EXHIBIT 13
COGNEX CORPORATION: 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this report, as well as oral statements made by the
Company from time to time, constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Readers can identify
these forward-looking statements by the Company's use of the words "expects,"
"anticipates," "estimates," "believes," "projects," "intends," "plans," "will,"
"may," "shall," and similar words and other statements of a similar sense. These
statements are based upon the Company's current estimates and expectations 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 involve known and unknown risks and uncertainties
that could cause actual results to differ materially from those projected. Such
risks and uncertainties include: (1) global economic conditions that impact the
capital spending trends of manufacturers in a variety of industries; (2) the
cyclicality of the semiconductor and electronics industries; (3) the inability
to achieve significant international revenue; (4) fluctuations in foreign
exchange rates; (5) the loss of, or a significant curtailment of purchases by,
any one or more principal customers; (6) the reliance upon certain sole-source
suppliers to manufacture and deliver critical components for the Company's
products; (7) the inability to attract and retain skilled employees; (8) the
inability to design and manufacture high-quality products; (9) inaccurate
forecasts of customer demand; (10) the technological obsolescence of current
products and the inability to develop new products; (11) the inability to
protect the Company's proprietary technology and intellectual property; (12) the
Company's involvement in time-consuming and costly litigation; (13) the impact
of competitive pressures; and (14) the inability to achieve expected results
from acquisitions. The foregoing list should not be construed as exhaustive and
the Company encourages readers to refer to the detailed discussion of risk
factors included in Part I - Item 1 of the Company's Annual Report on Form 10-K.
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.
26 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXECUTIVE OVERVIEW
Cognex Corporation (the "Company") designs, develops, manufactures, and markets
machine vision systems, or computers that can "see," which are used to automate
a wide range of manufacturing processes where vision is required. The Company's
Modular Vision Systems Division (MVSD) specializes in machine vision systems
that are used to automate the manufacture of discrete items, while the Company's
Surface Inspection Systems Division (SISD) specializes in machine vision systems
that are used to inspect the surfaces of materials processed in a continuous
fashion.
In addition to product revenue derived from the sale of machine vision
systems, the Company also generates revenue by providing maintenance and
support, education, consulting, and installation services to its customers. The
Company's customers can be classified into three categories: semiconductor and
electronics capital equipment manufacturers, discrete manufacturing customers,
and surface inspection customers. Semiconductor and electronics capital
equipment manufacturers purchase Cognex machine vision systems and integrate
them into the capital equipment that they manufacture and then sell to their
customers in the semiconductor and electronics industries that either make
computer chips or make printed circuit boards containing computer chips.
Although the Company sells to original equipment manufacturers (OEMs) in a
number of industries, these semiconductor and electronics OEMs have historically
been large consumers of the Company's products. The discrete manufacturing
category includes a wide array of manufacturers who use machine vision for
applications in a variety of industries, including the packaging, automotive,
consumer electronics, food and beverage, and personal care industries. The
majority of these customers are end users who purchase Cognex machine vision
systems and install them directly on their production lines. The last category,
surface inspection customers, includes manufacturers of materials processed in a
continuous fashion, such as paper and steel.
Over the past few years, the Company has been successful in diversifying
its customer base beyond semiconductor and electronics capital equipment
manufacturers. Demand from these capital equipment manufacturers is highly
cyclical, with periods of investment followed by temporary downturns. During the
first half of 2004, the Company experienced an increase in orders from these
customers, resulting in a 64% increase in sales to this sector for the full year
2004 over the prior year. Despite the rebound in this business, the Company
generated 58% of its total revenue in 2004 from customers outside of the
semiconductor and electronics capital equipment sector. Sales to customers in
the discrete manufacturing category increased from the prior year by 29%, while
surface inspection sales were down slightly from the prior year.
The Company's total revenue for 2004 increased 35% from the prior year to
$202 million, and because the Company was able to focus increased spending in
strategic areas that help drive revenue growth and in employee incentive
programs, earnings increased at an even faster rate than revenue. Net income
more than doubled from $0.36 per share in 2003 to $0.80 per share in 2004 and
grew from 11% of revenue in 2003 to 19% of revenue in 2004.
COGNEX CORPORATION: 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenue:
Year ended December 31, 2004 2003 2002
- ----------------------- ---- ---- ----
Revenue 100% 100% 100%
Cost of revenue 28 33 35
---- ---- ----
Gross margin 72 67 65
Research, development, and
engineering expenses 14 17 23
Selling, general, and
administrative expenses 35 37 51
---- ---- ----
Operating income (loss) 23 13 (9)
Nonoperating income 3 3 2
---- ---- ----
Income (loss) before taxes 26 16 (7)
Income tax provision (benefit) 7 5 (2)
---- ---- ----
Net income (loss) 19% 11% (5)%
==== ==== ====
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
REVENUE
Revenue for the year ended December 31, 2004 increased 35% to $201,957,000 from
$150,092,000 for the year ended December 31, 2003. The majority of this growth
came from sales to semiconductor and electronics capital equipment
manufacturers, which increased $33,001,000, or 64%, from the prior year. While
sales to these customers contributed most significantly to the Company's revenue
growth in 2004, sales to discrete manufacturing customers also increased by
$19,872,000, or 29%, from 2003. Surface inspection sales, however, decreased
$1,008,000, or 3%, from the prior year. Although sales to customers outside of
the semiconductor and electronics capital equipment sector grew from the prior
year and represented the majority of the company's total revenue in 2004, they
decreased as a percentage of total revenue to 58% in 2004 from 66% in 2003 due
to the significant increase in sales to semiconductor and electronics capital
equipment manufacturers. Geographically, revenue increased from the prior year
in all of the Company's major regions, but most significantly in Japan, where
many of the Company's semiconductor and electronics capital equipment customers
are located.
Product revenue for the year ended December 31, 2004 increased 35% to
$176,569,000 from $130,670,000 for the year ended December 31, 2003. The
increase in product revenue was due to a higher volume of machine vision systems
sold to customers in the semiconductor, electronics, automotive, and other
industries. Service revenue, which is derived from the sale of maintenance and
support, education, consulting, and installation services, increased 31% to
$25,388,000 from $19,422,000 due principally to higher revenue generated by
maintenance and support programs that are sold bundled with product offerings.
Service revenue remained constant as a percentage of total revenue at 13% in
both 2003 and 2004.
28 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MVSD revenue for the year ended December 31, 2004 increased 44% to
$173,889,000 from $121,016,000 for the year ended December 31, 2003. The
increase in MVSD revenue was due to a higher volume of modular vision systems
sold to customers in the semiconductor, electronics, automotive, and other
industries. Although surface inspection orders increased from the prior year,
the timing of shipments and installations resulted in a 3% decline in SISD
revenue to $28,068,000 in 2004 from $29,076,000 in 2003. As a result of the
increase in MVSD revenue, SISD revenue decreased as a percentage of total
revenue to 14% in 2004 compared to 19% in 2003.
GROSS MARGIN
Gross margin as a percentage of revenue was 72% for 2004 compared to 67% for
2003. The increase in gross margin was primarily due to the impact of the higher
sales volume without a proportional increase in manufacturing overhead costs, as
well as a greater percentage of total revenue from the sale of modular vision
systems, which have higher margins than the sale of services and surface
inspection systems.
Product gross margin as a percentage of revenue was 76% for 2004 compared
to 71% for 2003. The increase in product margin was primarily due to the
increased sales volume, as well as the shift in product mix to higher-margin
modular vision systems. Service gross margin as a percentage of revenue was 43%
for 2004 compared to 37% for 2003. Many of the Company's products are sold with
bundled maintenance and support programs for which the revenue is recognized
over the program period. The increasing volume of product sales in 2003 and 2004
has resulted in higher service revenue derived from these maintenance and
support programs. Although service costs increased to support the additional
revenue, the increase in revenue was greater than the increase in costs.
MVSD gross margin as a percentage of revenue was 76% for 2004 compared to
71% for 2003. The increase in MVSD margin was primarily due to the higher sales
volume of modular vision systems. SISD gross margin as a percentage of revenue
was 45% for 2004 compared to 48% for 2003. The decrease in SISD margin was due
principally to the impact of the lower revenue, while costs increased slightly.
OPERATING EXPENSES
Research, development, and engineering (R,D&E) expenses for the year ended
December 31, 2004 increased 9% to $27,063,000 from $24,719,000 for the year
ended December 31, 2003. MVSD R,D&E expenses increased $2,156,000, or 10%, from
the prior year primarily due to higher personnel-related costs, including the
additional engineering personnel resulting from the acquisition of the machine
vision business of Gavitec AG on December 1, 2003 and the accrual of company
bonuses for 2004. SISD R,D&E expenses increased $188,000, or 7%, from the prior
year due principally to the accrual of company bonuses for 2004.
Selling, general, and administrative (S,G&A) expenses for the year ended
December 31, 2004 increased 27% to $70,674,000 from $55,724,000 for the year
ended December 31, 2003. MVSD S,G&A expenses increased $11,577,000, or 27%,
COGNEX CORPORATION: 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
from the prior year, while SISD S,G&A expenses increased $1,031,000, or 14%,
from 2003. Corporate expenses that are not allocated to a division increased
$2,342,000, or 41%, from the prior year. The increase in MVSD expenses was
primarily due to the hiring of additional sales personnel and increased
marketing spending to grow the Company's base of discrete manufacturing
customers, higher commissions related to the increased sales volume, and the
accrual of company bonuses for 2004, as well as the unfavorable impact of
foreign exchange rates on the Company's international operations. A significant
amount of the Company's sales and marketing costs are denominated in currencies
other than the U.S. Dollar, primarily the Euro Dollar and Japanese Yen. During
2004, the Euro Dollar and Japanese Yen strengthened versus the U.S. Dollar,
resulting in a higher level of expenses when these amounts were translated into
U.S. Dollars. The increase in SISD expenses was primarily due to higher
personnel-related costs, as well as the accrual of company bonuses for 2004. The
increase in corporate expenses was principally due to the accrual of company
bonuses for 2004, as well as higher professional fees related to services
required to ensure the Company's compliance with the Sarbanes-Oxley Act of 2002.
