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 Exchange Act. 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,” "opportunity," "goal" 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 growth opportunities and trends, future financial performance and financial targets, customer demand and order rates and timing of related revenue, managing supply challenges, delivery lead times, future product mix, research and development activities, sales and marketing activities (including our Emerging Customer Program), new product offerings and product development activities, customer acceptance of our products, the potential effects of emerging technologies, capital expenditures, cost management activities, investments, liquidity, dividends and stock repurchases, strategic and growth plans, our ability to maintain and grow key relationships, acquisitions, 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 technological obsolescence of current products and the inability to develop new products, particularly in connection with emerging artificial intelligence technologies; (2) the impact of competitive pressures; (3) the inability to attract and retain skilled employees and maintain our unique corporate culture; (4) the failure to properly manage the distribution of products and services; (5) economic, political, and other risks associated with international sales and operations, including the impact of trade disputes, the economic climate in China, and the wars in Ukraine and Israel; (6) the challenges in integrating and achieving expected results from acquired businesses, including our acquisition of Moritex Corporation; (7) information security breaches; (8) the failure to comply with laws or regulations relating to data privacy or data protection; (9) the inability to protect our proprietary technology and intellectual property; (10) the failure to manufacture and deliver products in a timely manner; (11) the inability to obtain, or the delay in obtaining, components for our products at reasonable prices; (12) the failure to effectively manage product transitions or accurately forecast customer demand; (13) the inability to manage disruptions to our distribution centers or to our key suppliers; (14) the inability to design and manufacture high-quality products; (15) the loss of, or curtailment of purchases by, large customers in the logistics, consumer electronics, or automotive industries; (16) potential impairment charges with respect to our investments or acquired intangible assets; (17) exposure to additional tax liabilities, increases and fluctuations in our effective tax rate, and other tax matters; (18) fluctuations in foreign currency exchange rates and the use of derivative instruments; (19) unfavorable global economic conditions, including high interest rates and fluctuating inflation rates; (20) business disruptions from natural or man-made disasters, such as fire, or public health issues; (21) exposure to potential liabilities, increased costs, reputational harm, and other adverse effects associated with expectations relating to environmental, social, and governance considerations; (22) stock price volatility; and (23) 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, 2023, 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 seek to improve efficiency and quality in a wide range of 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 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 potential customers across a variety of industries, including automotive, logistics, consumer electronics, medical-related, semiconductor, consumer products, and food and beverage. 24 Revenue for the first quarter of 2024 totaled $210,797,000, representing an increase of 5% from the first quarter of 2023. The increase was primarily driven by incremental revenue arising from the acquisition of Moritex Corporation ("Moritex") that closed in the fourth quarter of 2023 and a strategic logistics project that completed in the first quarter of 2024, partially offset by lower spending trends across our factory automation business. Gross margin as a percentage of revenue was 67% for the first quarter of 2024 as compared to 71% for the first quarter of 2023 due primarily to the impact of a less favorable revenue mix and charges related to the Moritex acquisition. Operating expenses for the first quarter of 2024 increased 5% from the first quarter of 2023. Investments in our “Emerging Customer” sales initiative and incremental costs related to the acquisition of Moritex were partially offset by the impact of cost management activities and lower stock-based compensation expense. Operating income decreased to 7% of revenue for the first quarter of 2024 as compared to 11% of revenue for the first quarter of 2023. The lower gross margin percentage and continued investment in our "Emerging Customer" sales initiative more than offset higher revenue levels. This lower level of operating income, as well as the unfavorable impact of discrete tax items, resulted in net income of 6% of revenue, or $0.07 per diluted share, for the first quarter of 2024, as compared to 13% of revenue, or $0.15 per diluted share, for the first quarter of 2023. 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 increased by $9,673,000, or 5%, for the three-month period as compared to the same period in 2023. Revenue from the acquisition of Moritex that closed in the fourth quarter of 2023 contributed just under 8% to total revenue. Revenue from Moritex and a strategic logistics project that completed in the first quarter of 2024 was partially offset by lower spending trends across our factory automation business, most notably in the automotive and consumer electronics industries. The year-over-year decrease in automotive revenue was due to continued softness across the non-electric vehicle business, as well as delayed spending from electric vehicle battery manufacturers. Excluding the strategic project, logistics revenue was relatively flat year-over-year. 