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 Cognex Corporation ("Cognex", "we", "us", "our", or 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, commercial partnerships, capital expenditures, cost management activities, investments, liquidity, dividends and stock repurchases, strategic and growth plans and opportunities, acquisitions, and estimated tax benefits and expenses, changes in tax legislation, 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, without limitation, 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 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, and packaging. 24 Revenue for the second quarter of 2025 totaled $249,093,000, representing an increase of 4% over the second quarter of 2024 primarily due to strong growth in logistics and improved trends in broader factory automation markets, partially offset by continued weakness in the automotive industry. Gross margin as a percentage of revenue was 67% for the second quarter of 2025 as compared to 70% for the second quarter of 2024, primarily due to less favorable industry mix. Operating expenses for the second quarter of 2025 decreased 3% from the second quarter of 2024, principally due to disciplined cost management. Operating income increased to 17% of revenue for the second quarter of 2025 as compared to 16% of revenue for the second quarter of 2024 due to revenue growth and lower operating expenses. Net income increased to 16% of revenue, or $0.24 per diluted share, for the second quarter of 2025, as compared to 15% of revenue, or $0.21 per diluted share, for the second 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 $9,801,000, or 4%, for the three-month period and increased $15,040,000, or 3%, for the six-month period as compared to the same periods in 2024. Strong growth in logistics and improved trends in broader factory automation markets was partially offset by continued weakness in the automotive industry. Although not material to total revenue or any geographic trend, revenue from customers in the semiconductor industry declined modestly for the three-month period but still showed growth for the six-month period. 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 29, 2025 and June 30, 2024. Three-months Ended Six-months Ended June 29, 2025 June 30, 2024 $ Change % Change June 29, 2025 June 30, 2024 $ Change % Change (unaudited) (unaudited) Americas $ 92,137 $ 85,162 $ 6,975 8 % $ 191,867 $ 168,297 $ 23,570 14 % Percentage of total revenue 37 % 36 % 41 % 37 % Europe $ 66,623 $ 57,151 $ 9,472 17 % $ 115,833 $ 109,505 $ 6,328 6 % Percentage of total revenue 27 % 24 % 25 % 24 % Greater China $ 45,025 $ 54,410 $ (9,385) (17) % $ 71,815 $ 84,459 $ (12,644) (15) % Percentage of total revenue 18 % 23 % 15 % 19 % Other Asia $ 45,308 $ 42,569 $ 2,739 6 % $ 85,614 $ 87,828 $ (2,214) (3) % Percentage of total revenue 18 % 18 % 18 % 20 % Total revenue $ 249,093 $ 239,292 $ 9,801 4 % $ 465,129 $ 450,089 $ 15,040 3 % Changes in revenue from a geographic perspective were as follows: • Revenue from customers based in the Americas increased by 8% for the three-month period and increased by 14% for the six-month period as compared to the same periods in 2024. Strong growth in logistics and improved trends in the consumer electronics and packaging industries was partially offset by continued weakness in the automotive industry. • Revenue from customers based in Europe increased by 17% for the three-month period and increased by 6% for the six-month period as compared to the same periods in 2024. The increase was due primarily to 25 procurement changes made by consumer electronics customers to shift their purchases from entities based in China to Europe. Improved trends in the packaging industry also contributed to the increase in revenue. These increases were largely offset by weakness in the automotive industry for the six-month period. • Revenue from customers based in Greater China decreased by 17% for the three-month period and decreased by 15% for the six-month period as compared to the same periods in 2024. The decrease was primarily due to the procurement change in Europe mentioned above, as well as shifts in business from consumer electronics customers from China to the Other Asia region. Outside of the procurement change, revenue from the Greater China region decreased slightly over the same periods in the prior year. • Revenue from customers based in other countries in Asia increased by 6% for the three-month period and decreased by 3% for the six-month period as compared to the same periods in 2024. Other Asia regions benefited from the shift in consumer electronics business out of China noted above, offset by continued weakness in the automotive industry. Gross Profit The following table sets forth our gross profit (in thousands) for the three-month and six-month periods ended June 29, 2025 and June 30, 2024. Three-months Ended Six-months Ended June 29, 2025 June 30, 2024 $ Change % Change June 29, 2025 June 30, 2024 $ Change % Change (unaudited) (unaudited) Gross profit $ 167,876 $ 166,599 $ 1,277 1 % $ 312,199 $ 308,536 $ 3,663 1 % Percentage of total revenue 67 % 70 % 67 % 69 % Gross margin was 67% for both the three-month and six-month periods in 2025 as compared to 70% and 69% for the same periods in 2024, respectively. The decrease was primarily due to less favorable industry mix, and, to a lesser extent, the impact from tariffs. Operating Expenses The following table sets forth our operating expenses (in thousands) for the three-month and six-month periods ended June 29, 2025 and June 30, 2024. Three-months Ended Six-months Ended June 29, 2025 June 30, 2024 $ Change % Change June 29, 2025 June 30, 2024 $ Change % Change (unaudited) (unaudited) Research, development, and engineering expenses $ 33,102 $ 34,962 $ (1,860) (5) % $ 67,829 $ 72,067 $ (4,238) (6) % Percentage of total revenue 13 % 15 % 15 % 16 % Selling, general, and administrative expenses $ 91,341 $ 93,180 $ (1,839) (2) % $ 174,845 $ 183,808 $ (8,963) (5) % Percentage of total revenue 37 % 39 % 38 % 41 % Total operating expenses $ 124,443 $ 128,142 $ (3,699) (3) % $ 242,674 $ 255,875 $ (13,201) (5) % Percentage of total revenue 50 % 54 % 52 % 57 % Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses decreased by $1,860,000, or 5%, for the three-month period and decreased by $4,238,000, or 6%, for the six-month period as compared to the same periods in 2024. The decrease was primarily due to disciplined cost management, including a reduction in RD&E headcount. RD&E expenses as a percentage of revenue were 13% and 15% for the three-month and six-month periods in 2025, respectively, as compared to 15% and 16% for the same periods in 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. 