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Item 1. Business

2023-02-16 compared with 2022-02-17 · 106 added, 62 removed, 55 unchanged (75% of the section changed)

Corporate Profile

Cognex Corporation was incorporated in Massachusetts in 1981.

Our corporate headquarters are located at One Vision Drive, Natick, Massachusetts 01760 and our telephone number is (508) 650-3000.

Cognex 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.

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

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.

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.

Although Cognex sells to customers in a variety of industries, our largest industries are logistics, automotive, and consumer electronics, which combined represented approximately 70% of our total revenue in 2021.

A large customer in the logistics industry represented approximately 17% of our total revenue in 2021.

Machine Vision Market

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 or distributor can achieve better quality and efficiency by using machine vision, and therefore, Cognex products are used by a broad base of customers across a variety of industries, including logistics, automotive, consumer electronics, medical-related, semiconductor, consumer products, and food and beverage.

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.

Cognex Corporation (“the Company” or “Cognex”) invents and commercializes technologies that address some of the most critical manufacturing and distribution challenges.

We are a leading global provider of machine vision products and solutions that improve efficiency and quality in a wide range of businesses across attractive industrial end markets.

Our solutions blend physical products and software to capture and analyze visual information, allowing for the automation of manufacturing and distribution tasks for customers worldwide.

Machine vision products are used to automate the manufacturing or distribution and tracking of discrete items, such as mobile phones, electric vehicle batteries, and e-commerce packages, by locating, identifying, inspecting, and measuring them.

Machine vision is particularly valuable 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.

Cognex operates in one segment.

We offer a variety of machine vision products that have similar economic characteristics, production processes, sales distribution channels, and types of customers.

Cognex sells to customers in nearly all industries in which discrete items are manufactured on an assembly line or moved through a distribution center.

Our largest sales are in the automotive, logistics, and consumer electronics industries, which combined represented approximately 69% of our total revenue in 2022.

Our two largest customers, one in the logistics industry and one in the consumer electronics industry, each represented approximately 11% of our total revenue in 2022.

Cognex was incorporated in Massachusetts in 1981.

Machine vision is used in a variety of industries where technology is widely recognized as an important component of automated production, distribution, and quality assurance.

Virtually every manufacturer or distributor can achieve better quality and efficiency by using machine vision.

This results in a broad base of customers across a variety of industries, including automotive, logistics, consumer electronics, medical-related, semiconductor, consumer products, food and beverage, and others.

Cognex is one of the leading machine vision companies in the world.

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

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

Cognex’s ability to compete depends on 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.

Cognex’s ability to compete depends on our ability to design new products and functionality that meet evolving customer requirements, and then to manufacture and sell those high-quality products in a timely manner.

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

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

The importance of each of these factors varies depending on the specific needs of the customer.

Our Business Strategies

Expansion of market position

Our goal is to expand our position as a leading worldwide machine vision provider by growing in our core markets, as well as expanding into new markets and customers with both current and new products and services.

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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 been 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, energetic, and creative talent who are motivated to solve the most challenging vision tasks.

We invest heavily in research and development in order to maintain our position as a technology leader in machine vision.

We invest in technology that makes vision easier to use and more affordable, and therefore, available to a broader base of customers, such as our vision sensor products that enable customers with a lower budget to use machine vision without the help of sophisticated engineers.

We also invest in technology that addresses the most challenging vision applications, such as our 3D vision products that solve applications where a height or volume measurement is required and our deep learning vision software that solves complex applications with unpredictable defects and deviations.

We invest through internal development, as well as the acquisition of businesses and technologies.

We continue to invest in our core markets, such as automotive and consumer electronics, 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 e-commerce and omni-channel retail distribution centers, as well as parcel and post warehouses.

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 or may require supplemental technical support or integration assistance.

We invest in emerging, high-growth regions where many manufacturers can benefit from incorporating machine vision into their production processes.