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 March 31, 2024 and April 2, 2023. Three-months Ended March 31, 2024 April 2, 2023 $ Change % Change (unaudited) Americas $ 83,135 $ 80,442 $ 2,693 3 % Percentage of total revenue 39 % 40 % Europe $ 52,354 $ 59,842 $ (7,488) (13) % Percentage of total revenue 25 % 30 % Greater China $ 30,049 $ 33,172 $ (3,123) (9) % Percentage of total revenue 14 % 16 % Other Asia $ 45,259 $ 27,668 $ 17,591 64 % Percentage of total revenue 21 % 14 % Total revenue $ 210,797 $ 201,124 $ 9,673 5 % Changes in revenue from a geographic perspective were as follows: • Revenue from customers based in the Americas increased by 3% for the three-month period as compared to the same period in 2023. The increase was primarily driven by a strategic logistics project completed in 25 the first quarter of 2024, partially offset by continued softness across our factory automation business. • Revenue from customers based in Europe decreased by 13% for the three-month period as compared to the same period in 2023. Similar to the Americas, the Europe region continued to experience broader softness across our factory automation business. • Revenue from customers based in Greater China decreased by 9% for the three-month period as compared to the same period in 2023. The Greater China region continued to experience a challenging business environment. The impact of lower spending trends was partially offset by the revenue contribution from the Moritex acquisition, as well higher revenue related to a large consumer electronics customer. • Revenue from customers based in other countries in Asia increased by 64% for the three-month period as compared to the same period in 2023. The increase was primarily driven by incremental revenue related to the acquisition of Moritex, for which the majority of revenue currently comes from customers based in Japan, as well as higher revenue from customers in the semiconductor and logistics industries. Gross Margin The following table sets forth our gross margin (in thousands) for the three-month periods ended March 31, 2024 and April 2, 2023. Three-months Ended March 31, 2024 April 2, 2023 $ Change % Change (unaudited) Gross margin $ 141,937 $ 143,740 $ (1,803) (1) % Percentage of total revenue 67 % 71 % Gross margin as a percentage of revenue was 67% and 71% for the three-month periods in 2024 and 2023, respectively. The decrease was due to less favorable revenue mix in the first quarter of 2024 that included a strategic logistics project and Moritex products, both at lower-than-average gross margins. The lower gross margin percentage was also due to charges related to the Moritex acquisition that closed in the fourth quarter of 2023 that included the amortization of acquired technologies (approximately $900,000) and the final sell-through of acquired inventories that were written up to fair value (approximately $1,200,000). These decreases were partially offset by lower inventory costs driven by a reduction in premiums paid to brokers for the purchase of components as supply chain constraints eased. Operating Expenses The following table sets forth our operating expenses (in thousands) for the three-month periods ended March 31, 2024 and April 2, 2023. Three-months Ended March 31, 2024 April 2, 2023 $ Change % Change (unaudited) Research, development, and engineering expenses $ 37,105 $ 38,542 $ (1,437) (4) % Percentage of total revenue 18 % 19 % Selling, general, and administrative expenses $ 90,628 $ 83,037 $ 7,591 9 % Percentage of total revenue 43 % 41 % Total operating expenses $ 127,733 $ 121,579 $ 6,154 5 % Percentage of total revenue 61 % 60 % Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses decreased by $1,437,000, or 4%, for the three-month period as compared to the same period in 2023, primarily from lower stock-based compensation expense due to the impact of forfeiture adjustments. Personnel-related costs remained relatively flat, as the additional costs associated with a new team of optical engineers that joined Cognex with the acquisition of Moritex in the fourth quarter of 2023 were offset by lower deferred compensation costs related to the 2019 acquisition of Sualab Co, Ltd. that were fully paid in October 2023 and cost management activities that included the realignment of headcount to business levels. 26 RD&E expenses as a percentage of revenue were 18% and 19% for the three-month periods in 2024 and 2023, respectively. 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 the time to market for new products to be critical to our revenue growth and competitive position. These percentages are impacted by revenue levels and investment cycles. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses increased by $7,591,000, or 9%, for the three-month period as compared to the same period in 2023. The increase in SG&A expenses was primarily due to increased costs related to our “Emerging Customer” sales initiative, including additional headcount, travel expenses, and marketing costs. We launched this initiative in 2023 to serve a broader customer base and deepen penetration of less served markets, and are continuing to increase our investment in 2024. Costs related to the acquisition of Moritex that closed in the fourth quarter of 2023 also contributed to the higher SG&A expenses. These costs included additional sales and support personnel-related costs, the amortization of acquired customer relationships and trademarks (approximately $1,200,000), and integration costs (approximately $1,300,000). Lower stock-based compensation expense and cost management activities helped to offset the increase in SG&A expenses, including the realignment of headcount to support the Emerging Customer sales initiative. Non-operating Income (Expense) The following table sets forth our non-operating income (expense) (in thousands) for the three-month periods ended March 31, 2024 and April 2, 2023. Three-months Ended March 31, 2024 April 2, 2023 $ Change % Change (unaudited) Foreign currency gain (loss) $ 46 $ 394 $ (348) (88) % Investment income $ 3,120 $ 3,587 $ (467) (13) % Other income (expense) $ 196 $ 73 $ 123 168 % Total non-operating income (expense) $ 3,362 $ 4,054 $ (692) (17) % The Company recorded foreign currency gains of $46,000 and $394,000 for the three-month periods in 2024 and 2023, respectively, primarily resulting 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 decreased by $467,000, or 13%, for the three-month period as compared to the same period in 2023. The decrease was primarily due to lower average investment balances, partially offset by higher yields on the Company's portfolio of debt securities. During the fourth quarter of 2023, net cash payments related to the acquisition of Moritex reduced cash available to invest by approximately $257 million, which resulted in lower investment income for the first quarter of 2024. The Company recorded other income of $196,000 and $73,000 for the three-month periods in 2024 and 2023, respectively. Income Tax Expense The following table sets forth income tax information (in thousands) for the three-month periods ended March 31, 2024 and April 2, 2023. Three-months Ended March 31, 2024 April 2, 2023 $ Change % Change (unaudited) Income before income tax expense $ 17,566 $ 26,215 $ (8,649) (33) % Income tax expense $ 5,544 $ 600 $ 4,944 824 % Effective income tax rate 32 % 2 % 27 The Company’s effective tax rate was 32% and 2% for the three-month periods in 2024 and 2023, respectively. The Company recorded a net discrete tax expense of $3,085,000 for the three-month period in 2024 driven by unfavorable adjustments to certain tax assets and reserves, while in the three-month period in 2023 the Company recorded a net discrete tax benefit of $3,594,000 driven by the release of tax reserves on state tax credits and favorable adjustments to certain deferred tax assets. Excluding the impact of all discrete tax items, the Company's effective tax rate was 14% and 16% for the three-month periods in 2024 and 2023, respectively. The decrease was primarily due to more of the Company's profits being taxed in relatively lower tax rate jurisdictions, as well as an increase in available tax credits. 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 $556,619,000 as of March 31, 2024. 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 March 31, 2024, the Company's portfolio of debt securities was in a net unrealized loss position of $9,492,000. Although the Company typically holds investments in an unrealized loss position until full value recovery at maturity, if the Company is required to sell debt securities to meet liquidity needs, it may sell these investments at a loss. Operating activities Net cash provided by operating activities totaled $13,643,000 for the three-month period in 2024. Significant uses of cash consisted of an increase in accounts receivable primarily related to the seasonality of large consumer electronics orders, as well as purchases of inventory. Investing activities Net cash used in investing activities totaled $49,023,000 for the three-month period in 2024. Investing activities included capital expenditures that totaled $4,061,000 and consisted primarily of continued investments in business systems, manufacturing test equipment related to new product introductions, as well as building and leasehold improvements. Financing activities Net cash used in financing activities totaled $25,088,000 for the three-month period in 2024. In March 2022, the Company's Board of Directors authorized the repurchase of $500,000,000 of the Company's common stock. Under this March 2022 program, the Company repurchased 231,000 shares at a total cost of $9,339,000 during the three-month period in 2024, leaving a remaining balance of $323,553,000 as of March 31, 2024. 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. The Company’s Board of Directors declared and paid cash dividends of $0.075 per share for the first quarter of 2024, totaling $12,888,000. 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. Future Cash Requirements The Company's future material cash requirements include contractual obligations related to inventory purchase commitments and leases. As of March 31, 2024, the Company had inventory purchase commitments of $40,843,000, with the majority payable in the next twelve months, and lease payment obligations of $116,434,000, with $13,809,000 payable in the next twelve months. Other significant and/or expected cash outlays for 2024 are as follows: • We expect to continue to make significant cash outlays related to our Emerging Customer sales initiative as we continue to grow our sales force in order to to serve a broader customer base and deepen penetration of less served markets. • The Tax Cuts and Jobs Act of 2017 subjected unrepatriated foreign earnings to a one-time transition tax. As of March 31, 2024, the Company had a remaining balance payable of $33,006,000 through 2025. 28 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, 2023.