NONOPERATING INCOME
Investment and other income for the year ended December 31, 2004 decreased 14%
to $4,670,000 from $5,450,000 for the year ended December 31, 2003. This
decrease was due principally to lower average interest rates on the Company's
portfolio of debt securities.
The foreign currency gain for the year ended December 31, 2004 was
$1,641,000 compared to a loss of $1,712,000 for the year ended December 31,
2003. The loss in 2003 was primarily due to the revaluation and settlement of
the Company's Irish subsidiary's accounts receivable denominated in U.S. Dollars
and Japanese Yen. During 2003, the Euro Dollar strengthened versus the U.S.
Dollar and Japanese Yen, resulting in foreign currency losses on the Irish
subsidiary's books when these receivables were revalued and collected. Although
the Company experienced similar losses in 2004, they were offset by gains on the
revaluation and settlement of intercompany balances and gains on forward
contracts.
INCOME TAXES
The Company's effective tax rate for 2004 was 29% compared to 31% for 2003. The
decrease in the effective tax rate was primarily due to more of the Company's
profits being earned and taxed in lower tax jurisdictions.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUE
Revenue for the year ended December 31, 2003 increased 32% to $150,092,000 from
$114,107,000 for the year ended December 31, 2002. During the year, the Company
experienced an increase in demand as its business rebounded from a slowdown in
capital spending by manufacturers worldwide. Sales to OEM customers, most of
whom make capital equipment used in the semiconductor and electronics
industries,
30 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
increased $19,076,000, or 51%, from the prior year. Sales to end-user customers
increased from the prior year by $16,909,000, or 22%, due to higher demand from
customers across a variety of industries. Sales to end-user customers continued
to comprise the majority of the Company's revenue despite the rebound in the OEM
business, representing 62% of total revenue in 2003 compared to 67% in 2002.
Geographically, revenue increased from the prior year in all of the Company's
major regions, but most significantly in Japan, where many of the Company's OEM
customers are located.
Product revenue for the year ended December 31, 2003 increased 36% to
$130,670,000 from $96,202,000 for the year ended December 31, 2002. The increase
in product revenue was due to a higher volume of machine vision systems sold to
customers in the semiconductor, electronics, automotive, paper, metals, and
other industries. Service revenue, which is derived from the sale of maintenance
and support, education, consulting, and installation services, increased 8% to
$19,422,000 from $17,905,000. Many of the Company's products that were sold
during 2003 included bundled maintenance and support programs for which a
portion of the revenue will be recognized in future quarters over the program
period. As a result, service revenue did not increase as dramatically as product
revenue, and it decreased as a percentage of total revenue from 16% in 2002 to
13% in 2003.
MVSD revenue for the year ended December 31, 2003 increased 34% to
$121,016,000 from $90,358,000 for the year ended December 31, 2002. The increase
in MVSD revenue was due to a higher volume of modular vision systems sold to
customers in the semiconductor, electronics, automotive, and other industries.
SISD revenue for the year ended December 31, 2003 increased 22% to $29,076,000
from $23,749,000 for the year ended December 31, 2002. The increase in SISD
revenue was due principally to a higher volume of SmartView, systems sold to
customers in the paper and metals industries. The markets served by SISD had not
been as severely impacted by the worldwide slowdown in capital spending. As a
result, SISD revenue did not increase as dramatically as MVSD revenue, and it
decreased as a percentage of total revenue to 19% in 2003 compared to 21% in
2002.
GROSS MARGIN
Gross margin as a percentage of revenue was 67% for 2003 compared to 65% for
2002. The increase in gross margin was primarily due to the impact of the higher
sales volume with relatively flat manufacturing overhead costs, as well as a
greater percentage of revenue from the sale of modular vision systems, which
have higher margins than the sale of services and surface inspection systems.
This increase was partially offset by a lower amount of benefits recorded to
"Cost of product revenue" in 2003 from the sale of previously reserved inventory
and the favorable resolution of inventory purchase commitments, both of which
had been reserved in 2001. These benefits amounted to $1,290,000 in 2003
compared to $2,684,000 in 2002.
Product gross margin as a percentage of revenue was 71% for 2003 compared
to 70% for 2002. The increase in product margin was primarily due to the
increased sales volume, as well as the shift in product mix to higher-margin
modular vision
COGNEX CORPORATION: 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
systems. This increase was partially offset by the decreased benefit from the
sale of previously reserved inventory. Service gross margin as a percentage of
revenue remained consistent with the prior year at 37%.
MVSD gross margin as a percentage of revenue was 71% for 2003 compared to
70% for 2002. The increase in MVSD margin was primarily due to the impact of the
higher sales volume, as well as a greater percentage of revenue from the sale of
products, which carry higher margins than the service business. This increase
was partially offset by the decreased benefit from the sale of previously
reserved inventory. SISD gross margin as a percentage of revenue was 48% for
2003 compared to 45% for 2002. The increase in SISD margin was due principally
to the increased sales volume.
OPERATING EXPENSES
Research, development, and engineering (R,D&E) expenses for the year ended
December 31, 2003 decreased 4% to $24,719,000 from $25,630,000 for the year
ended December 31, 2002. MVSD R,D&E expenses decreased $1,245,000, or 5%, from
the prior year primarily due to a headcount reduction in the third quarter of
2002. SISD R,D&E expenses increased $334,000, or 15%, from the prior year due
principally to an increase in spending on software translation services and
other activities related to the SmartView product line.
Selling, general, and administrative (S,G&A) expenses for the year ended
December 31, 2003 decreased 5% to $55,724,000 from $58,376,000 for the year
ended December 31, 2002. MVSD S,G&A expenses increased $1,674,000, or 4%, from
the prior year, while SISD S,G&A expenses increased $587,000, or 8%, from 2002.
Corporate expenses that are not allocated to a division decreased $4,913,000, or
46%, from the prior year. The increase in MVSD and SISD expenses was primarily
due to higher spending in sales and marketing undertaken to increase sales
opportunities, as well as the unfavorable impact of foreign exchange rate
changes on the Company's international operations. A significant amount of the
Company's sales and marketing costs are denominated in currencies other than the
U.S. Dollar, primarily the Euro Dollar and Japanese Yen. During 2003, the Euro
Dollar and Japanese Yen strengthened versus the U.S. Dollar, resulting in a
higher level of expenses when these amounts were translated into U.S. Dollars.
The decrease in corporate expenses was due principally to lower legal expenses
associated with patent infringement lawsuits initiated by the Company to protect
its intellectual property.
NONOPERATING INCOME
Investment and other income for the year ended December 31, 2003 decreased 40%
to $5,450,000 from $9,156,000 for the year ended December 31, 2002. This
decrease was due principally to lower average interest rates on the Company's
portfolio of debt securities. In addition, during 2003, the Company reduced the
carrying value of its investment in a limited partnership by $1,031,000 compared
to $680,000 during 2002, representing realized investment losses and fund
expenses that were not offset by realized investment gains.
32 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During the fourth quarter of 2002, based upon the estimated fair value of
the Company's investment in a limited partnership, the Company determined that
it may be unable to recover its full carrying value. As a result, the Company
recorded a charge of $1,768,000, representing an other-than-temporary impairment
in the carrying value of this investment. In addition, during 2002, the Company
recorded losses from the sale of equity securities totaling $6,184,000.
The foreign currency loss for the year ended December 31, 2003 was
$1,712,000 compared to a gain of $350,000 for the year ended December 31, 2002.
The loss in 2003 was primarily due to the revaluation and settlement of the
Company's Irish subsidiary's accounts receivable denominated in U.S. Dollars and
Japanese Yen. During 2003, the Euro Dollar strengthened versus the U.S. Dollar
and Japanese Yen, resulting in foreign currency losses on the Irish subsidiary's
books when these receivables were revalued and collected. Although the Company
experienced similar losses in 2002, they were offset by gains on the revaluation
of intercompany balances that were not fully hedged. In addition, a smaller
percentage of the Company's Irish subsidiary's accounts receivable were
denominated in currencies other than the Euro Dollar in 2002.
INCOME TAXES
The Company's effective tax rate for 2003 was a provision of 31% compared to a
benefit of 27% for 2002. The change in the effective tax rate was primarily due
to lower tax-exempt investment income generated from the Company's municipal
bond portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically been able to generate positive cash flow from
operations, which has funded the Company's operating activities and other cash
requirements and has resulted in an accumulated cash, cash equivalent, and
investment balance of $391,076,000 at December 31, 2004, representing 85% of
shareholders' equity. The Company has established guidelines relative to credit
ratings, diversification, and maturities of its investments that maintain
liquidity.
The Company's cash requirements during the year ended December 31, 2004
were met with positive cash flow from operations and the proceeds from the
issuance of common stock under stock option and stock purchase plans. Cash
requirements primarily consisted of operating activities, capital expenditures,
and the payment of dividends. Capital expenditures in 2004 totaled $3,120,000
and consisted primarily of expenditures for computer hardware and software.
The Company believes that its existing cash, cash equivalent, and
investment balance, together with continued positive cash flow from operations,
will be sufficient to meet its operating, investing, and financing activities in
2005 and the foreseeable future.
