1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
During 1999, the Company experienced an increase in demand as its customers
recovered from the 1998 slowdown in capital spending by manufacturers in the
semiconductor and electronics industries, resulting in a 25% increase in
revenue. Sales to original equipment manufacturer (OEM) customers, most of whom
make capital equipment used by manufacturers in these industries, increased 34%
from the prior year. Sales to end-user customers also increased from 1998 by
13%.
During the year, the Company continued to invest in new product development and
end-user market penetration. This spending was outpaced, however, by the growth
in revenue, resulting in an 80% increase in operating income from 1998. Net
income increased 51% from the prior year and represented 20% of revenue in 1999.
The Company's financial position remained strong at December 31, 1999, with $315
million in total assets and $277 million in stockholders' equity. Working
capital was $231 million at December 31, 1999, representing an increase of 26%
from the prior year.
The following table sets forth certain consolidated financial data as a
percentage of revenue:
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------
Revenue 100% 100% 100%
Cost of revenue 30 31 27
--------------------------------------------------------------------
Gross margin 70 69 73
Research, development, and engineering expenses 18 20 14
Selling, general, and administrative expenses 29 31 23
Charge for acquired in-process technology 2 2
--------------------------------------------------------------------
Operating income 23 16 34
Investment and other income 5 6 4
--------------------------------------------------------------------
Income before provision for income taxes 28 22 38
Provision for income taxes 8 5 12
--------------------------------------------------------------------
Net income 20% 17% 26%
--------------------------------------------------------------------
10
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue for the year ended December 31, 1999 increased 25% to $152,125,000 from
$121,844,000 for the year ended December 31, 1998. During the year, the Company
experienced an increase in demand as its customers recovered from the 1998
slowdown in capital spending by manufacturers in the semiconductor and
electronics industries. The increase in revenue of $30,281,000, or 25%, from
1998 is due primarily to a higher volume of machine vision systems sold to the
Company's core OEM customers who serve these industries. Sales to OEM customers
increased $23,575,000, or 34%, from the prior year and represented 61% of total
revenue in 1999 compared to 57% of total revenue in 1998. Sales to end-user
customers increased $6,706,000, or 13%, from the prior year as a result of
increased volume from customers in general manufacturing industries, such as
automotive and consumer products.
While revenue increased in all of the Company's worldwide regions from 1998, the
most significant increase was in Japan, where most of the Company's core OEM
customers are located. Sales to customers located in Japan increased
$18,615,000, or 38%, from the prior year. Sales to customers located in Europe
increased $7,816,000, or 31%, from 1998 due primarily to a large general
manufacturing customer base in this region. Sales to customers located in the
United States increased $1,857,000, or 4%, from the prior year.
Based on increasing order trends in both the OEM and end-user markets
experienced early in the first quarter of 2000, the Company anticipates
sequential revenue growth to continue for at least the first half of 2000.
Gross margin as a percentage of revenue for 1999 was 70% compared to 69% for
1998. The increase in gross margin as a percentage of revenue is due primarily
to manufacturing efficiencies that resulted from increased product sales without
a significant increase in manufacturing overhead, as well as a lower percentage
of service revenue which carries a lower gross margin than product revenue.
Research, development, and engineering expenses for the year ended December 31,
1999 increased 12% to $27,669,000 from $24,662,000 for the year ended December
31, 1998. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's continued investment in the
research and development of new and existing products. Expenses as a percentage
of revenue declined from 20% in 1998 to 18% in 1999 as a result of revenue
increasing at a faster rate than spending. The Company anticipates that
aggregate expenses will continue to increase in 2000 due to planned continuing
investment in product development.
Selling, general, and administrative expenses for the year ended December 31,
1999 increased 15% to $43,655,000 from $37,973,000 for the year ended December
31, 1998. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's expanding worldwide operations,
including employee bonuses which were reinstated in 1999. Expenses as a
percentage of revenue declined from 31% in 1998 to 29% in 1999 as a result of
revenue increasing at a faster rate than spending . The Company anticipates that
aggregate expenses will continue to increase in 2000 due to additional resources
required to support the anticipated higher level of demand and to further
penetrate the end-user market.
Investment income for the year ended December 31, 1999 decreased 3% to
$6,572,000 from $6,756,000 for the year ended December 31, 1998. The decrease in
investment income is due primarily to lower average interest rates on the
Company's portfolio of investments, which consists principally of debt
securities.
Other income for the year ended December 31, 1999 remained relatively consistent
at $728,000 compared to $733,000 for the year ended December 31, 1998. Other
income consists primarily of rental income, net of related expenses, from
leasing the building adjacent to the Company's corporate headquarters.
The Company's effective tax rate for 1999 was 29% compared to 26% for 1998. The
increase in the effective tax rate is due primarily to the higher operating
income in 1999 and the diminishing effect of tax-free investments.
11
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue for the year ended December 31, 1998 decreased 22% to $121,844,000 from
$155,340,000 for the year ended December 31, 1997. During 1998, the Company's
results were impacted by a worldwide slowdown in capital spending by
manufacturers in the semiconductor and electronics industries, which is an
important source of revenue for the Company.
The decrease in revenue of $33,496,000, or 22%, from the prior year is due
primarily to decreased volume from the Company's OEM customers. Sales to OEM
customers, most of whom make capital equipment used by manufacturers in the
semiconductor and electronics industries, decreased $36,608,000, or 34%, from
the prior year.
