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,” “potential,” “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 and financial targets, the expected impact of the fire at our primary contract manufacturer's plant on our assets, business and results of operations and related recoveries, customer demand and order rates and timing of related revenue, managing supply shortages, delivery lead times, future product mix, research and development activities, sales and marketing activities, new product offerings and product development activities, capital expenditures, investments, liquidity, dividends and stock repurchases, strategic and growth 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 reliance on key suppliers, such as our primary contract manufacturer, to manufacture and deliver products; (2) the expected impact of the fire at our primary contract manufacturer's plant and related recoveries; (3) delays in the delivery of our products, the failure to meet delivery schedules, and resulting customer dissatisfaction or loss of sales; (4) the inability to obtain, or the delay in obtaining, components for our products at reasonable prices; (5) the failure to effectively manage product transitions or accurately forecast customer demand; (6) the inability to manage disruptions to our distribution centers or to our key suppliers; (7) the inability to design and manufacture high-quality products; (8) the impact, duration, and severity of the COVID-19 pandemic, particularly in China, including the availability and effectiveness of vaccines as well as government lockdowns; (9) the loss of, or curtailment of purchases by, large customers in the logistics, consumer electronics, or automotive industries; (10) information security breaches; (11) the failure to comply with laws or regulations relating to data privacy or data protection; (12) the inability to protect our proprietary technology and intellectual property; (13) the inability to attract and retain skilled employees and maintain our unique corporate culture; (14) the technological obsolescence of current products and the inability to develop new products; (15) the failure to properly manage the distribution of products and services, including the management of lead times and delivery dates; (16) the impact of competitive pressures; (17) the challenges in integrating and achieving expected results from acquired businesses; (18) potential disruptions in our business systems; (19) potential impairment charges with respect to our investments or acquired intangible assets; (20) exposure to additional tax liabilities, increases and fluctuations in our effective tax rate, and other tax matters; (21) fluctuations in foreign currency exchange rates and the use of derivative instruments; (22) unfavorable global economic conditions, including increases in interest rates and high inflation rates; (23) business disruptions from natural or man-made disasters, such as fire, or public health issues; (24) economic, political, and other risks associated with international sales and operations, including the impact of trade disputes on the economic climate in China and the war in Ukraine; (25) exposure to potential liabilities, increased costs, reputational harm, and other adverse effects associated with expectations relating to environmental, social, and governance considerations; (26) stock price volatility; and (27) our involvement in time-consuming and costly litigation or activist shareholder activities. 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, 2022, 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 (“the Company”) 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 high-growth potential businesses across attractive industrial end markets. 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. Machine vision is used in a variety of industries where technology is widely recognized as an important component 23 of automated production, distribution, and quality assurance. Virtually every manufacturer or distributor can achieve better quality and efficiency by using machine vision; thus, our applications have 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. Revenue for the first quarter of 2023 totaled $201,124,000, representing a decrease of 29% from the first quarter of 2022. The decrease was driven by three primary factors: (i) lower revenue from the logistics industry primarily as a result of the continued pause in investments by a few large e-commerce customers; (ii) the unfavorable impact of foreign currency exchange rate changes on revenue; and (iii) slower spending trends across our broader factory automation business. Gross margin as a percentage of revenue was 71% for the first quarter of 2023 compared to 72% for the first quarter of 2022. The decrease in gross margin was due to reduced cost efficiencies from the lower sales volume, a less favorable revenue mix, and the unfavorable effect of foreign currency exchange rates on revenue, partially offset by lower inventory costs. Operating expenses for the first quarter of 2023 totaled $121,579,000, representing an increase of 4% from the first quarter of 2022. The increase was primarily driven by additional headcount to support our "Emerging Customer" sales initiative and annual merit increases provided to employees. These higher expenses were offset by lower incentive compensation and the favorable impact of foreign currency exchange rate changes on expenses. As a result of the lower revenue level, operating income declined to 11% of revenue for the first quarter of 2023 as compared to 31% of revenue for the first quarter of 2022. Tax expense decreased from the first quarter of 2022 as a result of lower operating income and a more favorable impact from discrete tax items. Net income declined to 13% of revenue, or $0.15 per diluted share, for the first quarter of 2023 from 24% of revenue, or $0.38 per diluted share, for the first quarter of 2022. Results of Operations As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. We also use results on a constant-currency basis as one measure to evaluate our performance. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange rate changes. Results on a constant-currency basis are not in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S. GAAP. Revenue Revenue for the first quarter of 2023 totaled $201,124,000, representing a decrease of $81,283,000, or 29%, from the first quarter of 2022. Changes in foreign currency exchange rates resulted in a lower level of reported revenue in the first quarter of 2023 as compared to the same quarter in 2022. Excluding the impact of foreign currency exchange rate changes, revenue decreased 26%. The largest factor contributing to the year-over-year decrease in total revenue was a decline in logistics revenue primarily as a result of the continued pause in investments by a few large e-commerce customers. Slower spending trends across our broader factory automation business further contributed to the decrease in revenue, including in the consumer electronics, automotive, semiconductor, and medical-related industries. Additionally, revenue for the first quarter of 2022 benefited from incremental revenue from backlog orders that were requested to ship in the fourth quarter of 2021, but were delayed into the first quarter of 2022 due to global supply chain conditions. The following table sets forth our disaggregated revenue information by geographic area based upon the customer's country of domicile (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue. 24 Three-months Ended April 2, 2023 April 3, 2022 $ Change % Change (unaudited) Americas $ 80,442 $ 126,658 $ (46,216) (36)% Percentage of total revenue 40 % 45 % Europe $ 59,842 $ 62,792 $ (2,950) (5)% Percentage of total revenue 30 % 22 % Greater China $ 33,172 $ 48,406 $ (15,234) (31)% Percentage of total revenue 16 % 17 % Other Asia $ 27,668 $ 44,551 $ (16,883) (38)% Percentage of total revenue 14 % 16 % Total revenue $ 201,124 $ 282,407 $ (81,283) (29)% Changes in revenue from a geographic perspective were as follows: • Revenue from customers based in the Americas decreased from the prior year comparable quarter by 36%. The decrease was primarily driven by lower revenue from customers in the logistics industry. • Revenue from customers based in Europe decreased from the prior year comparable quarter by 5%. Changes in foreign currency exchange rates resulted in a lower level of reported revenue in the first quarter of 2023. Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Europe was flat with the first quarter of 2022. On both a U.S. GAAP and constant-currency basis, decreases in logistics revenue were largely offset by revenue increases in other industries, most notably automotive. • Revenue from customers based in Greater China decreased from the prior year comparable quarter by 31%. Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Greater China decreased by 25% from the first quarter of 2022. On both a U.S. GAAP and constant-currency basis, the decline was primarily driven by a decrease in revenue from customers in the consumer electronics industry. • Revenue from customers based in other countries in Asia decreased from the prior year comparable quarter by 38%. Excluding the impact of foreign currency exchange rate changes, revenue decreased by 32%. On both a U.S. GAAP and constant-currency basis, the decrease resulted from broad-based declines in revenue from customers across multiple industries. Gross Margin The following table sets forth our gross margin (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue. Three-months Ended April 2, 2023 April 3, 2022 $ Change % Change (unaudited) Gross margin $ 143,740 $ 203,617 $ (59,877) (29) % Percentage of total revenue 71 % 72 % Gross margin as a percentage of revenue was 71% for the first quarter of 2023 compared to 72% for the first quarter of 2022. The decrease in gross margin was due to reduced cost efficiencies from the lower sales volume, a less favorable revenue mix, and the unfavorable effect of foreign currency exchange rates on revenue. This decrease was partially offset by lower inventory costs due to a reduction in premiums paid to brokers for the purchase of components in response to global supply chain constraints. 25 Operating Expenses The following table sets forth our operating expenses (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods, and the line item as a percentage of total revenue. Three-months Ended April 2, 2023 April 3, 2022 $ Change % Change (unaudited) Research, development, and engineering expenses $ 38,542 $ 36,054 $ 2,488 7 % Percentage of total revenue 19 % 13 % Selling, general, and administrative expenses $ 83,037 $ 80,835 $ 2,202 3 % Percentage of total revenue 41 % 29 % Total operating expenses $ 121,579 $ 116,889 $ 4,690 4 % Percentage of total revenue 60 % 41 % Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses increased $2,488,000, or 7%, from the first quarter of 2022. This increase was primarily driven by personnel-related costs as a result of headcount additions to support new product initiatives and compensation increases provided to employees as part of our annual merit process, as well as increases in stock-based compensation expense. These increases were partially offset by lower incentive compensation expenses than the prior year, primarily due to lower revenue and a timing difference in bonus expense recognition. Foreign currency exchange rate changes further offset increases to total RD&E expenses, as costs denominated in foreign currencies were translated into U.S. Dollars at a lower rate. RD&E expenses as a percentage of revenue were 19% for the first quarter of 2023, compared to 13% for the first quarter of 2022. The increase in RD&E as a percentage of revenue was primarily a result of lower revenue in the first quarter of 2023 as compared to the first quarter of 2022. We believe that a continued commitment to RD&E activities is essential in order to maintain 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 and competitive position. This quarterly percentage is impacted by revenue levels and investing cycles. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses increased $2,202,000, or 3%, from the first quarter of 2022. SG&A expenses increased due to costs related to our “Emerging Customer” sales initiative, including primarily compensation for additional headcount, travel expenses, and sales demonstration equipment. We launched this initiative towards the end of 2022 to broaden the reach of our sales force to customers who are relatively new to factory automation and have not fully realized the advantages of machine vision. Unrelated to our "Emerging Customer" sales initiative, we also had higher personnel-related costs resulting from headcount additions and compensation increases provided to employees as part of our annual merit process. Travel expenses also increased due to both the number of sales personnel added and a higher level of travel activity now that restrictions related to the COVID-19 pandemic have eased or been eliminated. These increases were partially offset by lower incentive