COGNEX CORPORATION: 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table summarizes the Company's material contractual
obligations, both fixed and contingent (in thousands):
Limited
Year Ended Partnership
December 31, Interest Acquisitions Leases Total
- ------------ ----------- ------------ -------- --------
2005 $ 6,625 $ 2,577 $ 3,878 $ 13,080
2006 - - 977 977
2007 - - 349 349
2008 - - 192 192
2009 - - 190 190
Thereafter - - 445 445
-------- --------- -------- --------
$ 6,625 $ 2,577 $ 6,031 $ 15,233
======== ========= ======== ========
LIMITED PARTNERSHIP INTEREST
On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock
Associates III L.P. (Venrock), a venture capital fund. A director of the Company
is a Managing General Partner of Venrock Associates. In the original agreement
with Venrock, the Company committed to a total investment in the limited
partnership of up to $25,000,000, with the commitment period expiring on January
1, 2005. In January 2005, the Company signed an amendment to the original
agreement with Venrock, which reduces its commitment to $22,500,000 and extends
the commitment period through December 31, 2010. The Company does not have the
right to withdraw from the partnership prior to December 31, 2010. As of
December 31, 2004, the Company had contributed $15,875,000 to the partnership,
including $2,250,000 during 2004. The remaining commitment of $6,625,000 can be
called by Venrock in any period through 2010.
ACQUISITIONS
On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG for 7,000,000 Euros in cash (or approximately $7,630,000)
paid at closing, with the potential for an additional cash payment in 2005 of up
to 1,700,000 Euros (or approximately $2,306,000) depending upon the achievement
of certain performance criteria.
On December 1, 2003, the Company acquired the machine vision business of
Gavitec AG for 3,777,000 Euros in cash (or approximately$4,516,000), including
3,477,000 Euros paid at closing, 100,000 Euros (or approximately $123,000) paid
on December 1, 2004, and 200,000 Euros (or approximately $271,000) to be paid on
December 1, 2005. There was the potential for two additional cash payments of up
to 250,000 Euros (or approximately $339,000) each in the third quarter of 2004
and the first quarter of 2005 depending upon the achievement of certain
performance criteria. These criteria were not met, and therefore, these
contingent payments were not made.
34 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In addition to the obligations described above, the following items may
also result in future material uses of cash:
DERIVATIVE INSTRUMENTS
In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. Because the terms of the
derivative instrument and underlying exposure are generally matched at
inception, changes in foreign currency exchange rates should not expose the
Company to significant net cash outflows.
STANDBY LETTERS OF CREDIT
On March 25, 2004, the Company provided standby letters of credit totaling
3,146,280,000 Yen (or approximately $30,722,000) to taxing authorities in Japan
that are collateralized by investments on the Consolidated Balance Sheet. The
Tokyo Regional Taxation Bureau (TRTB) has asserted that Cognex Corporation has a
permanent establishment in Japan that would require certain income, previously
reported on U.S. tax returns for the years ended December 31, 1997 through
December 31, 2001, to be subject instead to taxation in Japan. The Company
disagrees with this position and is contesting the TRTB's assertion. Until this
matter is resolved, the Company is required to provide collateral for these tax
assessments. Should the TRTB prevail in its assertion, the income in question
would be taxable in Japan and the Company would be required to pay approximately
$30,722,000 in taxes, interest, and penalties to Japanese taxing authorities.
The Company would then be entitled to recoup the majority of this amount from
taxing authorities in the U.S.
STOCK REPURCHASE PROGRAM
On December 12, 2000, the Company's Board of Directors authorized the repurchase
of up to $100,000,000 of the Company's common stock. During 2002, a total of
1,768,452 shares were repurchased at a cost of $26,425,000. There have been no
other shares repurchased under this program. The Company may repurchase
additional shares under this program in future periods depending upon a variety
of factors, including the market value of the Company's common stock and the
average return on the Company's invested balances.
DIVIDENDS
Beginning in the third quarter of 2003, the Company's Board of Directors has
declared and paid a cash dividend in each quarter, including the first quarter
of 2005. During the third quarter of 2004, the Company's Board of Directors
voted to increase the quarterly cash dividend from $0.06 per share to $0.08 per
share. Dividend payments amounted to $12,756,000 during 2004 and $3,698,000 in
the first quarter of 2005. Future dividends will be declared at the discretion
of the Board of Directors and will depend upon such factors as the Board of
Directors deems relevant. The Board of Directors may modify the Company's
dividend policy from time to time.
COGNEX CORPORATION: 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and
various other assumptions believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could differ from these estimates under different assumptions or
circumstances resulting in charges that could be material in future reporting
periods. The Company believes the following critical accounting policies require
the use of significant estimates and judgments in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon delivery if a signed
customer contract or purchase order has been received, the fee is fixed or
determinable, and collection of the resulting receivable is probable. If the
arrangement contains customer-specified acceptance criteria, then revenue is
deferred until the Company can demonstrate that the customer's criteria have
been met. The Company maintains reserves against revenue for potential product
returns. Revenue from maintenance and support programs is deferred and
recognized ratably over the program period. Revenue from education and
consulting services is recognized over the period the services are provided.
Revenue from installation services is recognized when the customer has signed
off that the installation is complete.
While the Company applies the guidance of Statement of Position (SOP) No.
97-2, "Software Revenue Recognition," as amended by SOP No. 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," management exercises judgment in connection with the
determination of the amount of revenue to be recognized each period. Such
judgments include, but are not limited to, assessing the probability of
collecting the receivable, assessing whether the fee is fixed or determinable,
and assessing whether customer-specified acceptance criteria are substantive in
nature.
INVESTMENTS
At December 31, 2004, the Company's investment balance totaled $336,806,000, of
which $325,094,000 consisted of municipal bonds. Investments in municipal bonds
are reported at fair value, with unrealized gains and losses, net of tax,
recorded in shareholders' equity as other comprehensive income (loss). The
remaining investment balance of $11,712,000 represents a limited partnership
interest in Venrock
36 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Associates III, L.P., a venture capital fund. A director of the Company is a
Managing General Partner of Venrock Associates. The Company's limited
partnership interest is accounted for using the cost method because the
Company's investment is less than 5% of the partnership and the Company has no
influence over the partnership's operating and financial policies.
The fair value of the Company's limited partnership interest is based upon
valuations of the partnership's investments as determined by the General
Partner. The Company understands that the General Partner adjusts the investment
valuations at least quarterly to reflect both realized and unrealized gains and
losses on partnership investments. Securities of public companies are valued at
market, subject to appropriate discounts to reflect limitations on liquidity.
Securities of private companies are valued at an estimated fair value, which
initially is at cost, adjusted for subsequent transactions that indicate a
higher or lower value is warranted. The value of private securities may be
discounted when, in the General Partner's judgment, the carrying value of such
private securities has been impaired by specific events.
The Company monitors the carrying value of its investment compared to its
fair value to determine whether an other-than-temporary impairment in its
interest in the limited partnership has occurred. In considering whether a
decline in fair value is other than temporary, the Company considers many
factors, both qualitative and quantitative in nature. Some of these factors
include the duration and extent of the fair value decline, the length of the
Company's contractual commitment to the partnership, general economic and stock
market trends, and specific communications from the General Partner.
In 2002, the Company determined that it may be unable to recover the full
carrying value of this investment, and as a result, recorded an
other-than-temporary impairment charge of $1,768,000 to reduce the carrying
value of this investment to its then estimated fair value. Given the nature of
the partnership's portfolio and the difficulty inherent in valuing these
investments, there is a great deal of uncertainty surrounding the future value
of the Company's interest in the limited partnership and future impairment
charges may be required.
ACCOUNTS RECEIVABLE
The Company maintains reserves against its accounts receivable for potential
credit losses. Ongoing credit evaluations of customers are performed and the
Company has historically not experienced significant losses related to the
collection of its accounts receivable. Allowances for uncollectible accounts are
estimated by management taking into account the length of time receivables have
been outstanding, specific accounts determined to be at risk for collection, the
risks associated with selling to smaller customers, and the economic conditions
of the primary regions and industries sold to, as well as general economic
conditions. An adverse change in any of these factors may result in the need for
additional bad debt provisions.
COGNEX CORPORATION: 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INVENTORIES
Inventories are stated at the lower of cost or market. The Company estimates
excess and obsolescence exposures based upon assumptions about future demand,
product transitions, and market conditions and records reserves to reduce the
carrying value of inventories to their net realizable value. The failure to
accurately forecast demand, in terms of both volume and configuration, and
adjust material requirement plans in a timely manner may lead to additional
excess and obsolete inventory and future charges.
In 2001, the Company recorded a $16,300,000 charge for excess inventories
and purchase commitments resulting from an extended slowdown in the
semiconductor and electronics industries, as well as the expected transition to
newer Cognex hardware platforms by the Company's OEM customers. The Company has
been able to subsequently sell $3,885,000 of this inventory to customers as a
result of actual demand being higher than the demand that was forecasted at the
time of the charge. In addition, the Company has negotiated the favorable
resolution of $894,000 of the inventory purchase commitments. The Company did
not record significant excess and obsolete inventory provisions in 2002, 2003,
or 2004.
LONG-LIVED ASSETS
The Company has long-lived assets including property, plant, and equipment, as
well as acquired goodwill and other intangible assets. These assets are
susceptible to shortened estimated useful lives and changes in fair value due to
changes in their use, market or economic changes, or other events or
circumstances. In addition, the fair value of goodwill is susceptible to changes
in the fair value of the reporting units in which the goodwill resides, which
are also reportable segments. The Company evaluates the potential impairment of
its long-lived assets annually, as required, or whenever events or circumstances
indicate their carrying value may not be recoverable. If events or circumstances
occur which would require a significant reduction in the estimated useful lives
of these assets or a significant decrease in fair value below their carrying
value, an adjustment to the lives or carrying values would result in a charge to
income in the period of determination.
WARRANTY OBLIGATIONS
The Company records the estimated cost of fulfilling product warranties at the
time of sale based upon historical costs to fulfill warranty obligations.
Provisions may also be recorded subsequent to the time of sale whenever specific
events or circumstances impacting product quality become known that would not
have been taken into account using historical data. While the Company engages in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers and third-party contract
manufacturers, the Company's warranty obligation is affected by product failure
rates, material usage, and service delivery costs incurred in correcting a
product failure. An adverse change in any of these factors may result in the
need for additional warranty provisions.