Sales to end-user customers, however, increased $3,112,000, or 6%, from the
prior year due primarily to increased volume from customers in general
manufacturing industries, including sales of Fine-Line products which the
Company acquired from Mayan Automation, Inc. in a purchase transaction on July
31, 1997. The increased end-user volume achieved from customers in general
manufacturing industries was partially offset by decreased volume to end-user
customers in the semiconductor and electronics industries. In recent years, the
Company has devoted additional sales and marketing resources to grow its
end-user customer base. As a result of these efforts, as well as the decline in
OEM revenue, end-user revenue grew to 43% of total revenue in 1998 from 32% of
total revenue in 1997.
Geographically, revenue decreased $13,982,000, or 23%, in North America and
$20,467,000, or 30%, in Japan from the prior year, as most of the Company's
large OEM customers are based in these regions. Revenue increased $3,095,000, or
14%, in Europe from the prior year due primarily to a large general
manufacturing customer base in this region, as well as increased volume to one
customer for a cellular telephone application in 1998.
Gross margin as a percentage of revenue for the year ended December 31, 1998 was
69% compared to 73% for the year ended December 31, 1997. The decrease in gross
margin as a percentage of revenue is due primarily to the lower product revenue
in 1998. As a result, service revenue, which has a lower gross margin than
product revenue, increased as a percentage of total revenue in 1998 and lowered
the overall gross margin.
Research, development, and engineering expenses for the year ended December 31,
1998 increased 10% to $24,662,000 from $22,481,000 for the year ended December
31, 1997. The increase in aggregate expenses is due primarily to higher
personnel-related costs, as well as higher outside service costs, to support the
Company's continued investment in the research and development of new and
existing products. Expenses as a percentage of revenue were 20% in 1998 compared
to 14% in 1997. The increase in expenses as a percentage of revenue is due
primarily to the lower revenue base in 1998.
Selling, general, and administrative expenses for the year ended December 31,
1998 increased 6% to $37,973,000 from $35,810,000 for the year ended December
31, 1997. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's expanding worldwide operations,
as well as depreciation expense for an addition to the Company's corporate
headquarters and new computer information systems, both placed in service in
January 1998. These increases were partially off set by cost-containment
measures the Company implemented during the second half of 1998 which included
the elimination of employee bonuses and a two-week mandatory shutdown in
December. Expenses as a percentage of revenue were 31% in 1998 compared to 23%
in 1997. The increase in expenses as a percentage of revenue is due primarily to
the lower revenue base in 1998.
In July 1998, the Company acquired certain technology of Rockwell Automation's
Allen-Bradley machine vision business. The acquired technology related to
certain products under development. The technology was valued using a
risk-adjusted cash flow model, under which future cash flows were discounted
taking into account risks related to existing markets, the technology's life
expectancy, future target markets and potential changes thereto, and the
competitive outlook for the technology. This analysis resulted in an allocation
of $2,100,000 to in-process technology which had not reached technological
feasibility and had no alternative future use, and accordingly, was expensed
immediately.
12
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
(CONTINUED)
Investment income for the year ended December 31, 1998 increased 14% to
$6,756,000 from $5,947,000 for the year ended December 31, 1997. The increase in
investment income is due primarily to a higher average invested cash balance in
1998. Other income for the year ended December 31, 1998 remained relatively
consistent at $733,000 compared to $718,000 for the year ended December 31,
1997. Other income consists primarily of rental income, net of related expenses,
from leasing the building adjacent to the Company's corporate headquarters.
The Company's effective tax rate for the year ended December 31, 1998 was 26%
compared to 30.5% for the year ended December 31, 1997. The decrease in the
effective tax rate is due primarily to the impact of the Company's use of
tax-free investments and the Company's lower profitability in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements during the year ended December 31, 1999 were met
through cash generated from operations. Cash and investments increased
$58,489,000 from December 31, 1998 as a result of $55,386,000 of cash generated
from operations and $13,931,000 of proceeds from the issuance of common stock
under stock option and stock purchase plans. Capital expenditures for the year
ended December 31, 1999 totaled $3,443,000 and consisted primarily of
expenditures for computer hardware and software.
The Company believes that its existing cash and investments balance, together
with cash generated from operations, will be sufficient to meet the Company's
planned working capital and capital expenditure requirements through 2000,
including potential business acquisitions.
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current operations or
other comprehensive income, depending upon whether the derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction. The
Company anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material impact on its results of
operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 sets forth guidelines for accounting and disclosures related to revenue
recognition. SAB No. 101 does not require registrants that have not applied this
accounting to restate prior financial statements, provided they report a change
in accounting principle in accordance with Accounting Principles Board Opinion
No. 20, "Accounting Changes," no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is evaluating the
accounting and disclosure requirements of SAB No. 101 and will report the
effect, if any, in the first quarter of 2000.
YEAR 2000 UPDATE
The Company has not experienced any business disruptions related to the "Year
2000" issue. Nevertheless, the Company is continuing to evaluate the risks
associated with a potential delayed impact of Year 2000 failures. Any such
failure could materially and adversely impact the Company's results of
operations, liquidity, and financial position. The Company believes that its
Year 2000 compliance project has reduced, but not eliminated, the possibility
that its operations in the future will encounter any significant interruptions
related to the Year 2000 issue.
