Market Overview

Cognex Reports Results for the Second Quarter of 2018

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Cognex
Corporation
(NASDAQ:CGNX) today announced financial results for the
second quarter of 2018. Table 1 below shows selected financial data for
Q2-18 compared with Q2-17 and Q1-18, and the first six months of 2018
compared with the first six months of 2017. All periods presented
reflect the two-for-one stock split in Q4-17.

 

Table 1*

(Dollars in thousands, except per share amounts)

                 
   

Revenue

 

Net Income

 

Net Income
per Diluted
Share

 

Non-GAAP
Net Income
per Diluted
Share**

Quarterly Comparisons

               

Current quarter: Q2-18

  $211,264   $56,196   $0.32   $0.31
Prior year's quarter: Q2-17   $178,080   $56,495   $0.32   $0.28
Change: Q2-17 to Q2-18   19%   (1%)   0%   11%
Prior quarter: Q1-18   $169,567   $37,217   $0.21   $0.18
Change: Q1-18 to Q2-18   25%   51%   52%   72%

Year-to-Date Comparisons

               
Six months ended July 1, 2018   $380,831   $93,413   $0.52   $0.49
Six months ended July 2, 2017   $317,119   $101,966   $0.57   $0.46
Change from first six months of 2017 to first six months of 2018   20%   (8%)   (9%)   7%

* The financial results for all periods presented reflect the
retroactive adoption of a new revenue recognition standard (ASC 606,
"Revenue from Contracts with Customers") that became effective on
January 1, 2018. This standard did not have a material impact on total
revenue. For a historical perspective, Exhibit 4 of this news release
includes the company's quarterly Statement of Operations for 2017
adjusted for the impact of the new standard.

**Non-GAAP net income per diluted share excludes tax adjustments. A
reconciliation from GAAP to Non-GAAP is shown in Exhibit 2 of this news
release.

"Our results for Q2 of 2018 were rather good," said Dr.
Robert J. Shillman
, Founder and Chairman of Cognex. "Revenue was the
second highest of any quarter in our company's 37-year history. And
operating margin was at our 30% long-term target."

"I am pleased with our overall Q2 performance, which was slightly better
than our expectations," said Robert
J. Willett
, Chief Executive Officer of Cognex. "Revenue grew by 19%
year-on-year despite significantly lower revenue from the OLED display
market in Asia. Opportunities for machine vision in our other served
markets continue to grow rapidly, and because of that, we plan to go on
investing strongly in new product development and sales resources to
position ourselves for success over the long term."

Mr. Willett continued, "Looking at the second-half, comparisons will be
more challenging, particularly for Q3, because of last year's
extraordinary sales into OLED display and smartphone manufacturing."

Details of the Quarter

Statement of Operations Highlights – Second Quarter of 2018

  • Revenue increased 19% from Q2-17 and increased 25% from Q1-18. Revenue
    from most of Cognex's end markets grew worldwide, both year-on-year
    and sequentially. An exception was consumer electronics—Cognex's
    largest end market—where revenue was flat with Q2-17.
  • Gross margin was 74% for Q2-18, which was at the lower end of Cognex's
    target range compared with 76% for both Q2-17 and Q1-18. The decrease
    was primarily due to revenue mix, with a higher percentage of revenue
    coming from application-specific customer solutions in Q2-18.
  • Research, Development & Engineering (RD&E) expenses increased 15% from
    Q2-17 and decreased 13% from Q1-18. The year-on-year increase in RD&E
    reflects Cognex's investment in engineering resources and
    employee-related costs for the development of new products. The
    sequential decrease in RD&E reflects development efforts related to
    large opportunities in Q1-18 and lower stock option expense.
  • Selling, General & Administrative (SG&A) expenses increased 27% from
    Q2-17 and 5% from Q1-18. SG&A increased both year-on-year and
    sequentially due to investments in sales resources, and higher costs
    for travel and demonstration equipment. On a sequential basis, the
    increase was partially offset by lower stock option expense.
  • Investment and other income was $3,313,000 in Q2-18; $1,969,000 in
    Q2-17; and $3,517,000 in Q1-18. Investment income increased
    year-on-year due to higher yields on invested balances. On a
    sequential basis, the decrease was due to changes in the fair value of
    contingent consideration associated with recent acquisitions.
  • The effective tax rate was 16% in Q2-18, 9% in Q2-17, and 2% in Q1-18.
    All periods presented include a varying discrete tax benefit related
    to employee stock options exercised during that quarter. Excluding
    this discrete benefit and other discrete events, the rate was 17%, 18%
    and 15%, respectively (tax adjustments are summarized in Exhibit 2).
    The decrease year-on-year was due to the lower U.S. federal statutory
    corporate tax rate enacted in the Tax Cuts and Jobs Act of 2017. The
    increase on a sequential basis was due to the expectation that more of
    the company's profits in 2018 will be earned and taxed in higher tax
    jurisdictions than previously anticipated.

