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 (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 trends, future financial performance and financial targets, the impact of tariffs, customer demand and order rates and timing of related revenue, future product or revenue mix, research and development activities, sales and marketing activities, new product offerings, innovation and product development activities, customer acceptance of our products, capital expenditures, cost and working capital 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: (1) the technological obsolescence of current products and the inability to develop new products; (2) the impact of competitive pressures; (3) the inability to attract and retain skilled employees, effectively plan for succession including managing the change of our Chief Executive Officer, all while maintaining 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 imposition of tariffs, the economic climate in China, and the wars involving Ukraine and Israel; (6) the challenges in integrating and achieving expected results from acquired businesses; (7) uncertainty surrounding our future capital needs; (8) information security breaches and other cybersecurity threats; (9) the failure to comply with laws or regulations relating to data privacy or data protection; (10) the inability to protect our proprietary technology and intellectual property; (11) the failure to manufacture and deliver products in a timely manner; (12) the inability to obtain, or the delay in obtaining, components for our products at reasonable prices; (13) the inability to design and manufacture high-quality products; (14) the loss of, or curtailment of purchases by, large customers in the logistics, consumer electronics, or automotive industries; (15) challenges in accurately forecasting our financial results due to seasonal and cyclical variations in customer purchasing patterns and economic and market volatility; (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 increases in interest rates, elevated inflation rates, and recession risks; (20) business disruptions from natural or man-made disasters, public health crises, or other events outside our control; (21) stock price volatility; and (22) 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, 2024, 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 logistics, automotive, consumer electronics, semiconductor, consumer products, medical-related, and food and beverage. 21 Revenue for the first quarter of 2025 totaled $216,036,000, representing an increase of 2% over the first quarter of 2024. The increase was due primarily to higher revenue from customers in the logistics and semiconductor industries, partially offset by continued weakness in the automotive industry and the unfavorable impact of foreign currency exchange rate changes on revenue. Gross margin as a percentage of revenue was 67% for the first quarters of both 2025 and 2024. Operating expenses for the first quarter of 2025 decreased 7% from the first quarter of 2024. The decrease was principally due to disciplined cost management, lower stock-based compensation expense, and the favorable impact of foreign currency exchange rate changes on expenses. Operating income increased to 12% of revenue for the first quarter of 2025 as compared to 7% of revenue for the first quarter of 2024 due to revenue growth and lower operating expenses. Net income increased to 11% of revenue, or $0.14 per diluted share, for the first quarter of 2025, as compared to 6% of revenue, or $0.07 per diluted share, for the first quarter of 2024. Results of Operations As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of our 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 ("U.S. GAAP") and should be considered in addition to, and not a substitute for, results prepared in accordance with U.S. GAAP. Revenue Revenue increased by $5,239,000, or 2%, for the three-month period in 2025 as compared to the same period in 2024. Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2025 as compared to 2024. Excluding the impact of foreign currency exchange rate changes, revenue increased by 5% over the prior year. Higher revenue from the logistics and semiconductor industries was partially offset by continued weakness in the automotive industry, while broader factory automation revenue remained stable. 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 30, 2025 and March 31, 2024. Three-months Ended March 30, 2025 March 31, 2024 $ Change % Change (unaudited) Americas $ 99,374 $ 83,135 $ 16,239 20 % Percentage of total revenue 46 % 39 % Europe $ 46,790 $ 52,354 $ (5,564) (11) % Percentage of total revenue 22 % 25 % Greater China $ 26,946 $ 30,049 $ (3,103) (10) % Percentage of total revenue 12 % 14 % Other Asia $ 42,926 $ 45,259 $ (2,333) (5) % Percentage of total revenue 20 % 21 % Total revenue $ 216,036 $ 210,797 $ 5,239 2 % Changes in revenue from a geographic perspective were as follows: • Revenue from customers based in the Americas increased by 20% for the three-month period in 2025 as compared to the same period in 2024. Strong growth in logistics was partially offset by continued weakness in the automotive industry. • Revenue from customers based in Europe decreased by 11% for the three-month period in 2025 as compared to the same period in 2024. Changes in foreign currency exchange rates resulted in a lower level of reported revenue in the first quarter of 2025 as compared to the same period in 2024, as the U.S. Dollar 22 was stronger on average versus the Euro and sales denominated in Euros were translated into U.S. Dollars at a lower rate. Excluding the impact of foreign currency exchange rate changes, revenue from customers based in Europe decreased by 7% for the three-month period due primarily to continued weakness in the automotive industry. • Revenue from customers based in Greater China decreased by 10% for the three-month period in 2025 as compared to the same period in 2024. Changes in foreign currency exchange rates did not have a material impact on the three-month period. The decrease was primarily due to the timing of revenue from large electronics orders. Broader Greater China revenue increased in most other industries over the same period in the prior year. • Revenue from customers based in other countries in Asia decreased by 5% for the three-month period in 2025 as compared to the same period in 2024. Changes in foreign currency exchange rates resulted in a lower level of reported revenue in 2025, primarily driven by a stronger U.S. Dollar versus the Japanese Yen and Korean Won as compared to the prior year. Excluding the impact of foreign currency exchange rate changes, revenue from customers based in other countries in Asia was relatively flat with the