13
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
Certain statements made in this report (including statements regarding the Year
2000 issue), as well as oral statements made by the Company from time to time,
which are prefaced with words such as "expects," "anticipates," "believes,"
"projects," "intends," "plans," and similar words and other statements of
similar sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances, which may or may not be in the Company's control and as to which
there can be no firm assurances given. These forward-looking statements, like
any other forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include: (1) the loss of, or a significant
curtailment of purchases by, any one or more principal customers; (2) the
cyclicality of the semiconductor and electronics industries; (3) the Company's
continued ability to achieve significant international revenue; (4) capital
spending trends by manufacturing companies; (5) inability to protect the
Company's proprietary technology and intellectual property; (6) inability to
attract or retain skilled employees; (7) technological obsolescence of current
products and the inability to develop new products; (8) inability to respond to
competitive technology and pricing pressures; and (9) reliance upon certain sole
source suppliers to manufacture or deliver critical components of the Company's
products. The foregoing list should not be construed as exhaustive and the
Company disclaims any obligation subsequently to revise forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Further
discussions of risk factors are also available in the Company's registration
statements filed with the Securities and Exchange Commission. The Company wishes
to caution readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made.
14
6
COGNEX CORPORATION - FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Year Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Income Data:
Revenue $152,125 $121,844 $155,340 $122,843 $104,543
Cost of revenue 45,221 37,296 42,273 38,855 22,543
-----------------------------------------------------------------------------------------------------
Gross margin 106,904 84,548 113,067 83,988 82,000
Research, development, and engineering
expenses 27,669 24,662 22,481 19,434 13,190
Selling, general, and administrative
expenses 43,655 37,973 35,810 26,261 23,973
Charge for acquired in-process technology 2,100 3,115 10,189
-----------------------------------------------------------------------------------------------------
Operating income 35,580 19,813 51,661 38,293 34,648
Investment and other income 7,300 7,489 6,665 5,404 2,965
-----------------------------------------------------------------------------------------------------
Income before provision for income taxes 42,880 27,302 58,326 43,697 37,613
Provision for income taxes 12,435 7,099 17,790 13,328 14,579
-----------------------------------------------------------------------------------------------------
Net income $ 30,445 $ 20,203 $ 40,536 $ 30,369 $ 23,034
=====================================================================================================
Basic net income per share $ .74 $ .49 $ .98 $ .75 $ .60
=====================================================================================================
Diluted net income per share $ .69 $ .47 $ .91 $ .69 $ .55
=====================================================================================================
Basic weighted-average common shares
outstanding 40,932 40,978 41,322 40,594 38,175
=====================================================================================================
Diluted weighted-average common shares
outstanding 43,986 43,203 44,702 43,814 41,952
=====================================================================================================
December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
(In thousands)
Balance Sheet Data:
Working capital $231,327 $183,277 $199,570 $152,817 $119,402
Total assets 314,822 247,928 261,840 201,253 162,172
Long-term debt -- -- -- -- --
Stockholders' equity 276,624 222,875 236,142 182,689 143,916
15
7
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenue $152,125 $121,844 $155,340
Cost of revenue 45,221 37,296 42,273
--------------------------------------------------------------------------------
Gross margin 106,904 84,548 113,067
Research, development, and engineering expenses 27,669 24,662 22,481
Selling, general, and administrative expenses 43,655 37,973 35,810
Charge for acquired in-process technology 2,100 3,115
--------------------------------------------------------------------------------
Operating income 35,580 19,813 51,661
Investment income 6,572 6,756 5,947
Other income 728 733 718
--------------------------------------------------------------------------------
Income before provision for income taxes 42,880 27,302 58,326
Provision for income taxes 12,435 7,099 17,790
--------------------------------------------------------------------------------
Net income $ 30,445 $ 20,203 $ 40,536
================================================================================
Net income per common and common
equivalent share:
Basic $ .74 $ .49 $ .98
================================================================================
Diluted $ .69 $ .47 $ .91
================================================================================
Weighted-average common and common
equivalent shares outstanding:
Basic 40,932 40,978 41,322
================================================================================
Diluted 43,986 43,203 44,702
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
16
8
COGNEX CORPORATION - CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and investments $ 216,947 $ 158,458
Accounts receivable, less reserves of $2,836 and $2,583
in 1999 and 1998, respectively 28,742 20,987
Revenue in excess of billings 654 4,945
Inventories 10,872 10,812
Deferred income taxes 6,082 3,936
Prepaid expenses and other 5,495 8,141
---------------------------------------------------------------------------------------------
Total current assets 268,792 207,279
---------------------------------------------------------------------------------------------
Property, plant, and equipment, net 31,857 34,255
Deferred income taxes 7,051 2,237
Other assets 7,122 4,157
---------------------------------------------------------------------------------------------
$ 314,822 $ 247,928
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,237 $ 2,488
Accrued expenses 18,536 11,653
Accrued income taxes 7,470 2,002
Customer deposits 2,714 4,894
Deferred revenue 4,508 2,965
---------------------------------------------------------------------------------------------
Total current liabilities 37,465 24,002
---------------------------------------------------------------------------------------------
Other liabilities 733 1,051
Stockholders' equity:
Common stock, $.002 par value-
Authorized: 120,000,000 shares, issued: 44,220,434 and
42,453,980 shares in 1999 and 1998, respectively 88 85
Additional paid-in capital 122,522 97,531
Treasury stock, at cost, 2,381,032 and 2,307,140 shares in 1999