Balance Sheet Highlights – July 1, 2018

  • Cognex's financial position as of July 1, 2018, continued to be very
    strong, with $755 million in cash and investments and no debt. Cash
    and investments decreased by $73 million from the end of 2017. Cash
    outflows included $121 million spent to repurchase Cognex common
    stock, $22 million paid for capital expenditures, and $16 million in
    dividends paid to shareholders. Cash inflows consisted of $73 million
    generated from operations and $15 million received from the exercise
    of employee stock options. Cognex intends to continue to repurchase
    shares of its common stock in Q3-18, subject to market conditions and
    other relevant factors.
  • Inventories decreased by $7 million, or 7%, from the end of Q1-18 and
    increased by $22 million, or 32%, from the end of 2017. The increase
    from year end reflects strategic purchases for anticipated large
    customer shipments in the coming quarters and planned new product
    introductions.

Financial Outlook – Q3 2018

This financial outlook reflects the new revenue recognition standard
(ASC 606, "Revenue from Contracts with Customers") that took effect on
January 1, 2018. Cognex does not believe this standard will have a
material impact on total revenue. For a historical perspective, Exhibit
4 of this news release includes the company's quarterly Statement of
Operations for 2017 adjusted for the impact of the new standard.

  • Revenue for Q3-18 is expected to be between $220 million and $230
    million. This range represents a decline year-on-year due to
    substantially lower revenue expected from large customers in OLED
    display and smartphone manufacturing.
  • Gross margin is expected to be in the mid-70% range, which is Cognex's
    target range for gross margin under the new revenue recognition
    standard.
  • Operating expenses are expected to be approximately flat on a
    sequential basis.
  • The effective tax rate is expected to be 16%, before discrete tax
    items.

Non-GAAP Financial Measures

  • Exhibit 2 of this news release includes a reconciliation of certain
    financial measures from GAAP to non-GAAP. Cognex believes these
    non-GAAP financial measures are helpful because they allow investors
    to more accurately compare Cognex results over multiple periods using
    the same methodology that management employs in its budgeting process
    and in its review of Cognex's operating results. Non-GAAP
    presentations exclude the following: (1) stock option expense for
    calculating non-GAAP operating income and net income (because these
    expenses have no current effect on cash or the future uses of cash,
    and they fluctuate because of changes in Cognex's stock price), and
    (2) certain one-time discrete events, such as tax adjustments (because
    these costs are outside of Cognex's normal business operations).
    Cognex also uses results on a constant-currency basis as one measure
    to evaluate performance. Constant-currency information compares
    results between periods as if the exchange rates had remained constant
    period-over-period. Cognex does not intend for non-GAAP financial
    measures to be considered in isolation, or as a substitute for
    financial information provided in accordance with GAAP.
  • The tax effect of items identified in the reconciliation is estimated
    by applying the effective tax rate to the pre-tax amount. However, if
    a specific tax rate or tax treatment is required because of the nature
    of the item and/or the tax jurisdiction where the item was recorded,
    the tax effect is estimated by applying the relevant specific tax rate
    or tax treatment, rather than the effective tax rate.

Analyst Conference Call and Simultaneous Webcast

  • Cognex will host a conference call today at 5:00 p.m. Eastern Time
    (ET). The telephone number is (877) 704-4573 (or (201) 389-0911 if
    outside the United States). A replay will begin at 8:00 p.m. ET today
    and will be available until 11:59 p.m. ET on Thursday, August 2, 2018.
    The telephone number for the replay is (877) 660-6853 (or (201)
    612-7415 if outside the United States). The access code for both the
    live call and the replay is 13680912.
  • Internet users can listen to a real-time audio broadcast of the
    conference call or an archived recording on the Cognex Investor
    Relations website: http://www.cognex.com/Investor.

About Cognex Corporation

Cognex Corporation designs, develops, manufactures and markets a wide
range of image-based products, all of which use artificial intelligence
(AI) techniques that give them the human-like ability to make decisions
on what they see. Cognex products include machine vision systems,
machine vision sensors and barcode readers that are used in factories
and distribution centers around the world where they eliminate
production and shipping errors.