38 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINGENCIES
Estimated losses from contingencies are accrued by management based upon the
likelihood of a loss and the ability to reasonably estimate the amount of the
loss. Estimating potential losses, or even a range of losses, is difficult and
involves a great deal of judgment. The Company relies primarily on assessments
made by its internal and external legal counsel to make its determination as to
whether a loss contingency arising from litigation should be recorded or
disclosed. Should the resolution of a contingency result in a loss that the
Company did not accrue because management did not believe that the loss was
probable or capable of being reasonably estimated, then this loss would result
in a charge to income in the period the contingency was resolved.
INCOME TAXES
As part of the process of preparing consolidated financial statements,
management is required to estimate income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating the current tax
liability, as well as assessing temporary differences arising from the different
treatment of items for financial statement and tax purposes. These differences
result in deferred tax assets and liabilities, which are recorded on the
Consolidated Balance Sheet.
At December 31, 2004, the Company had net deferred tax assets of
$31,020,000, primarily resulting from temporary differences between the
financial statement and tax bases of assets and liabilities. Management has
evaluated the realizability of these deferred tax assets and has determined that
it is more likely than not that these assets will be realized. In reaching this
conclusion, management has evaluated relevant criteria, including the Company's
historical profitability, current projections of future profitability, and the
lives of tax credits, net operating and capital losses, and other carryforwards,
certain of which have indefinite lives. Should the Company fail to generate
sufficient pre-tax profits in future periods, the Company may be required to
record material adjustments to these deferred tax assets, resulting in a charge
to income in the period of determination.
Significant judgment is required in determining worldwide income tax
expense based upon tax laws in the various jurisdictions in which the Company
operates. The Company is subject to audits by various tax authorities, which may
result in future charges or credits.
DERIVATIVE INSTRUMENTS
In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. These contracts are used
to reduce the Company's risk associated with foreign currency exchange rate
changes, as the gains or losses on these contracts are intended to offset the
losses or gains on the underlying exposures. The Company does not engage in
foreign currency speculation.
The Company recorded foreign currency gains of $1,641,000 in 2004, foreign
currency losses of $1,712,000 in 2003, and foreign currency gains of $350,000 in
2002. The Company's exposure to foreign currency gains and losses has increased
COGNEX CORPORATION: 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
in recent years as a greater portion of its revenues, expenses, assets, and
liabilities are denominated in currencies other than the functional currencies
of the Company or its subsidiaries. In addition, foreign exchange rates have
fluctuated more significantly in the past few years.
Administering the Company's foreign currency risk management program
requires the use of estimates and the application of judgment, including
compiling forecasts of transaction activity denominated in various currencies.
The failure to identify foreign currency exposures and construct effective
hedges may result in material foreign currency gains or losses.
NEW PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123R, "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123R requires companies to recognize compensation cost for all share-based
payments to employees (including stock option and employee stock purchase plans)
at fair value. SFAS 123R will be effective for public companies for interim or
annual periods beginning after June 15 , 2005. The Company will adopt SFAS No.
123R beginning in the third quarter of 2005 using the modified prospective
method in which compensation cost is recognized beginning on the effective date.
The Company currently recognizes compensation costs using the intrinsic
value based method and, as such, generally recognizes no compensation cost.
Accordingly, the adoption of SFAS No. 123R's fair value based method will have a
significant impact on the Company's results of operations, although it will have
no impact on its overall financial position. The impact of adoption of SFAS No.
123R cannot be predicted at this time because it will depend upon levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income (loss) and net income (loss) per share in Note 1 to the
Company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
The Company faces exposure to adverse movements in foreign currency exchange
rates as a significant portion of its revenues, expenses, assets, and
liabilities are denominated in currencies other than the functional currencies
of the Company or its subsidiaries. These exposures may change over time as
business practices evolve. The Company evaluates its foreign currency exposures
on an ongoing basis and makes adjustments to its foreign currency risk
management program as circumstances change.
In certain instances, the Company enters into forward contracts and
currency swaps to hedge against foreign currency fluctuations. Currency swaps
are used to hedge long-term transactions between the Company and its
subsidiaries. Forward contracts are used to provide an economic hedge against
transactions denominated in currencies other than the functional currencies of
the Company or its subsidiaries.
40 COGNEX CORPORATION:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
These forward contracts and currency swaps are used to reduce the Company's risk
associated with foreign currency exchange rate changes, as the gains or losses
on these contracts are intended to offset the losses or gains on the underlying
exposures. The Company does not engage in foreign currency speculation.
The success of the Company's foreign currency risk management program
depends upon forecasts of transaction activity denominated in various
currencies. To the extent that these forecasts are overstated or understated
during periods of currency volatility, the Company could experience
unanticipated foreign currency gains or losses that could have a material impact
on the Company's results of operations. In addition, the failure to identify new
exposures and hedge them in a timely manner may result in material foreign
currency gains or losses.
The Company enters into currency swaps to hedge the foreign currency
exposure of its long-term intercompany loans between the parent and certain of
its European subsidiaries. Currency swaps to exchange a total of 48,340,000 Euro
Dollars for U.S. Dollars at a weighted-average settlement price of 1.02
USD/Euro, with original terms of two to five years, were outstanding at December
31, 2004. These instruments had a fair value of $68,565,000 at December 31,
2004. The Company also enters into forward contracts to hedge the foreign
currency exposure of a portion of its intercompany transactions between its
subsidiaries. In addition, the Company enters into forward contracts to hedge
the foreign currency exposure of its Irish subsidiary's accounts receivable
denominated in U.S. dollars and Japanese Yen. Forward contracts to exchange
1,421,000,000 Japanese Yen for Euro Dollars at a weighted-average settlement
price of 135.55 Yen/Euro and contracts to exchange 2,945,000 U.S. dollars for
Euro Dollars at a weighted-average settlement price of 1.34 USD/Euro, both with
terms of one to four months, were outstanding at December 31, 2004. These
instruments had a fair value of $17,112,000 at December 31, 2004.
While the contract amounts of derivative instruments provide one measure
of the volume of these transactions, they do not represent the amount of the
Company's exposure to changes in foreign currency exchange rates. Because the
terms of the derivative instrument and underlying exposure are generally matched
at inception, changes in foreign currency exchange rates should not expose the
Company to significant losses in earnings or net cash outflows when exposures
are properly hedged.
INTEREST RATE RISK
The Company's investment portfolio includes municipal bonds. Debt securities
with original maturities greater than three months are designated as
available-for-sale and are reported at fair value. At December 31, 2004, the
fair value of the Company's bond portfolio amounted to $325,094,000, with
principal amounts totaling $321,120,000, maturities that do not exceed three
years, and a yield to maturity of 1.77%. Differences between the fair value and
principal amounts of the Company's bond portfolio are primarily attributable to
discounts and premiums arising at the acquisition date, as well as unrealized
gains and losses at the balance sheet date.
COGNEX CORPORATION: 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Given the relatively short maturities and investment-grade quality of the
Company's bond portfolio at December 31, 2004, a sharp rise in interest rates
should not have a material adverse effect on the fair value of these
instruments. As a result, the Company does not currently hedge these interest
rate exposures.
The following table presents hypothetical changes in the fair value of the
Company's bond portfolio at December 31, 2004 arising from selected potential
changes in interest rates (in thousands):
Valuation Valuation
of securities No change of securities
given an interest in interest given an interest
Type of security rate decrease rates rate increase
- ---------------- -------------------------------------------------------------------
(100 BP) (50 BP) 50 BP 100 BP
-------------------------------------------------------------------
Municipal bonds $ 327,363 $ 326,185 $ 325,094 $ 324,041 $ 323,014
A 50 basis point (BP) movement in the Federal Funds Rate has occurred in
15 of the last 56 quarters. There has not been a 100 BP movement in the
Federal Funds Rate in any of the last 56 quarters.
OTHER MARKET RISKS
The Company's investment portfolio also includes a limited partnership
interest in Venrock Associates III, L.P., a venture capital fund with an
investment focus on Information Technology and Health Care and Life
Sciences. The majority of the partnership's portfolio consists of
investments in early stage, private companies characterized by a high
degree of risk, volatility, and illiquidity. A director of the Company is
a Managing General Partner of Venrock Associates.
The fair value of the Company's limited partnership interest is
based upon valuations of the partnership's investments as determined by
the General Partner. The Company understands that the General Partner
adjusts the investment valuations at least quarterly to reflect both
realized and unrealized gains and losses on partnership investments.
Securities of public companies are valued at market, subject to
appropriate discounts to reflect limitations on liquidity. Securities of
private companies are valued at an estimated fair value, which initially
is at cost, adjusted for subsequent transactions that indicate a higher or
lower value is warranted. The value of private securities may be
discounted when, in the General Partner's judgment, the carrying value of
such private securities has been impaired by specific events.
Given the nature of the partnership's portfolio and the difficulty
inherent in valuing these investments, there is a great deal of
uncertainty surrounding the future value of the Company's interest in the
limited partnership and future impairment charges may be required.