and 1998, respectively (43,550) (41,353)
Retained earnings 197,016 166,571
Accumulated other comprehensive income 548 41
---------------------------------------------------------------------------------------------
Total stockholders' equity 276,624 222,875
---------------------------------------------------------------------------------------------
$ 314,822 $ 247,928
=============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
17
9
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Total
Common Stock Additional Treasury Stock Compre- Compre- Stock-
----------------- Paid-in --------------- Retained hensive hensive holders'
(Dollars in thousands) Shares Par Value Capital Shares Cost Earnings Income Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 40,914,166 $82 $ 77,569 80,918 $ (889) $105,832 $ 95 $182,689
Issuance of common stock under stock option,
stock purchase, and bonus plans 945,229 2 5,504 5,506
Tax benefit from exercise of stock
options 8,009 8,009
Common stock received for payment
of stock option exercises 22,221 (547) (547)
Comprehensive income:
Net income 40,536 $40,536 40,536
Foreign currency translation adjustment (51) (51) (51)
---------
Comprehensive income 40,485
-------------------------------------------------------------------=========---------
Balance at December 31, 1997 41,859,395 84 91,082 103,139 (1,436) 146,368 44 236,142
=================================================================== =========
Issuance of common stock under stock option,
stock purchase, and bonus plans 594,585 1 4,385 4,386
Tax benefit from exercise of stock
options 2,064 2,064
Common stock received for payment
of stock option exercises 2,001 (50) (50)
Repurchase of common stock 2,202,000 (39,867) (39,867)
Comprehensive income:
Net income 20,203 20,203 20,203
Foreign currency translation adjustment (3) (3) (3)
---------
Comprehensive income 20,200
-------------------------------------------------------------------=========---------
Balance at December 31, 1998 42,453,980 85 97,531 2,307,140 (41,353) 166,571 41 222,875
=================================================================== =========
Issuance of common stock under stock option
and stock purchase plans 1,766,454 3 16,125 16,128
Tax benefit from exercise of stock
options 8,866 8,866
Common stock received for payment
of stock option exercises 73,892 (2,197) (2,197)
Comprehensive income:
Net income 30,445 30,445 30,445
Unrealized gain on investment,
net of tax of $279 471 471 471
Foreign currency translation adjustment 36 36 36
---------
Comprehensive income $30,952
-------------------------------------------------------------------=========---------
Balance at December 31, 1999 44,220,434 $88 $122,522 2,381,032 $(43,550) $197,016 $548 $276,624
=================================================================== =========
The accompanying notes are an integral part of these consolidated financial
statements.
18
10
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 30,445 $ 20,203 $ 40,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant, and equipment 6,360 6,393 4,870
Amortization of intangible assets 1,179 796 938
Amortization of investments 1,752 1,525 1,399
Tax benefit from exercise of stock options 8,866 2,064 8,009
Charge for acquired in-process technology 2,100 3,115
Deferred income tax provision (6,960) (1,343) (2,581)
Changes in other current assets and current liabilities:
Accounts receivable (6,997) 5,052 (6,603)
Inventories (419) (3,627) (920)
Accounts payable 1,723 (902) (421)
Accrued expenses 7,394 (1,454) 6,403
Accrued income taxes 5,117 (687) 661
Other current assets and current liabilities 6,303 (271) (1,984)
Other operating activities 623 (179) 314
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,386 29,670 53,736
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (97,773) (81,616) (94,581)
Maturity of investments 55,566 89,256 38,943
Purchase of property, plant, and equipment (3,443) (7,239) (10,852)
Cash paid for technology acquisitions,
net of cash assumed, and equity investments (1,723) (3,954) (2,999)
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47,373) (3,553) (69,489)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock under stock option,
stock purchase, and bonus plans 13,931 4,336 4,959
Repurchase of common stock (39,867)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 13,931 (35,531) 4,959
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,086) (977) 569
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 20,858 (10,391) (10,225)
Cash and cash equivalents at beginning of year 27,807 38,198 48,423
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 48,665 27,807 38,198
Investments 168,282 130,651 139,816
---------------------------------------------------------------------------------------------------------
Cash and investments $ 216,947 $ 158,458 $ 178,014
=========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
19
11
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described below.
NATURE OF OPERATIONS
Cognex Corporation (the Company) designs, develops, manufactures, and markets
machine vision systems, or computers that can "see." The Company's products are
used to automate a wide range of manufacturing processes where vision is
required.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the balance sheet date
and the reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Cognex Corporation
and its subsidiaries, all of which are wholly-owned. All intercompany accounts
and transactions have been eliminated. Certain amounts reported in prior years
have been reclassified to be consistent with the current year presentation.
FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries, where the local
currency is the functional currency, are translated using exchange rates in
effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. The resulting foreign currency
translation adjustment is recorded as other comprehensive income.
CASH AND INVESTMENTS
Cash and investments include cash equivalents, which the Company considers to be
all debt securities purchased with original maturities of three months or less.
Debt securities having original maturities in excess of three months are stated
at amortized cost, which approximates fair value, and are classified as
available-for-sale. Equity securities are stated at fair value and are also
classified as available-for-sale. Changes in unrealized gains or losses on
equity securities are recorded as other comprehensive income. The Company
considers all of its investments to be available for current operations and
maintains substantially all of its investments in securities that are highly
liquid and would not result in significant losses if sold prior to maturity.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method over the assets' estimated useful lives. Buildings' useful
lives are 39 years, building improvements' useful lives are 10 years, and the
useful lives of computer hardware, computer software, and furniture and fixtures
range from two to five years. Leasehold improvements are depreciated over the
shorter of the estimated useful lives or the remaining terms of the leases.