Cognex is the world's leader in the machine vision industry, having
shipped more than 1.5 million vision-based products, representing over
$5 billion in cumulative revenue, since the company's founding in 1981.
Headquartered in Natick, Massachusetts, USA, Cognex has offices and
distributors located throughout the Americas, Europe and Asia. For
details visit Cognex online at www.cognex.com.

Certain statements made in this news release, which do not relate
solely to historical matters, are forward-looking statements. These
statements can be identified by use of the words "expects,"
"anticipates," "estimates," "believes," "projects," "intends," "plans,"
"will," "may," "shall," "could," "should," and similar words and other
statements of a similar sense. These forward-looking statements, which
include statements regarding business and market trends, future
financial performance, customer order rates and the timing of related
revenue, expected areas of growth, emerging markets, future product mix,
research and development activities, further stock repurchases,
investments, strategic plans and 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 loss of a large customer; (2) current and future conditions in
the global economy; (3) the reliance on revenue from the consumer
electronics or automotive industries; (4) the inability to penetrate new
markets; (5) the inability to achieve significant international revenue;
(6) fluctuations in foreign currency exchange rates and the use of
derivative instruments; (7) information security breaches or business
system disruptions; (8) the inability to attract and retain skilled
employees; (9) the failure to effectively manage our growth; (10) the
reliance upon key suppliers to manufacture and deliver critical
components for our products; (11) the failure to effectively manage
product transitions or accurately forecast customer demand; (12) the
inability to design and manufacture high-quality products; (13) the
technological obsolescence of current products and the inability to
develop new products; (14) the failure to properly manage the
distribution of products and services; (15) the inability to protect our
proprietary technology and intellectual property; (16) our involvement
in time-consuming and costly litigation; (17) the impact of competitive
pressures; (18) the challenges in integrating and achieving expected
results from acquired businesses; (19) potential impairment charges with
respect to our investments or for acquired intangible assets or
goodwill; (20) exposure to additional tax liabilities; and (21) the
other risks detailed in Cognex reports filed with the SEC, including its
Form 10-K for the fiscal year ended December 31, 2017. You should not
place undue reliance upon any such forward-looking statements, which
speak only as of the date made. Cognex disclaims any obligation to
update forward-looking statements after the date of such statements.

 

Exhibit 1

 

COGNEX CORPORATION

Statements of Operations

(Unaudited)

Dollars in thousands, except per share amounts

 
  Three-months Ended   Six-months Ended
     

July 1, 2018

April 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

 
Revenue (1) $ 211,264 $ 169,567 $ 178,080 $ 380,831 $ 317,119
Cost of revenue (1) 54,169   40,198   42,164   94,367   74,696  
Gross margin 157,095 129,369 135,916 286,464 242,423
Percentage of revenue 74 % 76 % 76 % 75 % 76 %
Research, development, and engineering expenses (1) 26,888 31,076 23,377 57,964 46,147
Percentage of revenue 13 % 18 % 13 % 15 % 15 %
Selling, general, and administrative expenses (1) 66,752 63,697 52,518 130,449 99,039
Percentage of revenue 32 % 38 % 29 % 34 % 31 %
Operating income 63,455 34,596 60,021 98,051 97,237
Percentage of revenue 30 % 20 % 34 % 26 % 31 %
Foreign currency gain (loss) (195 ) (134 ) (184 ) (329 ) (447 )
Investment and other income 3,313   3,517   1,969   6,830   4,251  
Income before income tax expense 66,573 37,979 61,806 104,552 101,041
Income tax expense (benefit) 10,377   762   5,311   11,139   (925 )
Net income (loss) $ 56,196   $ 37,217   $ 56,495   $ 93,413   $ 101,966  
Percentage of revenue 27 % 22 % 32 % 25 % 32 %
 
Earnings per weighted-average common and common-equivalent share (2):
Basic $ 0.33   $ 0.21   $ 0.33   $ 0.54  

$

0.59  
Diluted $ 0.32   $ 0.21   $ 0.32  

$

0.52

 

$

0.57

 
 
 
Weighted-average common and common-equivalent shares outstanding (2):
Basic 172,370   173,280   173,278   172,825   172,960  
Diluted 177,149   179,641   179,228   178,418   178,904  
 
Cash dividends per common share (2) $ 0.0450   $ 0.0450   $ 0.0425   $ 0.0900   $ 0.0800  
Cash and investments per common share (2) $ 4.39   $ 4.65   $ 4.42   $ 4.39   $ 4.42  
Book value per common share (2) $ 6.27   $ 6.23   $ 6.08   $ 6.27   $ 6.08  
 
(1) Amounts include stock option expense, as follows:
Cost of revenue $ 557 $ 797 $ 454 $ 1,354 $ 884
Research, development, and engineering 3,154 4,815 2,715 7,969 5,325
Selling, general, and administrative 5,291   7,582   4,677   12,873   9,120  
Total stock option expense $ 9,002   $ 13,194   $ 7,846   $ 22,196   $ 15,329  
 

(2) Prior periods share and per share amounts have been adjusted to
reflect the 2-for-1 stock split of the Company's common stock that
occurred in the fourth quarter of 2017.