compensation expenses than the prior year, which included sales commissions and incentive bonuses, primarily due to lower revenue and a timing difference in bonus expense recognition. Foreign currency exchange rate changes further offset increases to total SG&A expenses, as costs denominated in foreign currencies were translated into U.S. Dollars at a lower rate. 26 Non-operating Income (Expense) The following table sets forth our non-operating income (expense) (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods. Three-months Ended April 2, 2023 April 3, 2022 $ Change % Change (unaudited) Foreign currency gain (loss) $ 394 $ (444) $ 838 (189) % Investment income $ 3,587 $ 1,468 $ 2,119 144 % Other income (expense) $ 73 $ (48) $ 121 (252) % Total non-operating income (expense) $ 4,054 $ 976 $ 3,078 315 % The Company recorded foreign currency gains of $394,000 for the first quarter of 2023, and foreign currency losses of $444,000 for the first quarter of 2022. Foreign currency gains and losses result primarily from the revaluation and settlement of assets and liabilities that are denominated in currencies other than the functional currency of the Company, which is the U.S. Dollar, or its subsidiaries. Investment income for the first quarter of 2023 totaled $3,587,000, representing an increase of $2,119,000 from the first quarter of 2022. The increase was primarily due to higher yields on the Company's portfolio of debt securities, and to a lesser extent, higher investment balances. The Company recorded other income of $73,000 for the first quarter of 2023 compared to other expense of $48,000 for the first quarter of 2022. Income Tax Expense The following table sets forth our effective income tax rate reconciliation (in thousands) for the three-month periods ended April 2, 2023 and April 3, 2022 with the dollar and percentage changes between the corresponding periods. Three-months Ended April 2, 2023 April 3, 2022 $ Change % Change (unaudited) Income before income tax expense $ 26,215 $ 87,704 $(61,489) (70)% Income tax expense $ 600 $ 20,371 $(19,771) (97)% Effective income tax rate 2 % 23 % The Company’s effective tax rate was 2% of pre-tax income in the first quarter of 2023, compared to 23% in the first quarter of 2022. The decrease in effective tax rate primarily resulted from the impact of discrete tax items, including a decrease in tax reserves and a decrease in tax expense for adjustments to certain deferred tax assets, partially offset by an increase in tax expense related to stock-based compensation. Excluding the impact of all discrete tax items, the Company’s effective tax rate was 16% of pre-tax income for both the first quarter of 2023 and 2022. 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 $843,913,000 as of April 2, 2023. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments to maintain the liquidity and safety of the investment portfolio. As of April 2, 2023, the Company's portfolio of debt securities was in a net unrealized loss position of $19,530,000. The Company currently does not intend to sell debt securities in an unrealized loss position to meet current liquidity needs as it has the ability and intention to hold these investments until full value recovery at maturity. However, if the Company is required to sell these debt securities to meet future liquidity needs, for example, to acquire new businesses or technologies, it is prepared to sell these investments at a loss. 27 Three-months Ended April 2, 2023 April 3, 2022 (unaudited) Net cash provided by (used in) operating activities $ 27,553 $ 49,517 Net cash provided by (used in) investing activities $ (5,788) $ 69,236 Net cash provided by (used in) financing activities $ (39,324) $ (138,114) The Company’s cash requirements for the first quarter of 2023 consisted of operating activities, repurchases of common stock, dividend payments, capital expenditures, purchases of investments, and net payments from the issuance of common stock under stock plans. Cash flows from operating activities totaled $27,553,000 for the three-month period ended April 2, 2023 compared to $49,517,000 for the three-month period ended April 3, 2022. This decrease was primarily driven by lower net income resulting from the decrease in revenue year-over-year. Cash outlays from operating activities in the first quarter of 2023 also consisted of incentive compensation payments that were earned and accrued in 2022. Capital expenditures for the first quarter of 2023 totaled $5,507,000 and consisted primarily of continued investments in business systems related to the Company's sales process, manufacturing test equipment related to new product introductions, and leasehold improvements related to one of the Company's offices in Shanghai, China. The Company's future material cash requirements include contractual obligations related to inventory purchase commitments and leases. As of April 2, 2023, the Company had inventory purchase commitments of $47,486,000, with the majority payable during 2023, and lease payment obligations of $44,445,000, with $7,284,000 payable during 2023. During 2023, we also expect significant cash outlays related to the Company's "Emerging Customer" sales initiative as we continue to grow our sales force in order to reach customers who may not be utilizing machine vision to its full potential. In addition to the obligations described above, the following items may also result in future material uses of cash: Stock Repurchases On March 3, 2022, the Company's Board of Directors authorized the repurchase of $500,000,000 of the Company's common stock. During the three-month period ended April 2, 2023, the Company repurchased 479,000 shares at a total cost of $24,178,000 leaving a remaining balance of $388,508,000 under this March 2022 program as of April 2, 2023. The Company may repurchase shares under stock repurchase programs as authorized by its Board of Directors 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. Dividend Payments The Company’s Board of Directors declared and paid cash dividends of $0.070 per share in the first quarter of 2023. Future dividends will be declared at the discretion of the Company's Board of Directors and will depend on such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations. We believe that the Company's 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. In addition, the Company has no long-term debt. We believe that our balance sheet condition has put us in a strong position with respect to anticipated 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, 2022. 28