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

We consider business acquisitions to be an important part of our growth strategy, and although we continue to actively seek out acquisition opportunities, we are selective in choosing businesses that we believe will enhance long-term growth and profitability, as well as fit within our corporate culture.

We plan to continue to seek opportunities to expand our product lines, customer base, distribution network, and technical talent through acquisitions in the machine vision industry.

We continue to invest in our core markets, such as automotive, logistics, and consumer electronics where we are a leading provider of vision and ID products for factory automation.

Within these markets, we are making significant investments to focus on what we believe to be the fastest-growing applications and use cases.

In the logistics market, we are moving beyond barcode reading into more complex applications in e-commerce and omni-channel retail distribution centers, as well as parcel and post warehouses.

In automotive, we are developing new solutions for fast growing electric vehicle manufacturers and suppliers.

We reach a broad base of customers through our worldwide direct sales force that sells primarily 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 or may require supplemental technical support or integration assistance.

Our “Emerging Customer” sales initiative is expanding our sales force to reach customers who may be newer to factory automation and have yet to fully benefit from all that machine vision can offer.

These customers are increasingly looking for automation solutions that are easy to implement, easy to use, and provide the best technology.

We expect our Emerging Customer strategy to broaden our reach, increase penetration, and further diversify our customer base.

Growth through innovation

We invest heavily in research and development to maintain our position as a technology leader in machine vision.

We invest in technology that addresses the most challenging vision applications, such as our deep learning vision software that solves complex applications with unpredictable defects and deviations.

We also invest in technology that makes vision easier to use and more affordable, and therefore, available to a broader base of customers, such as our vision sensor products that enable customers with a lower budget to use machine vision while minimizing installation and applications support.

Inorganic growth

We plan to drive inorganic growth through expansion in adjacent market segments.

We are focusing specifically on segments in which our products and solutions, application expertise, and customer and industry relationships should enable us to provide significant value to end-users.

We seek out selective opportunities in new applications and markets through the acquisition of businesses and technologies that are synergistic with our core markets.

We are selective in choosing businesses and technologies that we believe will enhance long-term growth and profitability, as well as fit within our corporate culture.

We plan to continue to seek acquisition opportunities to expand our product lines, customer base, distribution network, and technical talent.

Sustainable profitability

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

Our relatively high gross margins have the potential to provide us with strong incremental profit margins, leading to high operating leverage in our financial model.

Our strong and unique corporate culture reinforces our values of customer first and innovation, and enables us to attract and retain smart, enthusiastic, and creative talent who are motivated to solve the most challenging vision tasks both quickly and painlessly for customers.

The automotive market has been one of our largest markets for the past 20 years.

Machine vision is used in almost every step of vehicle manufacturing, from measuring inbound parts, to guiding robot assembly, to inspecting the stitching on leather seats.

We currently expect the proliferation of electronics in automobiles to be a significant growth driver in both electric vehicles and internal combustion engine vehicles.

For example, innovations in safety, driver assist, and entertainment features increase the number of items to be placed, tracked, measured, and inspected by machine vision.

We also anticipate a multi-year wave of investment in Electric Vehicle (“EV”) manufacturing equipment, including related to battery manufacturing and inspection.

Cognex works closely with the major EV battery manufacturers in Asia that we believe produce more than 90% of the world’s automotive batteries.

We believe that these manufacturers are positioned to grow within Asia, and to expand both independently and through partnerships in the Americas and Europe, and we anticipate that our existing relationships and proven offerings will position us to

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capture a significant share of this growth.

These anticipated trends may offset expected reductions in traditional powertrain investments on internal combustion engine vehicles, leading to growth in the automotive market.

Consumer Electronics

We anticipate major investments in new generations of consumer electronics.

We expect leading companies in this space to continue to grow based on new technologies that we expect to succeed and build on the smartphone.

We believe new devices will be difficult to manufacture on a large scale, and therefore will require more innovative vision products in that process.