 

Exhibit 2

 

COGNEX CORPORATION

Reconciliation of Selected Items from GAAP to Non-GAAP

(Unaudited)

Dollars in thousands, except per share amounts

 
  Three-months Ended     Six-months Ended
     
July 1, 2018   April 1, 2018   July 2, 2017 July 1, 2018   July 2, 2017
Adjustment for stock option expense and tax benefit for stock
option exercises
                 
Operating income (GAAP) $ 63,455 $ 34,596 $ 60,021 $ 98,051 $ 97,237
Stock option expense 9,002   13,194   7,846   22,196   15,329  
Operating income (Non-GAAP) $ 72,457   $ 47,790   $ 67,867   $ 120,247   $ 112,566  
Percentage of revenue (Non-GAAP) 34 % 28 % 38 % 32 % 35 %
 
Net income (loss) (GAAP) $ 56,196 $ 37,217 $ 56,495 $ 93,413 $ 101,966
Stock option expense 9,002 13,194 7,846 22,196 15,329
Tax effect on stock option expense (1,607 ) (2,347 ) (2,583 ) (3,954 ) (5,022 )
Discrete tax benefit related to employee stock option exercises (654 ) (4,935 ) (5,787 ) (5,589 ) (18,954 )
Net income (loss) (Non-GAAP) $ 62,937   $ 43,129   $ 55,971   $ 106,066   $ 93,319  
Percentage of revenue (Non-GAAP) 30 % 25 % 31 % 28 % 29 %
 
Net income (loss) per diluted weighted-average common and
common-equivalent share (GAAP) (1)
$ 0.32 $ 0.21 $ 0.32 $ 0.52 $ 0.57
Share impact of non-GAAP adjustments identified above (1) 0.04   0.03   (0.01 ) 0.07   (0.05 )

Net income (loss) per diluted weighted-average common and
common-equivalent share (Non-GAAP) (1)

$ 0.36   $ 0.24   $ 0.31   $ 0.59   $ 0.52  
 
Diluted weighted-average common and common-equivalent shares
outstanding (GAAP) (1)
177,149   179,641   179,228   178,418   178,904  
                               
 
Exclusion of tax adjustments                              
Income before income tax expense (GAAP) $ 66,573   $ 37,979   $ 61,806   $ 104,552   $ 101,041  
 
Income tax expense (GAAP) $ 10,377 $ 762 $ 5,311 $ 11,139 $ (925 )
Effective tax rate (GAAP) 16 % 2 % 9 % 11 % (1 )%
 
Tax adjustments:
Discrete tax benefit related to employee stock option exercises (654 ) (4,935 ) (5,787 ) (5,589 ) (18,954 )
Other discrete tax events         (143 )
Income tax expense excluding tax adjustments (Non-GAAP) $ 11,031   $ 5,697   $ 11,098   $ 16,728   $ 18,172  
Effective tax rate (Non-GAAP) 17 % 15 % 18 % 16 % 18 %
 
Net income excluding tax adjustments (Non-GAAP) $ 55,542   $ 32,282   $ 50,708   $ 87,824   $ 82,869  
Percentage of revenue (Non-GAAP) 26 % 19 % 28 % 23 % 26 %
 
Net income (loss) per diluted weighted-average common and
common-equivalent share (GAAP) (1)
$ 0.32 $ 0.21 $ 0.32 $ 0.52 $ 0.57
Share impact of non-GAAP adjustments identified above (1) (0.01 ) (0.03 ) (0.04 ) (0.03 ) (0.11 )
Net income per diluted weighted-average common and common-equivalent
share (Non-GAAP) (1)
$ 0.31   $ 0.18   $ 0.28   $ 0.49   $ 0.46  
 
Diluted weighted-average common and common-equivalent shares
outstanding (GAAP) (1)
177,149   179,641   179,228   178,418   178,904  
                               

(1) Prior periods share and per share amounts have been adjusted to
reflect the 2-for-1 stock split of the Company's common stock that
occurred in the fourth quarter of 2017.