26 Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses decreased by $1,839,000, or 2%, and $8,963,000, or 5%, respectively, for the three-month and six-month periods in 2025 as compared to the same periods 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 in the first quarter also contributed to the decrease in SG&A expenses for the six-month period. These decreases were partially offset by higher incentive compensation accruals. Non-operating Income (Expense) The following table sets forth our non-operating income (expense) (in thousands) for the three-month and six-month periods ended June 29, 2025 and June 30, 2024. Three-months Ended Six-months Ended June 29, 2025 June 30, 2024 $ Change % Change June 29, 2025 June 30, 2024 $ Change % Change (unaudited) (unaudited) Foreign currency gain (loss) $ (1,503) $ (181) $ (1,322) 730 % $ (3,956) $ (135) $ (3,821) 2830 % Investment income $ 4,040 $ 3,116 $ 924 30 % $ 8,030 $ 6,236 $ 1,794 29 % Other income (expense) $ 2,092 $ 176 $ 1,916 1089 % $ 2,261 $ 372 $ 1,889 508 % Total non-operating income (expense) $ 4,629 $ 3,111 $ 1,518 49 % $ 6,335 $ 6,473 $ (138) (2) % The Company recorded foreign currency losses of $1,503,000 and $3,956,000 for the three-month and six-month periods in 2025, respectively, and $181,000 and $135,000 for the same periods in 2024, respectively. 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 $924,000, or 30%, for the three-month period and increased by $1,794,000, or 29%, for the six-month period as compared to the same periods in 2024 due primarily to higher yields on the Company's portfolio of debt securities. Other income for the second quarter of 2025 included a one-time Employee Retention Credit from the U.S. Internal Revenue Service to refund payroll taxes paid during the COVID-19 pandemic. Income Tax Expense The following table sets forth income tax information (in thousands) for the three-month and six-month periods ended June 29, 2025 and June 30, 2024. Three-months Ended Six-months Ended June 29, 2025 June 30, 2024 $ Change % Change June 29, 2025 June 30, 2024 $ Change % Change (unaudited) (unaudited) Income before income tax expense $ 48,062 $ 41,568 $ 6,494 16 % $ 75,860 $ 59,134 $ 16,726 28 % Income tax expense $ 7,551 $ 5,356 $ 2,195 41 % $ 11,746 $ 10,900 $ 846 8 % Effective income tax rate 16 % 13 % 15 % 18 % The Company’s effective tax rate was 16% and 15% for the three-month and six-month periods in 2025, respectively, and 13% and 18% for the same periods in 2024, respectively. The Company recorded net discrete tax benefits of $211,000 and $518,000 for the three-month and six-month periods in 2025, respectively, compared to 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. Excluding the impact of discrete tax items, the Company's effective tax rate was 16% for both the three-month and six-month periods in 2025 compared to 14% for the same periods in 2024. The increase was due to more of the Company's profits taxed in relatively higher tax rate jurisdictions. 27 On July 4, 2025, tax legislation known as the One Big Beautiful Bill Act ("OBBBA") was enacted in the United States. OBBBA modifies certain international tax provisions such as the tax on Global Intangible Low Taxed Income ("GILTI") and renames GILTI as Net CFC Tested Income ("NCTI"). The Company records NCTI taxes on a deferred basis. The Company is in the early stages of evaluating the impact of U.S. tax law changes introduced by OBBBA on our consolidated financial statements and disclosures. As of the date of this filing, we expect OBBBA to materially increase our deferred tax liability and income tax expense in the third quarter of 2025, while also providing a cash tax benefit estimated between $12 million and $15 million for the full year. A full quantitative estimate of all specific financial impacts cannot be reasonably determined at this time due to the complexity of the changes in OBBBA and the need for further analysis. 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 $552,551,000 as of June 29, 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. Operating Activities Net cash provided by operating activities totaled $83,127,000 for the six-month period in 2025 as compared to $41,406,000 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 made the final payment totaling $15,503,000 related to a one-time transition tax on unrepatriated foreign earnings arising from the Tax Cuts and Jobs Act of 2017. Investing Activities Net cash provided by investing activities totaled $29,121,000 for the six-month period in 2025. Investing activities included capital expenditures that totaled $4,695,000 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 $131,626,000 for the six-month period in 2025. In March 2022, the Company's Board of Directors (the "Board") authorized a program providing for the repurchase of $500,000,000 of the Company's common stock (the "Program"). Under the Program, in addition to repurchases made in other periods, the Company repurchased 3,047,000 shares at a total cost of $102,233,000 during the six-month period in 2025. As of June 29, 2025, the remaining balance of the Program was $164,020,000. The Company may repurchase shares under the 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 Board declared and paid cash dividends of $0.08 per share for the first and second quarters of 2025, totaling $26,981,000. Future dividends will be declared at the discretion of the Board 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 June 29, 2025, the Company had inventory purchase commitments of $50,682,000, with the majority payable within twelve months, and lease payment obligations of $124,195,000, with $16,653,000 payable within twelve months. 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. 28 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.