Cognex has close relationships with the largest and most sophisticated companies in the consumer electronics market, and we expect to be a partner of choice as they bring new technologies to market.

Logistics has been one of our largest growth drivers over the past five years and has become one of our largest end markets.

We believe that our e-commerce logistics business is differentiated by the high performance of our bar-code reading and that growth will be driven by retailers investing in online fulfillment.

From an automation perspective, the logistics industry is still in its early stages with a large reliance on human labor and a low rate of robotic automation.

Beyond barcode reading, we expect vision applications in logistics to grow quickly and become a more substantial business for us.

Vision applications include tasks like inspecting packages for damage, object and symbol recognition, and dimensioning.

Geographically, our current logistics business is primarily within the U.S., but, over the long term, we expect to realize the highest rates of growth in Europe and Asia, where we believe customers are beginning to catch up with the U.S.

in logistics automation technology and are moving away from local incumbent suppliers.

In 2022, we saw a slowdown in this end market as the leading e-commerce players took a post-pandemic “time out” to absorb excess capacity, but we currently continue to expect logistics to be our highest growth end market over the mid to long term.

Medical-Related

Cognex has a growing customer base of life science equipment suppliers.

Our products are specified in over 100 different machine designs, many of which are in the process of obtaining regulatory approval.

As they launch, we believe they will deliver many years of recurring revenue.

Applications in this market include lab automation and medical device inspection applications.

In recent years, we also have seen demand for machine vision grow from manufacturers of diagnostic tests, vaccines, and protective equipment.

The number of end markets with a need for machine vision applications is expanding.

Other end market uses of Cognex machine vision include manufacturers of semiconductors, regulated products reducing counterfeiting, food producers improving food safety, manufacturers using 3D measurement for robotic guidance, and many others.

Products and Technology

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 solutions that solve complex applications with unpredictable defects and deviations.

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

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

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

For example, customers can purchase vision software to use with their own camera and processor, or they can purchase a standalone unit that combines camera, processor, and software into a single package.

Vision Systems and Sensors

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, and deep learning models, meet various price and performance requirements for factory automation customers.

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

Vision sensors can 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 include 2D, 3D, deep learning, and edge learning models, meet various price and performance requirements for factory automation customers.

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

Similar to our deep learning-based systems, our edge learning-based systems use pre-trained models, but on simpler applications that prioritize ease of use and have a broader appeal with easier and faster implementation and training.

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Cognex industrial image-based barcode readers quickly and reliably read 1D, 2D, label-based, 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.

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

Research, Development, and Engineering

Cognex engages in research, development, and engineering (RD&E) to enhance our existing products and to develop new products and functionality to address market opportunities.

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.

RD&E expenses as a percentage of revenue were 13% in 2021, 16% in 2020, and 16% in 2019.

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.

We believe that a continued commitment to RD&E activities is essential 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, 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 incurred RD&E costs of approximately $141 million, $135 million, and $131 million for the years ended December 31, 2022, 2021 and 2020, respectively.

We expect to continue our commitment to RD&E, even during periods of lower revenue levels, to introduce new products, platforms, and solutions throughout economic cycles.

Intellectual Property

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

Cognex’s products are manufactured utilizing third-party contractors, whereby the majority of component procurement, system assembly, and initial testing are performed by electronics manufacturing services suppliers.

Cognex’s hardware products are manufactured utilizing third-party contractors, whereby the majority of component procurement, system assembly, and initial testing are performed by electronics manufacturing services suppliers.

Cognex’s primary contract manufacturer is located in Indonesia.

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

After the completion of initial testing, assembled products from our contract manufacturers are routed to our distribution centers in Cork, Ireland or Natick, Massachusetts, USA, where trained Cognex personnel load Cognex software onto the products, provide additional assembly and image alignment as needed, 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, Massachusetts distribution center, while finished products for customers outside of the Americas are shipped from our Cork, Ireland distribution center.

