior year in all major industries we serve, the most significant dollar increases came from our three largest markets of logistics, automotive, and consumer electronics.

Included in our logistics growth is higher revenue from e-commerce customers that we believe may be benefiting from an online ordering trend that has grown since the COVID-19 pandemic.

Growth in other industries also contributed to the increase, including higher revenue from customers in

the semiconductor and medical-related industries.

Compared to the first quarter of 2021, revenue increased by $30,131,000, or 13%, due largely to the timing of revenue in the consumer electronics industry.

Revenue for the second quarter of 2021 was modestly impacted by delays of customer deliveries for certain products due to global supply shortages.

From a geographic perspective, revenue from customers based in the Americas increased by 57% for the three-month period and 67% for the six-month period driven by higher revenue in the logistics industry, and to a lesser extent, from applications in medical-related and automotive industries.

Revenue from customers based in Europe increased by 67% for the three-month period and 38% for the six-month period as a result of higher revenue from customers in a variety of industries, most notably automotive and logistics.

Changes in foreign currency exchange rates accounted for approximately 10% of the revenue increase in both periods, and related to the translation of Euro denominated revenue to U.S.

Revenue from customers based in Greater China increased by 87% for the three-month period and 68% for the six-month period due largely to higher revenue in the consumer electronics and automotive industries.

A portion of the increase was driven by the timing of revenue in the consumer electronics industry, as there was a higher concentration of this revenue in the second quarter of 2021 compared to the second quarter of 2020.

Changes in foreign currency exchange rates accounted for a relatively small percentage of the revenue increase in both periods, and related to the translation of Chinese Yuan denominated revenue to U.S.

Revenue from other countries in Asia increased by 27% for the three-month period and 20% for the six-month period due primarily to higher revenue in the semiconductor and automotive industries.

As of the date of this report, we expect revenue for the third quarter of 2021 to be higher than the second quarter of 2021, due primarily to higher revenue from customers in the consumer electronics and logistics industries.

Although we expect a sequential increase in revenue from the consumer electronics industry, we expect revenue from this industry to be lower than the prior year.

Our estimates for the third quarter of 2021 assume continued delays of customer deliveries for certain products due to global supply shortages.

Gross margin as a percentage of revenue was 75% and 76% for the three-month and six-month periods in 2021, respectively, compared to 70% and 73% for the same periods in 2020.

The increase in the gross margin percentage was primarily due to lower provisions for excess and obsolete inventories as compared to the prior year.

The higher provisions in 2020 took into account the global economic conditions resulting from the COVID-19 pandemic.

Gross margin as a percentage of revenue would be relatively consistent for all periods presented excluding the provisions for excess and obsolete inventories, as manufacturing efficiencies related to the higher revenue level were partially offset by a greater percentage of total revenue coming from the logistics industry, which has relatively lower gross margins.

In addition, we paid higher prices to purchase inventories in the second quarter of 2021 due to global supply shortages that we expect to continue for the remainder of the year.

As of the date of this report, we expect gross margin as a percentage of revenue for the third quarter of 2021 to be in the low-to-mid 70% range, but likely lower than the 75% reported for the second quarter of 2021.

We expect a sequential decrease due to lower margins from strategic logistics projects, as well continued higher inventory purchase prices.

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).

Three-month period

Research, Development, and Engineering Expenses

Research, development, and engineering (RD&E) expenses increased by $905,000, or 3%, for the three-month period and decreased by $936,000, or 1%, for the six-month period as detailed in the table below (in thousands).

Three-month period Six-month period

RD&E expenses in 2020 $ 30,397 $ 66,343

Stock-based compensation expense (1,568)

Personnel-related costs (1,350) (2,637)

Stock-based compensation expense 554 (1,014)

Foreign currency exchange rate changes 1,215 2,565

Incentive compensation 789 1,551

Other (303) (1,401)

RD&E expenses in 2021 $ 31,302 $ 65,407

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.

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 decreased for the six-month period 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 the workforce reduction.

This decrease was partially offset by credits related to the workforce reduction that were recorded in the second quarter of 2020 and did not repeat, the impact of which resulted in an increase in stock-based compensation expense for the three-month period.

Foreign currency exchange rate changes 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.

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.

RD&E expenses as a percentage of revenue were 12% and 13% for the three-month period and six-month period, respectively, compared to 18% and 20% for the same periods in 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.

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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

Selling, general, and administrative (SG&A) expenses increased by $16,690,000, or 28%, for the three-month period and $19,976,000, or 15%, for the six-month period as detailed in the table below (in thousands).

