What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 81 added, 68 removed, 108 unchanged (58% 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 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.

These forward-looking statements, which include statements regarding business and market 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 or revenue mix, research and development activities, sales and marketing activities (including our 'Emerging Customer' sales initiative), new product offerings and product development activities, customer acceptance of our products, capital expenditures, cost management activities, investments, liquidity, dividends and stock repurchases, strategic and growth plans and opportunities, 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:

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(6) the challenges in integrating and achieving expected results from acquired businesses, including our acquisition of Moritex Corporation;

(7) information security breaches;

(7) information security breaches and other cybersecurity risks;

(8) the failure to comply with laws or regulations relating to data privacy or data protection;

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(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;

(15) the loss of, or curtailment of or delays in 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;

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(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;

(21) exposure to potential liabilities, increased costs (including regulatory compliance costs), reputational harm, and other potential impacts associated with expectations relating to environmental, social, and governance considerations;

(22) stock price volatility;

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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.

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.

Revenue for the second quarter of 2024 totaled $239,292,000 and was relatively flat compared to the second quarter of 2023.

Incremental revenue arising from the acquisition of Moritex Corporation ("Moritex") that closed in the fourth quarter of 2023 and higher revenue from customers in the logistics and semiconductor industries, was partially offset by lower spending trends across our factory automation business.

Gross margin as a percentage of revenue was 70% for the second quarter of 2024 as compared to 74% for the second quarter of 2023 due primarily to the impact of a less favorable revenue mix and the amortization of Moritex acquired technologies.

Operating expenses for the second quarter of 2024 increased 12% from the second quarter of 2023.

Investments in our “Emerging Customer” sales initiative focused on broadening our customer base and incremental costs related to the acquisition of Moritex were partially offset by the impact of cost management activities.

Operating income decreased to 16% of revenue for the second quarter of 2024 as compared to 27% of revenue for the second quarter of 2023 driven by the lower gross margin percentage and continued investment in our "Emerging Customer" sales initiative.

This lower level of operating income resulted in net income of 15% of revenue, or $0.21 per diluted share, for the second quarter of 2024, as compared to 24% of revenue, or $0.33 per diluted share, for the second quarter of 2023.

Results of Operations

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GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S.

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

Revenue decreased by $3,220,000, or 1%, for the three-month period and increased by $6,453,000, or 1%, for the six-month period as compared to the same periods in 2023.

Revenue from the acquisition of Moritex that closed in the fourth quarter of 2023 represented approximately 7% of total revenue for both periods in 2024.

In addition to the contribution of Moritex, revenue from customers in the logistics and semiconductor industries increased for both the three-month and six-month periods in 2024 from the prior year.

These increases were offset by lower spending trends across our factory automation business, most notably in the automotive and consumer electronics industries.

The decrease in automotive revenue was due to continued softness across the automotive business, as well as delayed spending from electric vehicle battery manufacturers.

The decrease in consumer electronics revenue was also impacted by the timing of large customer deployments that were completed late in the second quarter of 2023.

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 and six-month periods ended June 30, 2024 and July 2, 2023.

Three-months Ended Six-months Ended

June 30, 2024 July 2, 2023 $ Change % Change June 30, 2024 July 2, 2023 $ Change % Change

(unaudited) (unaudited)

Americas $ 85,162 $ 82,297 $ 2,865 3 % $ 168,297 $ 162,911 $ 5,386 3 %

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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

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.

• Revenue from customers based in the Americas increased by 3% for both the three-month and six-month periods.

The increase was primarily driven by higher revenue from customers in the logistics industry, partially offset by continued softness across our factory automation business.

The increase in logistics revenue for the six-month period in 2024 included a strategic logistics project completed in the first quarter.

• Revenue from customers based in Europe increased by 1% for the three-month period and decreased by 6% for the six-month period.

Similar to the Americas, the Europe region continued to experience softness across our factory automation business.