42 COGNEX CORPORATION: CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31, 2004 2003 2002
- ---------------------------------- --------- --------- --------
Revenue
Product $ 176,569 $ 130,670 $ 96,202
Service 25,388 19,422 17,905
--------- --------- --------
201,957 150,092 114,107
Cost of revenue
Product 42,788 37,870 28,499
Service 14,583 12,269 11,360
--------- --------- --------
57,371 50,139 39,859
Gross margin
Product 133,781 92,800 67,703
Service 10,805 7,153 6,545
--------- --------- --------
144,586 99,953 74,248
Research, development, and
engineering expenses 27,063 24,719 25,630
Selling, general, and
administrative expenses 70,674 55,724 58,376
--------- --------- --------
Operating income (loss) 46,849 19,510 (9,758)
Investment and other income 4,670 5,450 9,156
Loss on sale of equity securities
and impairment of investment
in limited partnership - - (7,952)
Foreign currency gain (loss) 1,641 (1,712) 350
--------- --------- --------
Income (loss) before taxes 53,160 23,248 (8,204)
Income tax provision (benefit) 15,416 7,297 (2,177)
--------- --------- --------
Net income (loss) $ 37,744 $ 15,951 $ (6,027)
========= ========= ========
Net income (loss) per common
and common equivalent share:
Basic $ 0.83 $ 0.37 $ (0.14)
========= ========= ========
Diluted $ 0.80 $ 0.36 $ (0.14)
========= ========= ========
Weighted-average common and
common equivalent shares
outstanding:
Basic 45,480 43,173 43,503
========= ========= ========
Diluted 47,358 44,466 43,503
========= ========= ========
Cash dividends per common share $ 0.28 $ 0.12 $ -
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
COGNEX CORPORATION: CONSOLIDATED BALANCE SHEETS 43
(in thousands)
December 31, 2004 2003
- ---------------------------------------------------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 54,270 $ 49,980
Short-term investments 180,409 82,653
Accounts receivable, less reserves of $2,596 and
$2,613 in 2004 and 2003, respectively 33,816 26,697
Inventories, net 20,091 15,519
Deferred income taxes 9,504 8,223
Prepaid expenses and other current assets 14,871 14,526
--------- ---------
Total current assets 312,961 197,598
Long-term investments 156,397 170,869
Property, plant, and equipment, net 23,995 24,980
Deferred income taxes 21,516 19,428
Intangible assets, net 7,506 8,582
Goodwill 7,033 7,222
Other assets 3,900 3,854
--------- ---------
$ 533,308 $ 432,533
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,563 $ 5,555
Accrued expenses 55,779 32,098
Customer deposits 3,445 3,932
Deferred revenue 5,714 5,702
--------- ---------
Total current liabilities 70,501 47,287
Other liabilities - 252
Commitments (Notes 4, 9, 10, 11, 12, and 18)
Shareholders' equity:
Common stock, $.002 par value -
Authorized: 140,000 shares, issued: 46,155 and
48,186 shares in 2004 and 2003, respectively 92 96
Additional paid-in capital 192,860 209,679
Treasury stock, at cost, 0 and 4,253 shares
in 2004 and 2003, respectively - (72,445)
Retained earnings 283,712 258,724
Accumulated other comprehensive loss (13,857) (11,060)
--------- ---------
Total shareholders' equity 462,807 384,994
--------- ---------
$ 533,308 $ 432,533
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
44 COGNEX CORPORATION: CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Additional
------------------- Paid-in
Shares Par Value Capital
------- --------- ---------
Balance at December 31, 2001 46,289 $ 93 $ 173,675
====== ==== =========
Issuance of common stock under stock option,
stock purchase, and other plans 588 1 7,470
Tax benefit from exercise of stock options - - 3,450
Repurchase of common stock - - -
Common stock received for payment
of stock option exercises - - -
Comprehensive loss:
Net loss - - -
Recognition of accumulated gains on equity securities
in current operations, net of tax of $2,506 - - -
Losses on currency swaps, net of gains on long-term
intercompany loans, net of tax of $21 - - -
Foreign currency translation adjustment - - -
Comprehensive loss ------ ---- ---------
Balance at December 31, 2002 46,877 $ 94 $ 184,595
====== ==== =========
Issuance of common stock under stock option,
stock purchase, and other plans 1,309 2 20,782
Tax benefit from exercise of stock options - - 4,302
Payment of dividends - - -
Common stock received for payment of
stock option exercises - - -
Comprehensive income:
Net income - - -
Losses on currency swaps, net of gains on long-term
intercompany loans, net of tax of $367 - - -
Net unrealized gain on available-for-sale
investments, net of tax of $299 - - -
Foreign currency translation adjustment - - -
Comprehensive income ------ ---- ---------
Balance at December 31, 2003 48,186 $ 96 $ 209,679
====== ==== =========
Issuance of common stock under stock option,
stock purchase, and other plans 2,232 4 44,213
Tax benefit from exercise of stock options - - 11,722
Payment of dividends - - -
Common stock received for payment of
stock option exercises - - -
Retirement of treasury stock (4,263) (8) (72,754)
Comprehensive income:
Net income - - -
Losses on currency swaps, net of gains on long-term
intercompany loans, net of tax of $1,016 - - -
Net unrealized loss on available-for-sale
investments, net of tax of $696 - - -
Foreign currency translation adjustment - - -
Comprehensive income ------ ---- ---------
Balance at December 31, 2004 46,155 $ 92 $ 192,860
====== ==== =========
The accompanying notes are an integral part of these consolidated financial
statements.
COGNEX CORPORATION: CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 45
Treasury Stock Accumulated Total
- --------------------- Retained Other Comprehensive Shareholders'
Shares Cost Earnings Comprehensive Loss Income(Loss) Equity
- ------ --------- --------- ------------------ ------------- -------------
2,390 $ (43,419) $ 254,037 $ (6,342) $ 378,044
====== ========= ========= ========= ==========
- - - - - 7,471
- - - - - 3,450
1,768 (26,425) - - - (26,425)
91 (2,467) - - - (2,467)
- - (6,027) - (6,027) (6,027)
- - - 4,269 4,269 4,269
- - - (35) (35) (35)
- - - (3,760) (3,760) (3,760)
- ------ --------- --------- --------- -------- ----------
4,249 $ (72,311) $ 248,010 $ (5,868) $ (5,553) $ 354,520
====== ========= ========= ========= ======== ==========
- - - - - 20,784
- - - - - 4,302
- - (5,237) - - (5,237)
4 (134) - - - (134)
- - 15,951 - 15,951 15,951
- - - (625) (625) (625)
- - - 509 509 509
- - - (5,076) (5,076) (5,076)
- ------ --------- --------- --------- -------- ----------
4,253 $ (72,445) $ 258,724 $ (11,060) $ 10,759 $ 384,994
====== ========= ========= ========= ======== ==========
- - - - - 44,217
- - - - - 11,722
- - (12,756) - - (12,756)
10 (317) - - - (317)
(4,263) 72,762 - - - -
- - 37,744 - 37,744 37,744
- - - (1,730) (1,730) (1,730)
- - - (1,185) (1,185) (1,185)
- - - 118 118 118
- ------ --------- --------- --------- -------- ----------
- $ - $ 283,712 $ (13,857) $ 34,947 $ 462,807
====== ========= ========= ========= ======== ==========
46 COGNEX CORPORATION: CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, 2004 2003 2002
- ------------------------------------------------------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 37,744 $ 15,951 $ (6,027)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation of property, plant, and equipment 4,548 5,422 6,534
Amortization of intangible assets 1,526 1,012 543
Amortization of investments 3,896 3,728 2,447
Tax benefit from exercise of stock options 11,722 4,302 3,450
Deferred income tax benefit (2,568) (432) (2,196)
Net loss (gain) on investment in
limited partnership (154) 1,031 680
Impairment on investment in
limited partnership - - 1,768
Loss on sale of equity securities - - 6,184
Changes in current assets and current liabilities:
Accounts receivable (5,417) (4,775) (348)
Inventories (3,642) 5,833 5,010
Accounts payable (290) 1,482 (2,569)
Accrued expenses 15,785 148 (1,411)
Other current assets and current liabilities (49) (2,783) 1,979
Other operating activities 75 45 402
--------- --------- ---------
Net cash provided by operating activities 63,176 30,964 16,446
--------- --------- ---------
Cash flows from investing activities:
Purchase of investments (805,621) (316,481) (137,922)
Maturity and sale of investments 716,714 276,529 184,453
Purchase of property, plant, and equipment (3,120) (2,462) (2,227)
Cash paid for business acquisitions (123) (11,787) (349)
--------- --------- ---------
Net cash provided by (used in)
investing activities (92,150) (54,201) 43,955
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock under stock
option, stock purchase, and other plans 43,900 20,650 5,004
Repurchase of common stock - - (26,425)
Payment of dividends (12,756) (5,237) -
--------- --------- ---------
Net cash provided by (used in) financing activities 31,144 15,413 (21,421)
--------- --------- ---------
Effect of exchange rate changes on cash 2,120 (660) (4,875)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 4,290 (8,484) 34,105
Cash and cash equivalents at beginning of year 49,980 58,464 24,359
--------- --------- ---------
Cash and cash equivalents at end of year $ 54,270 $ 49,980 $ 58,464
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
the significant 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 judgments that
affect the reported amounts of assets and liabilities at the balance sheet date
and the reported amounts of revenue 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 in shareholders' equity as other
comprehensive income (loss).
CASH, CASH EQUIVALENTS, AND INVESTMENTS
Debt securities purchased with original maturities of three months or less are
classified as cash equivalents and are stated at amortized cost. Debt securities
with original maturities greater than three months and remaining maturities of
one year or less, as well as auction rate securities for which interest rates
reset in less than 90 days but for which the maturity date is greater than 90
days, are classified as short-term investments. Despite the long-term nature of
their contractual maturities, the Company has the ability to quickly liquidate
auction rate securities. Debt securities with remaining maturities greater than
one year, as well as a limited partnership interest, are classified as long-term
investments. It is the Company's policy to invest in debt securities with
contractual maturities that do not exceed three years.
Debt securities with original maturities greater than three months are
designated as available-for-sale and are reported at fair value, with unrealized
gains and losses, net of tax, recorded in shareholders' equity as other
comprehensive income (loss). Realized gains and losses are included in current
operations, along with the amortization of the discount or premium arising at
acquisition and are calculated using the specific identification method.
48 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's limited partnership interest is accounted for using the cost
method because the Company's investment is less than 5% of the partnership and
the Company has no influence over the partnership's operating and financial
policies. The Company monitors the carrying value of its investment compared to
its fair value to determine whether an other-than-temporary impairment in its
interest in the limited partnership has occurred. If the decline in fair value
is determined to be other-than-temporary, an impairment charge is recorded in
current operations.