Maintenance and repairs are expensed when incurred; additions and improvements
are capitalized. Upon retirement or disposition, the cost and related
accumulated depreciation of the assets disposed of are removed from the
accounts, with any resulting gain or loss included in current operations.
20
12
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are stated at cost and amortized using the straight-line
method over the assets' estimated useful lives, which range from two to eight
years. The Company evaluates the possible impairment of long-lived assets,
including intangible assets, whenever events or circumstances indicate that the
carrying value of the assets may not be recoverable.
WARRANTY OBLIGATIONS
The Company warrants hardware products of its manufacture to be free from
defects in material and workmanship for periods ranging from six months to two
years from the date of shipment based upon the product being purchased and the
terms of the customer's contract. Estimated warranty obligations are evaluated
and recorded at the time of sale.
REVENUE RECOGNITION
The Company's revenue is derived primarily from two sources: (1) product sales
to both original equipment manufacturer (OEM) customers who incorporate the
Company's product into their product for resale and end-user customers, and (2)
service revenue derived principally from providing maintenance and support,
education, and consulting services to OEM and end-user customers.
The Company recognizes revenue from product sales upon shipment if a signed
purchase order exists, the fee is fixed or determinable, and collection of the
resulting receivable is probable. The Company recognizes revenue from
maintenance and support programs ratably over the program period. Revenue from
education and consulting services is recognized as the related services are
performed. Revenue from construction-type projects is recognized using the
percentage-of-completion method. Losses on projects, if any, are recognized when
identified.
RESEARCH AND DEVELOPMENT
Research and development costs for internally developed products are expensed
when incurred until technological feasibility has been established for the
product. Thereafter, all software costs are capitalized until the product is
available for general release to customers. The cost of acquired software is
capitalized for products determined to have reached technological feasibility;
otherwise the cost is expensed. Capitalized software costs are amortized using
the straight-line method over the economic life of the product, which is
typically three to five years.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, a deferred tax asset or liability is determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Tax credits are recorded as a reduction in income taxes. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
NET INCOME PER SHARE
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were issued, exercised, or converted into common stock. Dilutive
common equivalent shares consist of stock options, calculated using the treasury
stock method.
21
13
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
Other comprehensive income consists of unrealized gains and losses on
investments and foreign currency translation adjustments.
FINANCIAL INSTRUMENTS
FAIR VALUE
The Company's financial instruments consist primarily of cash and cash
equivalents, investments, trade receivables, trade payables, and forward
exchange contracts. The carrying amounts of cash and cash equivalents,
investments, trade receivables, and trade payables approximate fair value due to
the short maturity of these instruments. Based on year-end exchange rates, the
Company estimates the aggregate contract value of the forward exchange contracts
to be representative of the fair value of these instruments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments, and
trade receivables.
The Company primarily invests in debt securities of federal and state government
entities. The Company has established guidelines relative to credit ratings,
diversification, and maturities that maintain safety and liquidity. The Company
has not experienced any significant losses on its cash equivalents and
investments.
A significant portion of the Company's sales and receivables are from customers
who are either in or who serve the semiconductor and electronics industries. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. The Company has not experienced any
significant losses related to the collection of its accounts receivable.
OFF-BALANCE SHEET RISK
In certain instances, the Company enters into forward exchange contracts to
hedge against foreign currency fluctuations. These contracts are used to reduce
the Company's risk associated with exchange rate movements, as the gains or
losses on these contracts are intended to offset the exchange rate losses or
gains on the underlying exposures. The Company does not engage in foreign
currency speculation. The Company had $16,138,000 and $8,700,000 of foreign
exchange contracts outstanding, all of which were in Japanese yen, at December
31, 1999 and 1998, respectively.
FOREIGN CURRENCY RISK
The Company enters into transactions denominated in foreign currencies and
includes the exchange rate gains or losses arising from such transactions in
current operations. The Company recorded net exchange rate gains of $955,000 in
1999 and $127,000 in 1998, and a net exchange rate loss of $155,000 in 1997.
22
14
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND INVESTMENTS
Cash and investments consist of the following:
December 31, 1999 1998
- ------------------------------------------------------------------------------------
(In thousands)
Cash $ 19,545 $ 22,002
Municipal obligations with contractual maturities:
Less than three months 29,120 5,805
-------------------------------------------------------------------------------
Total cash and cash equivalents 48,665 27,807
Greater than three months and less than one year 62,890 49,345
Greater than one year 105,392 81,306
-------------------------------------------------------------------------------
$216,947 $158,458
===============================================================================
The Company has not experienced any significant realized gains or losses on the
sale of its investments in 1999, 1998, and 1997.
INVENTORIES
Inventories consist of the following:
December 31, 1999 1998
- --------------------------------------------
(In thousands)
Raw materials $ 5,451 $ 6,195
Work-in-process 1,987 1,262
Finished goods 3,434 3,355
---------------------------------------
$10,872 $10,812
=======================================
23
15
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
December 31, 1999 1998
- --------------------------------------------------------------
(In thousands)
Land $ 3,051 $ 3,051
Buildings 17,571 17,571
Building improvements 3,236 3,127
Computer hardware and software 28,230 24,793
Furniture and fixtures 3,446 3,351
Leasehold improvements 1,638 1,542
---------------------------------------------------------
57,172 53,435
Less: accumulated depreciation (25,315) (19,180)
---------------------------------------------------------
$ 31,857 $ 34,255
=========================================================
"Buildings" include property held for lease with a cost basis of $4,950,000 and
accumulated depreciation of $571,000 at December 31, 1999.