Although logistics revenue was higher for both periods in 2024, this increase was not enough to offset declines in factory automation revenue for the six-month period.

• Revenue from customers based in Greater China decreased by 25% for the three-month period and decreased by 20% for the six-month period.

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 impact of lower spending trends, as well as the timing of certain deployments related to a large consumer electronics customer that were completed late in the second quarter of 2023, was partially offset by the revenue contribution from the Moritex acquisition.

• Revenue from customers based in other countries in Asia increased by 37% for the three-month period and increased by 50% for the six-month period.

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.

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

The following table sets forth our gross margin (in thousands) for the three-month and six-month periods ended June 30, 2024 and July 2, 2023.

Three-months Ended Six-months Ended

June 30, 2024 July 2, 2023 $ Change % Change June 30, 2024 July 2, 2023 $ Change % Change

(unaudited) (unaudited)

Gross margin $ 166,599 $ 179,683 $ (13,084) (7) % $ 308,536 $ 323,423 $ (14,887) (5) %

Percentage of total revenue 70 % 74 % 69 % 73 %

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).

Gross margin as a percentage of revenue was 70% and 69% for the three-month and six-month periods in 2024, respectively, as compared to 74% and 73% for the same periods in 2023.

The decrease was due to a less favorable revenue mix in 2024 that included products with relatively low gross margins from the Moritex acquisition that closed in the fourth quarter of 2023, as well as the amortization of Moritex acquired technologies.

The decrease for the six-month period was also due to a strategic logistics project completed in the first quarter that had lower-than-average gross margins, as well as charges related to the final sell-through of Moritex acquired inventories in the first quarter that were written up to fair value.

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

The following table sets forth our operating expenses (in thousands) for the three-month and six-month periods ended June 30, 2024 and July 2, 2023.

Three-months Ended Six-months Ended

June 30, 2024 July 2, 2023 $ Change % Change June 30, 2024 July 2, 2023 $ Change % Change

(unaudited) (unaudited)

Research, development, and engineering expenses $ 34,962 $ 33,585 $ 1,377 4 % $ 72,067 $ 72,127 $ (60) — %

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Percentage of total revenue 39 % 34 % 41 % 38 %

Loss (recovery) from fire $ — $ (2,500) $ 2,500 (100) % $ — $ (2,500) $ 2,500 (100) %

Percentage of total revenue — % (1) % — % (1) %

Total operating expenses $ 128,142 $ 114,508 $ 13,634 12 % $ 255,875 $ 236,087 $ 19,788 8 %

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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.

Research, development, and engineering (RD&E) expenses increased by $1,377,000, or 4%, for the three-month period and remained relatively flat for the six-month period as compared to the same periods in 2023.

Higher incentive compensation expenses were offset by lower stock-based compensation expenses for the six-month period due to the impact of forfeiture adjustments in the first quarter.

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.

RD&E expenses as a percentage of revenue were 18% and 19% for the three-month periods in 2024 and 2023, respectively.

RD&E expenses as a percentage of revenue were 15% and 16% for the three-month and six-month periods in 2024, respectively, as compared to 14% and 16% for the same periods in 2023.

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.

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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.

Selling, general, and administrative (SG&A) expenses increased by $9,757,000, or 12%, for the three-month period and increased by $17,348,000, or 10%, for the six-month period as compared to the same periods in 2023.

The increase 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).

These costs included additional sales and support personnel-related costs, the amortization of acquired customer relationships and trademarks, and integration costs.

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.

Loss (Recovery) from Fire

On June 7, 2022, the Company’s primary contract manufacturer experienced a fire at its plant in Indonesia, destroying a significant amount of Cognex inventories.

In the second quarter of 2023, the Company recorded a recovery related to the fire of $2,500,000 for proceeds received from the Company’s insurance carrier in relation to a business interruption claim.

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

The following table sets forth our non-operating income (expense) (in thousands) for the three-month and six-month periods ended June 30, 2024 and July 2, 2023.