prior year, as higher semiconductor revenue was offset by lower automotive revenue. Gross Profit The following table sets forth our gross profit (in thousands) for the three-month periods ended March 30, 2025 and March 31, 2024. Three-months Ended March 30, 2025 March 31, 2024 $ Change % Change (unaudited) Gross profit $ 144,323 $ 141,937 $ 2,386 2 % Percentage of total revenue 67 % 67 % Gross margin was 67% for the three-month periods in both 2025 and 2024. The gross margin in 2024 included the final sell-through of acquired Moritex Corporation inventories that were written up to fair value. This favorable year-over-year impact was offset by less favorable industry mix, as well as the unfavorable impact of changes in foreign currency exchange rates. The impact of pricing pressure was offset by productivity measures, including material cost reductions. Operating Expenses The following table sets forth our operating expenses (in thousands) for the three-month periods ended March 30, 2025 and March 31, 2024. Three-months Ended March 30, 2025 March 31, 2024 $ Change % Change (unaudited) Research, development, and engineering expenses $ 34,727 $ 37,105 $ (2,378) (6) % Percentage of total revenue 16 % 18 % Selling, general, and administrative expenses $ 83,504 $ 90,628 $ (7,124) (8) % Percentage of total revenue 39 % 43 % Total operating expenses $ 118,231 $ 127,733 $ (9,502) (7) % Percentage of total revenue 55 % 61 % Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses decreased by $2,378,000, or 6%, for the three-month period in 2025 as compared to the same period in 2024. The decrease was due to disciplined cost management, including a reduction in RD&E headcount. Foreign currency exchange rate changes also contributed to the lower RD&E expenses, as costs denominated in foreign currencies were translated into U.S. Dollars at a lower rate. 23 RD&E expenses as a percentage of revenue were 16% and 18% for the three-month period in 2025 and 2024, 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 decreased by $7,124,000, or 8%, for the three-month period in 2025 as compared to the same period in 2024. The decrease was due to disciplined cost management, including a reduction in SG&A headcount. Lower stock-based compensation expense due to higher credits resulting from the annual true-up of forfeiture rate assumptions, as well as the favorable impact of foreign currency exchange rate changes, also contributed to the decrease in SG&A expenses. Non-operating Income (Expense) The following table sets forth our non-operating income (expense) (in thousands) for the three-month periods ended March 30, 2025 and March 31, 2024. Three-months Ended March 30, 2025 March 31, 2024 $ Change % Change (unaudited) Foreign currency gain (loss) $ (2,453) $ 46 $ (2,499) (5433) % Investment income $ 3,990 $ 3,120 $ 870 28 % Other income (expense) $ 169 $ 196 $ (27) (14) % Total non-operating income (expense) $ 1,706 $ 3,362 $ (1,656) (49) % The Company recorded foreign currency losses of $2,453,000 for the three-month period in 2025 and foreign currency gains of $46,000 for the three-month period in 2024. Foreign currency gains and losses in each period resulted 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 increased by $870,000, or 28%, for the three-month period due primarily to higher yields on the Company's portfolio of debt securities. Income Tax Expense The following table sets forth income tax information (in thousands) for the three-month periods ended March 30, 2025 and March 31, 2024. Three-months Ended March 30, 2025 March 31, 2024 $ Change % Change (unaudited) Income before income tax expense $ 27,798 $ 17,566 $ 10,232 58 % Income tax expense $ 4,195 $ 5,544 $ (1,349) (24) % Effective income tax rate 15 % 32 % The Company’s effective tax rate was 15% for the three-month period in 2025 and 32% for the three-month period in 2024. The Company recorded a net discrete tax benefit of $307,000 in 2025 and a net discrete tax expense of $3,085,000 in 2024. Excluding the impact of discrete tax items, the Company's effective tax rate was 16% in 2025 compared to 14% in 2024. The increase was due to more of the Company's profits taxed in relatively higher 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 resulted in an accumulated cash and investment balance of $512,757,000 as of March 30, 2025. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments to maintain liquidity and safety of its investment portfolio. 24 Operating Activities Net cash provided by operating activities totaled $40,502,000 in the first quarter of 2025 compared to $13,643,000 in the same period of 2024. Disciplined cost management and a reduction in inventories primarily drove the increase in operating cash flow from the prior year. In the second quarter of 2025, the Company will make the final payment totaling $15,503,000 related to a one-time transition tax on unrepatriated foreign earnings. Investing Activities Net cash provided by investing activities totaled $33,087,000 for the three-month period in 2025. Investing activities included capital expenditures that totaled $2,501,000 and consisted primarily of continued investments in business systems, manufacturing equipment related to new product introductions, and building and leasehold improvements. Financing Activities Net cash used in financing activities totaled $118,370,000 for the three-month period in 2025. 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, in addition to repurchases made in prior periods, the Company repurchased 3,047,000 shares at a total cost of $103,413,000 during the three-month period in 2025. This cost included $1,180,000 of buyback excise tax in accordance with the Inflation Reduction Act of 2022. As of March 30, 2025, the remaining balance of the 2022 program was $164,020,000. 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 $0.080 per share in the first quarter of 2025, totaling $13,550,000. 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 As of March 30, 2025, the Company had inventory purchase commitments of $53,401,000, with the majority payable within twelve months, and lease payment obligations of $119,196,000, with $15,238,000 payable within twelve months. As of March 30, 2025, the Company had a remaining balance of $18,338,000 payable related to a one-time transition tax on unrepatriated foreign earnings arising from the Tax Cuts and Jobs Act of 2017, of which $15,503,000 will be paid in the second quarter of 2025 and the remainder was satisfied through the application of prior-year federal tax overpayments. 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 strong cash position has put us in a relatively good 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. 25 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, 2024.