OTHER ASSETS
Other assets include intangible assets which consist primarily of acquired
complete technology, non-compete agreements, and goodwill. Intangible assets had
a cost basis of $5,697,000 and $4,725,000 and accumulated amortization of
$3,930,000 and $2,756,000 at December 31, 1999 and 1998, respectively.
Other assets also include an equity security with a cost basis of $2,824,000 and
an unrealized gain of $750,000 at December 31, 1999.
ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, 1999 1998
- ---------------------------------------------------------------------
(In thousands)
Bonus $ 4,560 $ 300
Warranty 3,820 2,761
Salaries, commissions, and payroll taxes 2,737 1,943
Professional fees 1,963 1,407
Vacation 1,753 1,296
Other 3,703 3,946
----------------------------------------------------------------
$18,536 $11,653
================================================================
24
16
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASES
The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through 2003 and are accounted for as
operating leases. Annual rent expense totaled $2,620,000 in 1999, $2,366,000 in
1998, and $1,637,000 in 1997. Future minimum rental payments under these
agreements are as follows at December 31, 1999 (in thousands):
Year Amount
---------------
2000 $2,723
2001 2,019
2002 705
2003 31
---------------
$5,478
===============
The Company owns an 83,000 square-foot office building adjacent to its corporate
headquarters. The building is currently occupied with tenants who have lease
agreements that expire at various dates through 2001. Annual rental income
totaled $1,581,000 in 1999, $1,499,000 in 1998, and $1,428,000 in 1997. Rental
income and related expenses are included in "Other income" on the Consolidated
Statements of Income. Future minimum rental receipts under non-cancelable lease
agreements are as follows at December 31, 1999 (in thousands):
Year Amount
---------------
2000 $1,207
2001 183
---------------
$1,390
===============
STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 400,000 shares of authorized but unissued $.01 par value
preferred stock.
STOCK REPURCHASE PROGRAM
On April 21, 1998, the Company's Board of Directors authorized the repurchase of
up to $20,000,000 of the Company's common stock. A total of 882,000 shares were
repurchased through May 27, 1998 amounting to $19,937,000, which completed the
Company's stock repurchases under this program. On June 3, 1998, the Board
authorized the repurchase of up to an additional 1,500,000 shares of the
Company's common stock. A total of 1,320,000 shares were repurchased through
November 6, 1998 amounting to $19,930,000, which completed the Company's stock
repurchases under this second program.
25
17
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation."
The Company continues to recognize compensation costs using the intrinsic value
based method described in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." No compensation costs were
recognized in 1999, 1998, and 1997.
Net income and net income per share as reported in these consolidated financial
statements and on a pro forma basis, as if the fair value based method described
in SFAS No. 123 had been adopted, are as follows:
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income As reported $ 30,445 $ 20,203 $ 40,536
Pro forma 20,203 13,500 34,380
Basic net income per share As reported .74 .49 .98
Pro forma .49 .33 .83
Diluted net income per share As reported .69 .47 .91
Pro forma .48 .33 .79
STOCK OPTION PLANS
At December 31, 1999, the Company had 10,832,453 shares approved by the Board of
Directors and stockholders for grant under the following stock option plans: the
1992 Director Plan, 352,000; the 1993 Director Plan, 320,000; the 1993 Employee
Plan, 8,000,000; the 1998 Director Plan, 250,000; and the 1998 Stock Incentive
Plan, 1,910,453.
On April 21, 1998, the stockholders approved the 1998 Stock Incentive Plan,
under which the Company may initially grant stock options and stock awards to
purchase up to 1,700,000 shares of common stock. Effective January 1, 1999 and
each January 1st thereafter during the term of the 1998 Stock Incentive Plan,
the number of shares of common stock available for grants of stock options and
stock awards shall be increased automatically to an amount equal to 4.5% of the
total number of issued shares of common stock, including shares held in
treasury, as of the close of business on December 31st of the preceding year.
On December 15, 1998, the Company granted 1,320,100 stock options at the current
fair market value with similar terms and conditions to previously issued but
unexercised grants. In exchange for the new grants, employees agreed to forfeit
their prior stock options.
Stock options generally vest over five years and generally expire no later than
ten years from the date of grant.
26
18
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes the status of the Company's stock option plans at
December 31, 1999, 1998, and 1997, and changes during the years then ended:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 8,322,335 $ 11.65 7,764,907 $ 11.85 8,014,386 $ 8.34
Granted at fair market value 2,058,463 28.50 3,587,535 16.63 1,450,521 24.55
Granted above fair market value 91,500 26.41
Exercised (1,764,353) 9.00 (604,714) 6.50 (996,965) 4.87
Forfeited (569,605) 18.02 (2,425,393) 20.96 (794,535) 10.05
--------- --------- ---------
Outstanding at end of year 8,046,840 16.09 8,322,335 11.65 7,764,907 11.85
--------- --------- ---------
Options exercisable at year-end 2,091,171 9.47 2,502,865 7.45 2,140,956 6.14
========= ========= =========
Weighted-average grant-date fair
value of options granted during
the year at fair market value $ 14.06 $ 5.65 $ 12.48
Weighted-average grant-date fair
value of options granted during
the year above fair market value $ 11.50
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
- ----------------------------------------------------------------------------------
$ .50 - 7.00 616,683 4.1 $ 3.29 575,134 $ 3.38
7.38 - 7.50 1,750,625 8.8 7.50 626,625 7.50
8.06 - 15.88 1,944,932 7.3 14.63 593,220 13.45
16.00 1,340,390 8.3 16.00 197,275 16.00
16.50 - 26.19 941,577 8.6 21.90 67,792 17.69
26.50 - 36.38 1,452,633 10.8 30.12 31,125 26.58
--------- ---------
8,046,840 8.3 16.09 2,091,171 9.47
========= =========
For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1999, 1998, and
1997, respectively: a risk-free interest rate of 5.6%, 5.1%, and 6.3%; an
expected life of 4.5, 4.1, and 5.1 years; an expected volatility of 54%, 50%,
and 50%; and no expected dividends.