Three-months Ended Six-months Ended

June 30, 2024 July 2, 2023 $ Change % Change June 30, 2024 July 2, 2023 $ Change % Change

(unaudited) (unaudited)

Foreign currency gain (loss) $ (181) $ (1,605) $ 1,424 (89) % $ (135) $ (1,211) $ 1,076 (89) %

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Total non-operating income (expense) $ 3,111 $ 2,602 $ 509 20 % $ 6,473 $ 6,656 $ (183) (3) %

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.

The Company recorded foreign currency losses of $181,000 and $135,000 for the three-month and six-month periods in 2024, respectively, and $1,605,000 and $1,211,000 for the corresponding periods in 2023, 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.

Investment income decreased by $979,000, or 24%, for the three-month period and decreased by $1,446,000, or 19%, for the six-month period in 2024 as compared to the corresponding periods 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.

The Company recorded other income of $176,000 and $372,000 for the three-month and six-month periods in 2024, respectively, and $112,000 and $185,000 for the corresponding periods in 2023.

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

The following table sets forth income tax information (in thousands) for the three-month and six-month periods ended June 30, 2024 and July 2, 2023.

Three-months Ended Six-months Ended

June 30, 2024 July 2, 2023 $ Change % Change June 30, 2024 July 2, 2023 $ Change % Change

(unaudited) (unaudited)

Income before income tax expense $ 41,568 $ 67,777 $ (26,209) (39) % $ 59,134 $ 93,992 $ (34,858) (37) %

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Effective income tax rate 13 % 15 % 18 % 12 %

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.

The Company’s effective tax rate was 13% and 18% for the three-month and six-month periods in 2024, respectively, and 15% and 12% for the same periods in 2023.

The Company recorded a net discrete tax benefit of $463,000 for the three-month period in 2024 and a net discrete tax expense of $2,622,000 for the six-month period in 2024, as compared to a net discrete tax expense of $399,000 in the three-month period in 2023 and a net discrete tax benefit of $3,195,000 for the six-month period in 2023.

The higher level of discrete tax expense for the six-month period in 2024 was driven by unfavorable adjustments to certain tax assets and reserves, while the higher level of discrete tax benefits for the six-month period in 2023 was 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% for both the three-month and six-month periods in 2024, as compared to 15% for the corresponding periods in 2023.

The decrease was primarily due to more of the Company's profits being taxed in relatively lower tax rate jurisdictions.

Liquidity and Capital Resources

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash and investment balance of $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.

As of June 30, 2024, the Company's portfolio of debt securities was in a net unrealized loss position of $8,127,000.

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.

Net cash provided by operating activities totaled $41,406,000 for the six-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.

Investing activities

Net cash used in investing activities totaled $49,023,000 for the three-month period in 2024.

Net cash used in investing activities totaled $13,785,000 for the six-month period in 2024.

Investing activities included capital expenditures that totaled $8,571,000 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.

Net cash used in financing activities totaled $47,506,000 for the six-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.

Under this March 2022 program, the Company repurchased 473,000 shares at a total cost of $19,879,000 during the six-month period in 2024, leaving a remaining balance of $313,013,000 as of June 30, 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.

The Company’s Board of Directors declared and paid cash dividends of $0.075 per share for the first and second quarters of 2024, totaling $25,756,000.

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.

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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.

As of June 30, 2024, the Company had inventory purchase commitments of $43,078,000, with the majority payable in the next twelve months, and lease payment obligations of $112,234,000, with $13,364,000 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.

• We expect to continue to make significant cash outlays related to our Emerging Customer sales initiative as we continue to grow our sales force 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.

As of June 30, 2024, the Company had a remaining balance payable of $18,338,000 through 2025.

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.

We believe that our balance sheet condition currently gives us a strong position with respect to anticipated longer-term liquidity needs.

New Pronouncements

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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