Three-month period Six-month period

SG&A expenses in 2020 $ 60,153 $ 129,291

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Foreign currency exchange rate changes 2,955 5,822

Travel expenses (1,944)

Personnel-related costs (1,624)

Business system investments 494 1,307

Marketing programs 702 971

Stock-based compensation expense 1,963 449

Personnel-related costs 603 (1,021)

Travel expenses 1,749 (195)

Other 2,010 1,282

SG&A expenses in 2021 $ 76,843 $ 149,267

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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.

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.

Expenses were also higher due to investments the Company is making in business systems related to its sales process, including systems to help our sales team more efficiently manage customer relationships and sales opportunities.

A portion of these costs is expensed as incurred, while the majority of these investments will be accounted for as a capital asset that is expected to be placed into service in the first quarter of 2022.

The Company also increased spending on marketing programs in an effort to generate future sales opportunities, particularly related to new product introductions.

Finally, stock-based compensation expense increased due primarily to credits related to the workforce reduction that were recorded in the second quarter of 2020 and did not repeat, partially offset by decreases due to the impact of forfeiture rates revised in the first quarter of 2021 and changes in equity awards over time.

These increases were partially offset by lower personnel-related costs for the six-month period due to the workforce reduction, net of higher costs from annual salary increases and higher fringe benefits provided to employees.

For the three-month period, there was a lesser impact due to the timing of the workforce reduction that took place on May 26, 2020.

In addition, during the second quarter of 2021, the Company increased its sales headcount in strategic growth areas of the business.

Travel expenses were slightly lower for the six-month period, but were higher for the three-month period, as restrictions related to COVID-19 that were still in place in the first quarter of 2021 were eased in certain regions in the second quarter of 2021.

Restructuring and Intangible Asset Impairment Charges

In the second quarter of 2020, the Company recorded restructuring charges totaling $14,798,000 as a result of actions related to the Company’s restructuring plan, which included a global workforce reduction of approximately 8% and office closures.

In addition, the adverse impact of the COVID-19 pandemic triggered a review of long-lived assets for potential impairment in the second quarter of 2020.

This review resulted in intangible asset impairment charges totaling $19,571,000 recorded in the second quarter of 2020.

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.

The Company recorded foreign currency losses of $639,000 and $1,647,000 for the three-month and six-month periods in 2021, respectively, compared to foreign currency gains of $336,000 and foreign currency losses of $2,667,000 for the same periods in 2020.

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.

Investment income decreased by $1,568,000, or 48%, for the three-month period and $5,243,0000, or 62%, for the six-month period.

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.

The Company recorded other expense of $127,000 and $295,000 for the three-month and six-month periods in 2021, respectively, compared to other income of $203,000 and $20,000 for the same periods in 2020.

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.

Income Tax Expense (Benefit)

The Company’s effective tax rate was 17% and 14% of pre-tax income for the three-month and six-month periods in 2021, respectively, compared to a benefit of 51% of pre-tax loss and an expense of 7% of pre-tax income for the same periods in 2020.

The effective tax rate included a decrease in tax expense of $1,431,000 and $6,638,000 for the three-month and six-month periods in 2021, respectively, and $4,413,000 and $6,093,000 for the same periods in 2020, 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.

Other discrete tax items included an increase in tax expense of $535,000 for both the three-month and six-month periods in 2021, and an increase in tax expense of $3,267,000 and $3,509,000 for the three-month and six-month periods in 2020, respectively, 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 an expense of 18% of pre-tax income for both the three-month and six-month periods in 2021, compared to a benefit of 1% of pre-tax loss and an expense of 19% of pre-tax income for the same periods in 2020.

The decrease in the effective tax rate for the six-month period, excluding the impact of discrete items, was due to a lower percentage of the Company's pre-tax income being earned and taxed in higher tax jurisdictions.

There was an adjustment in the three-month period in 2020 to bring the year-to-date effective tax rate to 19%.

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.

The Company’s cash requirements for the six-month period ended July, 4, 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.

Cash flows from operating activities included increases in accounts receivable and inventories related to higher business levels.

The Company expects inventory levels to continue to increase for the remainder of the year as we receive inventory that we purchased in response to global supply chain challenges.

Capital expenditures for the six-month period ended July 4, 2021 totaled $6,550,000 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, the majority of which will be accounted for as a capital asset that is 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.

As of July 4, 2021, the Company repurchased 3,075,000 shares at a cost of $142,225,000 under this program, including 258,000 shares at a cost of $20,877,000 during the six-month period ended July 4, 2021, leaving a remaining balance of $57,775,000.

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.

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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.

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.

The Company’s Board of Directors declared and paid cash dividends of $0.060 per share in the first and second quarters of 2021, totaling $21,192,000.

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.

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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-Q

Item 2. Management’s Discussion and Analysis