Our contract manufacturers use specified components sourced from vendor lists approved by Cognex and assembly/test processes created and controlled by Cognex.

After the completion of initial testing, assembled products from our contract manufacturers are routed to our distribution centers in Cork, Ireland or Southborough, Massachusetts, USA, where trained Cognex personnel load Cognex software onto the products, provide additional assembly and image alignment as needed, 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 Southborough, Massachusetts distribution center, while finished products for customers outside of the Americas are shipped from our Cork, Ireland distribution center.

Sales Channels and Support Services

Cognex sells its products through a worldwide direct sales force that focuses on the development of strategic accounts that generate or are expected to generate significant sales volume, as well as through a global network of distribution and integration partners.

Cognex sells its products through a worldwide direct sales force that primarily focuses on the development of strategic accounts which generate or are expected to generate significant sales volume, as well as through a global network of distribution and integration partners.

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.

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.

Through each of these channels, 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.

Towards the end of 2022, we also began to build out our Emerging Customer sales force that primarily focuses on establishing relationships and selling into new accounts which are newer to factory automation and Cognex.

Sales to customers based outside of the United States represented approximately 66% of our total revenue in 2022, with approximately 23% from customers based in Europe, 23% from customers based in Greater China, and 20% from customers based in other regions outside the United States.

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

Maintenance and support programs include hardware support programs that entitle customers to have failed products repaired, as well as software support programs that provide customers with application support and software updates to the latest software releases.

Maintenance and support programs can include hardware support programs that entitle customers to have products repaired, as well as software support programs that provide customers with application support and software updates to the latest software releases.

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.

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Human Capital

Our employees are our most valuable assets and critical to our success.

Our employees are our most valuable asset and critical to our success.

We create and maintain an environment where “Cognoids,” a unique name for our employees, can engage with each other, perform their best work, develop their careers, and be creative.

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We are committed to finding the very best talent to be part of our growing technology company.

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

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

To preserve and enhance our corporate culture, while recognizing differences across and within regions, we have a global team of Cognoids who serve as Ministers of Culture, led by our Chief Culture Officer.

Learning and Development

Cognex invests in tools and resources that support employees’ learning and development.

We employ a team that creates content to provide skills and coaching to employees on a variety of topics, such as leading teams, as well as to support continued understanding of our culture, values, organization, and products.

We believe these efforts better position Cognex to operate as a leader in the machine vision industry.

Compensation and Benefits

Our compensation programs reflect a pay-for-performance philosophy.

As Cognoids advance in their careers, an increasing percentage of total compensation is tied to variable incentive programs, such as performance-based bonuses and stock-based awards.

In addition, we care about the health and well-being of our employees and provide access to a host of benefits, including health, vision, a student loan repayment program, and reward and recognition programs.

We believe in investing in tools and resources that support employees’ learning and development and setting a compensation structure that reflects the Company’s commitment to pay-for-performance philosophy.

We believe these efforts align with our stockholders’ long-term interests and better position Cognex to operate as a leader in the machine vision industry.

Diversity, Equity, Inclusion, and Belonging

While we are incredibly proud of our culture, we continue to listen, learn, and grow.

We are excited about the opportunities to continue to build an organization that reflects the best of the world around us.

As a multi-national company where over half our Cognoids live outside the U.S., diversity means different things to different groups.

We are building strategies and plans to continue to enhance our diversity, equity, inclusion, and belonging (DEIB) initiatives.

One specific place where this evolution is visible is through the launch of our DEIB Council.

The Council is led by Cognex’s Vice President of Solutions and is comprised of over 50 volunteer Cognoids representing a broad cross-section of functions, geographies, and backgrounds.

Regulatory Compliance

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

Information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K.

Cognex has used, and intends to continue to use, its investor relations website as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.

Information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K or in any other document or report that Cognex files with the SEC, and any references to Cognex's website are intended to be inactive textual references only.

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What changed 10-K

Item 1. Business