27
19
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan (ESPP), employees who have
completed six months of continuous employment with the Company may purchase
common stock semi-annually at the lower of 85% of the fair market value of the
stock at the beginning or end of the six-month payment period, through
accumulation of payroll deductions. Employees are required to hold common stock
purchased under the ESPP for a period of one year from the date of purchase.
Common stock reserved for future sales totaled 408 ,746 shares at December 31,
1999. Shares purchased under the ESPP totaled 24,118 in 1999, 30,670 in 1998,
and 22,436 in 1997. The weighted-average fair value of shares purchased under
the ESPP was $17.59 in 1999, $7.52 in 1998, and $5.08 in 1997.
For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchases in 1999, 1998, and
1997: a weighted-average risk-free interest rate of 5.3%; an expected life of
six months; an expected volatility of 54%, 50%, and 50%, respectively; and no
expected dividends.
EMPLOYEE SAVINGS PLAN
Under the Company's Employee Savings Plan, a defined contribution plan,
employees who have attained age 21 may contribute 1% to 15% of their salary on a
pre-tax basis. Employer contributions are made at the discretion of management
and vest after five years of continuous employment with the Company. Employer
contributions approximated $490,000 in 1999, $230,000 in 1998, and $400,000 in
1997.
INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------
(In thousands)
Current:
Federal $ 12,838 $ 5,468 $ 17,048
State 2,390 1,617 2,850
Foreign 1,154 1,357 473
-----------------------------------------------------------
16,382 8,442 20,371
Deferred:
Federal (2,167) (1,582) (1,552)
State (1,515) 239 (1,029)
Foreign (265) -- --
-----------------------------------------------------------
(3,947) (1,343) (2,581)
-----------------------------------------------------------
$ 12,435 $ 7,099 $ 17,790
===========================================================
28
20
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the federal statutory rate
is as follows:
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
Provision for income taxes at federal statutory rate 35% 35% 35%
State income taxes, net of federal benefit 2 1 2
Foreign Sales Corporation benefit (3) (3) (3)
Tax-exempt investment income (5) (8) (3)
Other 1 (0.5)
----------------------------------------------------------------------------------
Provision for income taxes 29% 26% 30.5%
==================================================================================
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The tax effects of the
principal items making up deferred income taxes are as follows:
December 31, 1999 1998
- -------------------------------------------------------------------------
(In thousands)
Current deferred tax assets:
Vacation, bad debt, and other $1,686 $ 1,370
Inventory, warranty, and other 3,750 2,298
Other 646 268
--------------------------------------------------------------------
Total net current deferred tax asset $6,082 $ 3,936
====================================================================
Noncurrent deferred tax assets (liabilities):
Federal and state credit carryforwards $4,918 $ 999
Acquired complete technology and other 25 (156)
Acquired in-process technology 1,685 1,615
Depreciation 423 (221)
--------------------------------------------------------------------
Total net noncurrent deferred tax asset $7,051 $ 2,237
====================================================================
The Company's state credit carryforwards, net of federal tax impact, are
approximately $1,933,000, a portion of which will begin to expire in 2010. The
Company's federal credit carryforwards are approximately $2,985,000 and have an
unlimited life. Approximately $3,000,000 of the Company's credit carryforwards
relate to deductions for stock option exercises and, as a result, will be
recorded as a benefit to additional paid in capital when realized.
29
21
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME PER SHARE
Net income per share is calculated as follows:
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income $30,445 $20,203 $40,536
===================================================================================
Basic:
Weighted-average common shares outstanding 40,932 40,978 41,322
===================================================================================
Net income per common share $ .74 $ .49 $ .98
===================================================================================
Diluted:
Weighted-average common shares outstanding 40,932 40,978 41,322
Effect of dilutive securities:
Stock options 3,054 2,225 3,380
-----------------------------------------------------------------------------------
Weighted-average common and common
equivalent shares outstanding 43,986 43,203 44,702
===================================================================================
Net income per common and common
equivalent share $ .69 $ .47 $ .91
===================================================================================
Stock options to purchase 97,672, 151,550, and 545,386 shares of common stock
were outstanding during the years ended December 31, 1999, 1998, and 1997,
respectively, but were not included in the calculation of diluted net income per
share because the options' exercise price was greater than the average market
price of the Company's common stock during those years. Although these stock
options were antidilutive in 1999, 1998, and 1997, they may be dilutive in
future years' calculations.
30
22
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION
The Company has one reportable segment that designs, develops, and markets
machine vision systems. Operating segments are determined based on the way that
management organizes its business for making operating decisions and assessing
performance.
During the years ended December 31, 1999, 1998, and 1997, one customer accounted
for $19,611,000, $17,083,000, and $27,292,000, or 13%, 14%, and 18%,
respectively, of revenue.