ACCOUNTS RECEIVABLE
The Company establishes reserves against its accounts receivable for potential
credit losses when it determines receivables are at risk for collection based
upon the length of time receivables have been outstanding, as well as various
other factors. Receivables are written off against these reserves in the period
they are determined to be uncollectible.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs, which approximate the first in, first out (FIFO) method. The
Company estimates excess and obsolescence exposures based upon assumptions about
future demand, product transitions, and market conditions and records reserves
to reduce the carrying value of inventories to their net realizable value.
The Company generally disposes of obsolete inventory upon determination of
obsolescence. The Company does not dispose of excess inventory immediately, due
to the possibility that some of this inventory could be sold to customers as a
result of differences between actual and forecasted demand.
When inventory has been written down below cost, such reduced amount is
considered the new cost basis for subsequent accounting purposes. As a result,
the Company would recognize a higher than normal gross margin if the reserved
inventory were subsequently sold.
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.
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 ten
years. The Company evaluates the possible impairment of long-lived assets,
including intangible assets, whenever events or circumstances indicate the
carrying value of the assets may not be recoverable. At the occurrence of a
certain event or change in circumstances, the
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49
Company evaluates the potential impairment of an asset based upon the estimated
future undiscounted cash flows. If an impairment exists, the Company determines
the amount of such impairment based upon the present value of the estimated
future cash flows using a discount rate commensurate with the risks involved.
GOODWILL
Goodwill is stated at cost. The Company evaluates the possible impairment of
goodwill annually each fourth quarter, and whenever events or circumstances
indicate the carrying value of the goodwill may not be recoverable. The Company
evaluates the potential impairment of goodwill by comparing the fair value of
the reporting unit to its carrying value, including goodwill. If the fair value
is less than the carrying value, the Company determines the amount of such
impairment by comparing the implied fair value of the goodwill to its carrying
value.
WARRANTY OBLIGATIONS
The Company warrants its hardware products to be free from defects in material
and workmanship for periods ranging from six months to two years from the time
of sale based upon the product being purchased and the terms of the customer
arrangement. Warranty obligations are accounted for in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies," since
it is probable that customers will make claims under warranties related to
products that have been sold and the amount of these claims can be reasonably
estimated based upon experience. Estimated warranty obligations are evaluated
and recorded at the time of sale based upon historical costs to fulfill warranty
obligations. Provisions may also be recorded subsequent to the time of sale
whenever specific events or circumstances impacting product quality become known
that would not have been taken into account using historical data.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position (SOP)
No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," since the software is not incidental to the arrangement and the
services in the arrangement do not involve significant production, modification,
or customization of the software. The Company recognizes revenue from product
sales upon delivery if a signed customer contract or purchase order has been
received, the fee is fixed or determinable, and collection of the resulting
receivable is probable. If the arrangement contains customer-specified
acceptance criteria, then revenue is deferred until the Company can demonstrate
that the customer's criteria have been met.
Certain of the Company's products are sold with multiple elements, such as
maintenance and support programs, education services, and installation services.
The Company accounts for each element separately. The amount allocated to each
undelivered element is the price charged when the item is sold separately, with
the residual value from the arrangement allocated to the delivered element. In
addition, the Company also provides consulting services. Revenue from
maintenance and support programs is deferred and recognized ratably over the
program period.
50 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from education and consulting services are recognized over the period
the services are provided. Revenue from installation services is recognized when
the customer has signed off that the installation is complete.
The Company's products are sold directly to end users, as well as to
resellers including original equipment manufacturers (OEMs), system integrators,
and distributors. Revenue is recognized upon delivery of the product to the
reseller, assuming all other revenue recognition criteria have been met. The
Company establishes reserves against revenue for potential product returns in
accordance with Statement of Financial Accounting Standards No. 48, "Revenue
Recognition When Right of Return Exists," since the amount of future returns can
be reasonably estimated based upon experience.
Amounts billed to customers related to shipping and handling, as well as
reimbursements received from customers for out-of-pocket expenses, are
classified as revenue, with the associated costs included in cost of revenue.
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 Company determines technological
feasibility at the time the product reaches beta in its stage of development.
Historically, the time incurred between beta and general release to customers
has been short, and therefore, the costs have been insignificant. As a result,
the Company has not capitalized software costs associated with
internally-developed products.
The cost of acquired software for products determined to have reached
technological feasibility is capitalized; 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 two 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 upon the
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that 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 (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding for the period plus
potential dilutive common shares. All potential dilutive common shares are
excluded from the computation of net loss per share because they are
antidilutive. Dilutive common equivalent shares consist of stock options and are
calculated using the treasury stock method.
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 51
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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 (loss) consists of foreign currency translation
adjustments, unrealized gains and losses on available-for-sale investments, net
of tax, and gains and losses on long-term intercompany loans and their
associated currency swaps, net of tax.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and trade
receivables. The Company primarily invests in municipal obligations of state and
local government entities. The Company has established guidelines relative to
credit ratings, diversification, and maturities of its debt securities that
maintain safety and liquidity. The Company has not experienced any significant
realized losses on its debt securities.
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.
A significant portion of the Company's MVSD inventory is manufactured by a
third-party contractor. The Company is dependent upon this contractor to provide
quality product and meet delivery schedules. The Company engages in extensive
product quality programs and processes, including actively monitoring the
performance of its third-party manufacturers.
DERIVATIVE INSTRUMENTS
The Company has adopted the accounting and disclosure requirements of Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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 in
shareholders' equity as other comprehensive income (loss), depending upon
whether the derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. Hedges of underlying exposures are designated
and documented at the inception of the hedge and are evaluated for effectiveness
at least quarterly. As the terms of the derivative are generally matched at
inception with the underlying exposure, hedging effectiveness is calculated by
comparing the change in fair value of the derivative to the change in fair value
of the underlying exposure.
In certain instances, the Company enters into forward contracts and
currency swaps to hedge against foreign currency fluctuations. Currency swaps
are used to hedge long-term transactions between the Company and its
subsidiaries. Forward contracts are used to provide an economic hedge against
transactions denominated in currencies other than the functional currencies of
the Company or its subsidiaries.
52 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These forward contracts and currency swaps are used to reduce the Company's risk
associated with exchange rate changes, as the gains or losses on these contracts
are intended to offset the losses or gains on the underlying exposures. The
Company does not engage in foreign currency speculation.
STOCK-BASED COMPENSATION PLANS
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." 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 2004, 2003, or 2002.
Net income (loss) and net income (loss) 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 (in
thousands, except per share amounts):
Year Ended December 31, 2004 2003 2002
- ----------------------- -------- -------- ---------
Net income (loss), as reported $ 37,744 $ 15,951 $ (6,027)
Less: Total stock-based
compensation costs determined
under fair value based method,
net of tax (13,183) (14,092) (17,235)
Net income (loss), pro forma $ 24,561 $ 1,859 $ (23,262)
======== ======== =========
Basic net income (loss) per share,
as reported $ 0.83 $ 0.37 $ (0.14)
======== ======== =========
Basic net income (loss) per share,
pro forma $ 0.54 $ 0.04 $ (0.53)
======== ======== =========
Diluted net income (loss) per share,
as reported $ 0.80 $ 0.36 $ (0.14)
======== ======== =========
Diluted net income (loss) per share,
pro forma $ 0.49 $ 0.04 $ (0.53)
======== ======== =========
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:
Year Ended December 31, 2004 2003 2002
- ----------------------- ---- ---- ----
Risk-free interest rate 2.5% 2.1% 3.5%
Expected life (in years) 3.1 2.9 2.9
Expected volatility 45% 58% 57%
Expected annualized dividend yield .73% .85% -
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 53
TREASURY STOCK
Effective July 1, 2004, the Massachusetts Business Corporation Act (the "Act")
eliminated the concept of treasury shares. Under the Act, shares previously
classified as treasury shares are to be treated as authorized but unissued
shares of common stock. As a result of this change, the Company reclassified its
treasury shares to authorized but unissued shares of common stock on the
Consolidated Balance Sheet.
NOTE 2: NEW PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123R, "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123R requires companies to recognize compensation cost for all share-based
payments to employees (including stock option and employee stock purchase plans)
at fair value. SFAS 123R will be effective for public companies for interim or
annual periods beginning after June 15 , 2005. The Company will adopt SFAS No.
123R beginning in the third quarter of 2005 using the modified prospective
method in which compensation cost is recognized beginning on the effective date.
The Company currently recognizes compensation costs using the intrinsic
value based method and, as such, generally recognizes no compensation cost.
Accordingly, the adoption of SFAS No. 123R's fair value based method will have a
significant impact on the Company's results of operations, although it will have
no impact on its overall financial position. The impact of adoption of SFAS No.
123R cannot be predicted at this time because it will depend upon levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income (loss) and net income (loss) per share in Note 1 to the
Company's consolidated financial statements.
NOTE 3: FOREIGN CURRENCY RISK MANAGEMENT
The Company enters into currency swaps to hedge the foreign currency exposure of
its long-term intercompany loans between the parent and certain of its European
subsidiaries. These contracts, which relate to the Euro Dollar, have original
terms of two to five years. These hedges have been designated for hedge
accounting. They are classified as net investment hedges, with the gains or
losses on the currency swaps, along with the associated losses or gains on the
intercompany loans, net of tax, recorded in shareholders' equity as other
comprehensive income (loss) to the extent they are effective as a hedge. The
Company recorded net foreign currency losses of $1,730,000, $625,000, and
$35,000 in other comprehensive income (loss) on the intercompany loans and
associated currency swaps in 2004, 2003, and 2002, respectively.