 

Exhibit 3

 

COGNEX CORPORATION

Balance Sheets

(Unaudited)

Dollars in thousands

 
  July 1, 2018   December 31, 2017
Assets
Cash and investments $ 754,883 $ 827,984
Accounts receivable 136,084 119,388
Unbilled revenue 3,603 7,454
Inventories 89,556 67,923
Property, plant, and equipment 87,893 78,048
Goodwill and intangible assets 124,859 126,397
Other assets 79,432 60,559
   
Total assets $ 1,276,310   $ 1,287,753
 
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 71,242 $ 91,712
Deferred revenue and customer deposits 40,881 9,420
Income taxes 80,421 85,044
Other liabilities 4,634 5,904
Shareholders' equity 1,079,132 1,095,673
   
Total liabilities and shareholders' equity $ 1,276,310   $ 1,287,753
 

 

Exhibit 4

 

COGNEX CORPORATION

Restated Statements of Operations under ASC 606 "Revenue from
Contracts with Customers"

(Unaudited)

Dollars in thousands

 
  Three-months Ended

April 2,
2017

 

July 2,
2017

 

October 1,
2017

 

December 31,
2017

 
Revenue $ 139,039 $ 178,080 $ 266,042 $ 182,922

Cost of revenue

32,532   42,164   68,061   44,532  
Gross margin 106,507 135,916 197,981 138,390
Percentage of revenue 77 % 76 % 74 % 76 %
Research, development, and engineering expenses 22,770 23,377 26,078 26,980
Percentage of revenue 16 % 13 % 10 % 15 %
Selling, general, and administrative expenses 46,521 52,518 61,054 60,635
Percentage of revenue 33 % 29 % 23 % 33 %
Operating income 37,216 60,021 110,849 50,775
Percentage of revenue 27 % 34 % 42 % 28 %
Foreign currency gain (loss) (263 ) (184 ) (127 ) (1,027 )
Investment and other income 2,282   1,969   2,030   2,923  
Income before income tax expense 39,235 61,806 112,752 52,671
Income tax expense (benefit) (6,236 ) 5,311   10,259   80,418  
Net income (loss) $ 45,471   $ 56,495   $ 102,493   $ (27,747 )
Percentage of revenue 33 % 32 % 39 % (15 )%
 
Earnings per weighted-average common and common-equivalent share (1):
Basic $ 0.26   $ 0.33   $ 0.59   $ (0.16 )
Diluted $ 0.25   $ 0.32   $ 0.57   $ (0.16 )
 
Weighted-average common and common-equivalent shares outstanding (1):
Basic 172,646   173,278   173,234   173,397  
Diluted 178,354   179,228   179,354   173,397  
 

(1) Prior periods share and per share amounts have been adjusted to
reflect the 2-for-1 stock split of the Company's common stock that
occurred in the fourth quarter of 2017.

 

Adjustments to certain financial data as a result of the
implementation of ASC 606 "Revenue from Contracts with Customers
on Jan. 1 2018"

  Three-months Ended

April 2,
2017

 

July 2,
2017

 

October 1,
2017

 

December 31,
2017

 
Revenue as reported $ 134,942 $ 172,904 $ 259,739 $ 180,365
Adjustments to revenue 4,097   5,176   6,303   2,557  
Revenue as restated $ 139,039   $ 178,080   $ 266,042   $ 182,922  
 
Cost of revenue as reported 28,225 37,471 62,360 40,642
Adjustments to cost of revenue 4,307   4,693   5,701   3,890  
Cost of revenue as restated $ 32,532   $ 42,164   $ 68,061   $ 44,532  
 
Gross margin as reported $ 106,717 $ 135,433 $ 197,379 $ 139,723
Adjustments to gross margin (210 ) 483   602   (1,333 )
Gross margin as restated $ 106,507   135,916   $ 197,981   $ 138,390  
 
Gross margin percentage as reported 79 % 78 % 76 % 77 %
Adjustments to gross margin percentage (2 )% (2 )% (2 )% (1 )%
Gross margin percentage as restated 77 % 76 % 74 % 76 %
 
Operating income as reported $ 37,426 $ 59,538 $ 110,247 $ 52,108
Adjustments to operating income (210 ) 483   602   (1,333 )
Operating income as restated $ 37,216   $ 60,021   $ 110,849   $ 50,775  
 
Operating margin as reported 28 % 34 % 42 % 29 %
Adjustments to operating margin (1 )% % % (1 )%
Operating margin as restated 27 % 34 % 42 % 28 %

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