The following table summarizes information about geographic areas (in
thousands):
UNITED
Year Ended December 31, 1999 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
Revenue:
Unaffiliated customers $ 130,618 $ 21,507 $ 152,125
Intercompany 10,162 $ (10,162)
Long-lived assets 30,614 2,089 $ 2,702 35,405
UNITED
Year Ended December 31, 1998 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
Revenue:
Unaffiliated customers $ 104,321 $ 17,523 $ 121,844
Intercompany 5,493 $ (5,493)
Long-lived assets 33,807 2,035 $ 2,570 38,412
UNITED
Year Ended December 31, 1997 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
Revenue:
Unaffiliated customers $ 137,887 $ 17,453 $ 155,340
Intercompany 10,336 $ (10,336)
Long-lived assets 34,010 674 $ 1,773 36,457
Revenue is presented geographically based on the country in which the sale is
recorded. Inventories are transferred to the Company's Japanese subsidiary at
previously established transfer prices, resulting in intercompany revenue and
receivables for the United States operation.
"Other" represents all long-lived assets in other countries, none of which were
significant, and certain deposits that are included in "Other assets" on the
Consolidated Balance Sheets.
Deferred tax assets recorded in Japan are not material compared to the Company's
consolidated financial position, and therefore, are not presented.
31
23
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITION OF ALLEN-BRADLEY TECHNOLOGY
In July 1998, the Company acquired certain technology of Rockwell Automation's
Allen-Bradley machine vision business. The acquired technology related to
certain products under development. The technology was valued using a
risk-adjusted cash flow model, under which future cash flows were discounted
taking into account risks related to existing markets, the technology's life
expectancy, future target markets and potential changes thereto, and the
competitive outlook for the technology. This analysis resulted in an allocation
of $2,100,000 to in-process technology which had not reached technological
feasibility and had no alternative future use, and accordingly, was expensed
immediately.
ACQUISITION OF MAYAN AUTOMATION, INC.
On July 31, 1997, the Company acquired selected assets and assumed selected
liabilities of Mayan Automation, Inc. (Mayan), a developer of low-cost machine
vision systems used for surface inspection, for $4,800,000 in cash. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, Mayan's results of operations have been included in the Company's
consolidated results of operations since the date of acquisition. Mayan's
historical results of operations were not material compared to the Company's
consolidated results of operations, and therefore, pro forma results are not
presented.
The purchase price was allocated among the identifiable assets of Mayan. After
allocating the purchase price to the net tangible assets, acquired technology
was valued using a risk-adjusted cash flow model, under which future cash flows
were discounted taking into account risks related to existing markets, the
technology's life expectancy, future target markets and potential changes
thereto, and the competitive outlook for the technology. This analysis resulted
in an allocation of $400,000 to complete technology, to be amortized over five
years, and $3,115,000 to in-process technology which had not reached
technological feasibility and had no alternative future use, and accordingly,
was expensed immediately. An additional $839,000 of contingent consideration was
recorded as purchase price when paid in 1999 and was allocated to goodwill to be
amortized over the remaining period of expected benefit, which is three years.
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Cash paid for income taxes totaled $2,347,000 in 1999, $10,710,000 in 1998, and
$12,564,000 in 1997.
Common stock received as payment for stock option exercises totaled $2,197,000
in 1999, $50,000 in 1998, and $547,000 in 1997.
The Company retired certain fully depreciated property, plant, and equipment
totaling $1,056,000 in 1997.
32
24
COGNEX CORPORATION - REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COGNEX CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cognex
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 27, 2000
33
25
COGNEX CORPORATION - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
APRIL 4, JULY 4, OCTOBER 3, DECEMBER 31,
QUARTER ENDED 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenue $ 27,485 $ 35,271 $ 41,046 $ 48,323
Gross margin 18,757 24,329 29,097 34,721
Operating income 2,455 7,024 10,579 15,522
Net income 3,104 6,189 8,966 12,186
Basic net income per share .08 .15 .22 .29
Diluted net income per share .07 .14 .20 .27
Common stock prices:
High 28.3750 33.5000 35.8750 39.0625
Low 19.0000 23.6250 28.5000 26.1250
APRIL 5, JULY 5, OCTOBER 4, DECEMBER 31,
QUARTER ENDED 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenue $ 40,056 $ 32,036 $ 24,659 $ 25,093
Gross margin 29,129 22,562 16,382 16,475
Charge for acquired in-process technology 2,100
Operating income 12,955 7,219 (1,095) 734
Net income 10,542 6,517 951 2,193
Basic net income per share .25 .16 .02 .05
Diluted net income per share .24 .15 .02 .05
Common stock prices:
High 27.0000 24.6875 19.2500 20.0000
Low 19.5000 15.5000 11.2500 10.1250
34
26
COGNEX CORPORATION - COMPANY INFORMATION
TRANSFER AGENT
BankBoston, N.A. c/o EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone (781) 575-3100
www.equiserve.com
GENERAL COUNSEL
Hutchins, Wheeler & Dittmar-Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP-Boston, Massachusetts
FORM 10-K
A copy of the annual report filed with the Securities and Exchange Commission on
Form 10-K is available to stockholders, without charge, upon request to:
Department of Investor Relations
Cognex Corporation
One Vision Drive
Natick, MA 01760
Additional copies of this annual report are also available, without charge, upon
request to the above address.
The Company's common stock is traded on The NASDAQ Stock Market, under the
symbol CGNX. As of February 18, 2000, there were approximately 12,000 registered
and non-registered holders of the Company's common stock.
No dividends on the Company's common stock were paid during 1999 and 1998.
35