The Company enters into forward contracts to hedge the foreign currency
exposure of a portion of its intercompany transactions between its subsidiaries
and to hedge the foreign currency exposure of its Irish subsidiary's accounts
receivable denominated in U.S. Dollars and Japanese Yen. These contracts, which
relate to the Euro Dollar and Japanese Yen, generally have terms of one to four
months. These hedges have been deemed economic hedges and have not been
designated for hedge accounting. They are classified as fair value hedges, with
the gains or losses on the forward contracts, along with the associated losses
or gains on the revaluation and
54 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
settlement of the intercompany balances and accounts receivable, recorded in
current operations. In addition to the transactions described above that are
included in the Company's hedging program, the Company enters into other
transactions denominated in foreign currencies for which the exchange rate gains
or losses are included in current operations. The Company recorded net foreign
currency gains of $1,641,000 in 2004, net foreign currency losses of $1,712,000
in 2003, and net foreign currency gains of $350,000 in 2002, representing the
total net exchange rate gains or losses that are recognized in current
operations.
NOTE 4: CASH, CASH EQUIVALENTS, AND INVESTMENTS
Cash, cash equivalents, and investments consist of the following (in thousands):
December 31, 2004 2003
- ------------ ---------- ---------
Cash $ 54,270 $ 49,980
---------- ---------
Total cash and cash equivalents 54,270 49,980
========== =========
Municipal bonds 180,409 82,653
---------- ---------
Total short-term investments 180,409 82,653
========== =========
Municipal bonds 144,685 156,511
Corporate bonds - 4,212
Limited partnership interest 11,712 10,146
---------- ---------
Total long-term investments 156,397 170,869
========== =========
$ 391,076 $ 303,502
========== =========
In connection with the preparation of the accompanying consolidated financial
statements, the Company concluded that it was appropriate to classify its
auction rate securities as short-term investments. Previously, such securities
were classified as cash and cash equivalents. Accordingly, the Company revised
the classification to exclude from cash and cash equivalents $26,247,000 at
December 31, 2003 and to include such amounts in short-term investments on the
Consolidated Balance Sheets. This revised classification was also reflected in
the Consolidated Statements of Cash Flows for all periods presented to reflect
gross purchases and sales of these investments, which had the impact of
increasing net cash used in investing activities by $23,847,000 in 2003 and
increasing net cash provided by investing activities by $4,901,000 in 2002. This
change in classification did not affect previously reported cash flows from
operations or financing activities, or the results of operations and statements
of shareholders' equity for the periods presented.
The following is a summary of the Company's available-for-sale investments
at December 31, 2004 (in thousands):
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Short-term municipal bonds $ 180,627 $ 14 $ (232) $ 180,409
Long-term municipal bonds 145,540 5 (860) 144,685
--------- -------- ---------- ----------
$ 326,167 $ 19 $ (1,092) $ 325,094
========= ======== ========== ==========
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 55
The Company recorded gross realized gains on the sale of debt securities
totaling $392,000 in 2004, $1,222,000 in 2003, and $1,112,000 in 2002. The
Company recorded gross realized losses on the sale of debt securities totaling
$90,000 in 2004, $24,000 in 2003, and $25,000 in 2002.
On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock
Associates III, L.P. (Venrock), a venture capital fund. A director of the
Company is a Managing General Partner of Venrock Associates. In the original
agreement with Venrock, the Company committed to a total investment in the
limited partnership of up to $25,000,000 with an expiration date of January 1,
2005. In January 2005, the Company signed an amendment to the original agreement
with Venrock, which reduces its total commitment to $22,500,000 and extends the
commitment period through December 31, 2010. The Company does not have the right
to withdraw from the partnership prior to December 31, 2010. As of December 31,
2004, the Company had contributed $15,875,000 to the partnership, including
$2,250,000 during 2004. Venrock returned $838,000 to the Company during 2004
representing realized gains on the sale of certain investments in the portfolio.
At December 31, 2004, the carrying value of this investment was
$11,712,000 compared to an estimated fair value, as determined by the General
Partner, of $10,730,000. The unrealized loss of $982,000 was determined to be
temporary.
NOTE 5: INVENTORIES
Inventories consist of the following (in thousands):
December 31, 2004 2003
- --------------- ------- --------
Raw materials $ 6,311 $ 7,831
Work-in-process 6,285 3,323
Finished goods 7,495 4,365
------- --------
$20,091 $ 15,519
======= ========
In the fourth quarter of 2001, the Company recorded a $16,300,000 charge in
"Cost of product revenue" on the Consolidated Statement of Operations for excess
inventories and purchase commitments resulting from an extended slowdown in the
semiconductor and electronics industries, as well as the expected transition to
newer Cognex hardware platforms by the Company's OEM customers. A total of
$12,500,000 of this charge represented reserves against existing inventories and
was accordingly included in "Inventories" on the Consolidated Balance Sheet at
December 31, 2001. The remaining $3,800,000 of the charge represented
commitments to purchase excess components and systems from various suppliers and
accordingly was included in "Accrued Expenses" on the Consolidated Balance Sheet
at December 31, 2001.
56 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the change in the inventory-related reserve
established in the fourth quarter of 2001 (in thousands):
Balance Sheet
-------------------------- Statement of
Accrued Operations
Inventories Expenses Benefits
----------- -------- ------------
Initial charge in the fourth
quarter of 2001 $ 12,500 $ 3,800 -
Inventory sold to customers (1,790) - $ 1,790
Settlement of purchase commitments 1,506 (2,400) 894
-------- ------- -------
Reserve balance at
December 31, 2002 $ 12,216 $ 1,400
Benefits to cost of product revenue
recorded in 2002 $ 2,684
======== ======= =======
Inventory sold to customers (1,290) - 1,290
Inventory sold to brokers (667) - -
Write-off and scrap of inventory (876) - -
-------- ------- -------
Reserve balance at
December 31, 2003 $ 9,383 $ 1,400
Benefits to cost of product revenue
recorded in 2003 $ 1,290
======== ======= =======
Inventory sold to customers (805) - 805
Inventory sold to brokers (387) - -
Write-off and scrap of inventory (743) - -
-------- ------- -------
Reserve balance at
December 31, 2004 $ 7,448 $ 1,400
Benefits to cost of product revenue
recorded in 2004 $ 805
======== ======= =======
A favorable settlement of the remaining purchase commitments may result in a
recovery of a portion of the remaining $1,400,000 accrued at December 31, 2004.
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following (in thousands):
December 31, 2004 2003
- ------------------------------ -------- ----------
Land $ 3,051 $ 3,051
Buildings 17,571 17,571
Building improvements 4,622 4,156
Computer hardware and software 33,826 32,100
Furniture and fixtures 4,183 3,919
Leasehold improvements 2,197 2,308
-------- ----------
65,450 63,105
Less: accumulated depreciation (41,45) (38,125)
-------- ----------
$ 23,995 $ 24,980
======== ==========
Buildings include property held for lease with a cost $4,950,000 at December 31,
2004 and 2003 and accumulated depreciation of $1,206,000 and $1,079,000 at
December 31, 2004 and 2003, respectively.
NOTE 7: INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
Gross Net
Carrying Accumulated Carrying
Value Amortization Value
-------- ------------ --------
December 31, 2004
Customer contracts and
relationships $ 8,349 $ 1,522 $ 6,827
Complete technology 5,440 4,864 576
Patents 122 42 80
Noncompete agreements 54 31 23
-------- -------- --------
$ 13,965 $ 6,459 $ 7,506
======== ======== ========
December 31, 2003
Customer contracts and
relationships $ 7,832 $ 492 $ 7,340
Complete technology 5,388 4,280 1,108
Patents 113 17 96
Noncompete agreements 50 12 38
-------- -------- --------
$ 13,383 $ 4,801 $ 8,582
======== ======== ========
58 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate amortization expense was $1,526,000 in 2004, $1,012,000 in 2003, and
$543,000 in 2002. Estimated amortization expense for each of the five succeeding
fiscal years and thereafter is as follows (in thousands):
Year ended December 31, Amount
- ----------------------- --------
2005 $ 1,315
2006 1,195
2007 1,136
2008 1,035
2009 1,001
Thereafter 1,824
-------
$ 7,506
=======
NOTE 8: GOODWILL
The Company has two reporting units with goodwill, the Modular Vision Systems
Division (MVSD) and the Surface Inspection Systems Division (SISD), which are
also reportable segments.
The changes in the carrying value of goodwill are as follows (in thousands):
MVSD SISD Consolidated
---------- --------- ------------
Balance at December 31, 2002 $ 1,488 $ 2,254 $ 3,742
Business acquisitions (Note 18) 2,753 - 2,753
Foreign exchange rate changes 281 446 727
------- ------- -------
Balance at December 31, 2003 $ 4,522 $ 2,700 $ 7,222
======= ======= =======
Purchase price adjustment (Note 18) (514) - (514)
Foreign exchange rate changes 113 212 325
------- ------- -------
Balance at December 31, 2004 $ 4,121 $ 2,912 $ 7,033
======= ======= =======
NOTE 9: ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31, 2004 2003
- ----------------------------------------- -------- -------
Forward contracts and currency swaps $ 19,527 $12,971
Income taxes 9,165 3,017
Company bonuses 5,979 423
Consumption taxes 4,900 2,368
Salaries, commissions, and payroll taxes 3,452 2,340
Vacation 2,775 2,348
Warranty obligations 1,758 2,119
Professional fees 1,698 1,780
Purchase commitments 1,400 1,400
Other 5,125 3,332
-------- -------
$ 55,779 $32,098
======== =======
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59
The changes in the warranty obligation are as follows (in thousands):
Balance at December 31, 2002 $ 1,523
Provisions for warranties issued during the period 1,591
Provisions related to pre-existing warranties 550
Fulfillment of warranty obligations (1,771)
Foreign exchange rate changes 226
-------
Balance at December 31, 2003 $ 2,119
=======
Provisions for warranties 797
Fulfillment of warranty obligations (1,298)
Foreign exchange rate changes 140
-------
Balance at December 31, 2004 $ 1,758
=======
NOTE 10: COMMITMENTS
At December 31, 2004, the Company had purchase orders totaling $4,960,000 to
purchase inventory from various vendors. These purchase commitments relate to
expected sales in 2005.
The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through 2014 and are accounted for as
operating leases. Annual rental expense totaled $4,662,000 in 2004, $4,427,000
in 2003, and $4,536,000 in 2002. Future minimum rental payments under these
agreements are as follows (in thousands):
Year ended December 31, Amount
- ----------------------- --------
2005 $ 3,878
2006 977
2007 349
2008 192
2009 190
Thereafter 445
-------
$ 6,031
=======
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 2007. Annual rental income
totaled $818,000 in 2004, $1,137,000 in 2003, and $1,224,000 in 2002. Rental
income and related expenses are included in "Investment and other income" on the
Consolidated Statement of Operations. Future minimum rental receipts under
non-cancelable lease agreements are $891,000 in 2005 and 2006, $294,000 in 2007,
$95,000 in 2008, and $40,000 in 2009.
60 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: INDEMNIFICATION PROVISIONS
Except as limited by Massachusetts law, the by-laws of the Company require it to
indemnify certain current or former directors, officers, and employees of the
Company against expenses incurred by them in connection with each proceeding in
which he or she is involved as a result of serving or having served in certain
capacities. Indemnification is not available with respect to a proceeding as to
which it has been adjudicated that the person did not act in good faith in the
reasonable belief that the action was in the best interests of the Company. The
maximum potential amount of future payments the Company could be required to
make under these provisions is unlimited. The Company has never incurred
significant costs related to these indemnification provisions. As a result, the
Company believes the estimated fair value of these provisions is minimal.
The Company accepts standard limited indemnification provisions in the
ordinary course of business, whereby it indemnifies its customers for certain
direct damages incurred in connection with third-party patent or other
intellectual property infringement claims with respect to the use of the
Company's products. The term of these indemnification provisions generally
coincides with the customer's use of the Company's products. The maximum
potential amount of future payments the Company could be required to make under
these provisions is always subject to fixed monetary limits. The Company has
never incurred significant costs to defend lawsuits or settle claims related to
these indemnification provisions. As a result, the Company believes the
estimated fair value of these provisions is minimal.
The Company also accepts limited indemnification provisions from time to
time, whereby it indemnifies customers for certain direct damages incurred in
connection with bodily injury and property damage arising from the installation
of the Company's products. The term of these indemnification provisions
generally coincides with the period of installation. The maximum potential
amount of future payments the Company could be required to make under these
provisions is limited and is likely recoverable under the Company's insurance
policies. As a result of this coverage, and the fact that the Company has never
incurred significant costs to defend lawsuits or settle claims related to these
indemnification provisions, the Company believes the estimated fair value of
these provisions is minimal.
NOTE 12: STANDBY LETTERS OF CREDIT
On March 25, 2004, the Company provided standby letters of credit totaling
3,146,280,000 Yen (or approximately $30,722,000) to taxing authorities in Japan
that are collateralized by investments on the Consolidated Balance Sheet. The
Tokyo Regional Taxation Bureau (TRTB) has asserted that Cognex Corporation has a
permanent establishment in Japan that would require certain income, previously
reported on U.S. tax returns for the years ended December 31, 1997 through
December 31, 2001, to be subject instead to taxation in Japan. The Company
disagrees with this position and believes that this assertion is inconsistent
with principles under the U.S. - Japan income tax treaty. The Company has filed
a notice of objection and request for deferral of tax payment and intends to
contest
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 61
this assessment vigorously, although no assurances can be made that the Company
will prevail in this matter. In September 2003, the Company also filed a request
with the Internal Revenue Service Tax Treaty Division for competent authority
assistance. Until this matter is resolved, the Company is required to provide
collateral for these tax assessments. These letters of credit expire in
approximately one year. Should the TRTB prevail in its assertion, the income in
question would be taxable in Japan and the Company would be required to pay
approximately $30,722,000 in taxes, interest, and penalties to Japanese taxing
authorities. The Company would then be entitled to recoup the majority of this
amount from taxing authorities in the U.S.
NOTE 13: SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 400,000 shares of authorized but unissued $.01 par value
preferred stock.
STOCK REPURCHASE PROGRAM
On December 12, 2000, the Company's Board of Directors authorized the repurchase
of up to $100,000,000 of the Company's common stock. During 2002, a total of
1,768,452 shares were repurchased at a cost of $26,425,000. There have been no
other shares repurchased under this program.
STOCK OPTION PLANS
At December 31, 2004, the Company had 9,311,319 shares available for grant under
the following stock option plans: the 1998 Director Plan, 4,000; the 1998 Stock
Incentive Plan, 1,807,319; no shares under the 2001 Interim General Stock
Incentive Plan; and the 2001 General Stock Option Plan, 7,500,000.
The 2001 General Stock Option Plan was adopted by the Board of Directors
on December 11, 2001 without shareholder approval. This plan provides for the
granting of nonqualified stock options to any employee who is actively employed
by the Company and is not an officer or director of the Company. The maximum
number of shares of common stock available for grant under the plan is 7,500,000
shares. All option grants must have an exercise price per share that is no less
than the fair market value per share of the Company's common stock on the grant
date and must have a term that is no longer than fifteen years from the grant
date. No stock options have been granted under the 2001 General Stock Option
Plan.
The 2001 Interim General Stock Incentive Plan was adopted by the Board of
Directors on July 17, 2001 without shareholder approval. This plan provides for
the granting of nonqualified stock options to any employee who is actively
employed by the Company and is not an officer or director of the Company. The
maximum number of shares of common stock available for grant under the plan is
400,000 shares. All option grants have an exercise price per share that is no
less than the fair market value per share of the Company's common stock on the
grant date and must have a term that is no longer than fifteen years from the
grant date. All 400,000 stock options have been granted under the 2001 Interim
General Stock Incentive Plan.
62 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 21, 1998, the shareholders approved the 1998 Stock Incentive
Plan, under which the Company initially was able to 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 is increased automatically by an amount equal
to 4.5% of the total number of issued shares of common stock as of the close of
business on December 31st of the preceding year.
Stock options generally vest over four years and generally expire no later
than ten years from the date of grant.
The following table summarizes the status of the Company's stock option
plans at December 31, 2004, 2003, and 2002, and changes during the years then
ended (shares in thousands):
2004 2003 2002
---------------------- -------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ------- --------- -------- ----------
Outstanding at
beginning
of year 10,986 $ 22.85 10,381 $ 22.40 9,529 $ 22.31
Granted at
fair market
value 2,253 29.31 2,402 21.54 2,211 21.38
Exercised (2,210) 19.78 (1,279) 15.84 (550) 12.56
Forfeited (409) 26.06 (518) 25.75 (809) 25.26
-------- --------- ------- --------- -------- ----------
Outstanding at
end of year 10,620 24.74 10,986 22.85 10,381 22.40
======== ========= ======= ========= ======== ==========
Options
exercisable at
year-end 5,074 24.52 5,182 22.37 4,156 19.01
Weighted-average
grant-date fair
value of options
granted during
the year at fair
market value $ 9.22 $ 8.32 $ 8.39
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63
No stock options were granted above fair market value in 2004, 2003, or 2002.
The following table summarizes information about stock options outstanding
at December 31, 2004 (shares in thousands):
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
- --------------- ----------- --------------- --------- ----------- ---------
$ 1.00 - 18.13 1,981 5.2 $ 14.00 1,461 $ 12.79
18.19 - 21.73 1,847 8.3 21.05 353 20.62
21.74 - 24.45 1,568 6.8 22.34 864 22.45
24.49 - 28.51 1,165 7.3 25.67 700 25.53
28.67 - 28.90 1,913 8.8 28.69 316 28.77
28.95 - 59.69 2,146 7.6 35.56 1,380 37.76
----------- --------------- --------- ----------- ---------
10,620 7.3 24.74 5,074 24.52
=========== =============== ========= =========== =========
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. The
maximum number of shares of common stock available for issuance under the ESPP
is 250,000 shares. Effective January 1, 2001 and each January 1st thereafter
during the term of the ESPP, 250,000 shares of common stock will always be
available for issuance. Shares purchased under the ESPP totaled 21,031 in 2004,
31,667 in 2003, and 38,105 in 2002. The weighted-average fair value of shares
purchased under the ESPP was $10.61 in 2004, $9.89 in 2003, and $5.73 in 2002.
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:
Year Ended December 31, 2004 2003 2002
- ---------------------------------- ----- ----- -----
Risk-free interest rate 2.3% 2.0% 1.5%
Expected life (in months) 12 12 6
Expected volatility 39% 58% 57%
Expected annualized dividend yield 1.00% .85% -
64 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: EMPLOYEE SAVINGS PLAN
Under the Company's Employee Savings Plan, a defined contribution plan,
employees who have attained age 21 may contribute up to 25% of their salary on a
pre-tax basis subject to the annual dollar limitations established by the
Internal Revenue Service. The Company contributes fifty cents for each dollar an
employee contributes, with a maximum contribution of 3% of an employee's pre-tax
salary. Company contributions vest 20%, 40%, 60%, and 100% after two, three,
four, and five years of continuous employment with the Company, respectively.
Company contributions totaled $967,000 in 2004, $917,000 in 2003, and $869,000
in 2002. Cognex stock is not an investment alternative, nor are Company
contributions made in the form of Cognex stock.
NOTE 15: INCOME TAXES
Domestic income before taxes was $22,507,000, $24,852,000, and $3,422,000 and
foreign income (loss) before taxes was $30,653,000, $(1,604,000), and
$(11,626,000) in 2004, 2003, and 2002, respectively.
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended December 31, 2004 2003 2002
- ----------------------- --------- --------- --------
Current:
Federal $ 9,662 $ 6,330 $ (1,930)
State 758 431 48
Foreign 983 2,181 1,040
--------- --------- --------
11,403 8,942 (842)
--------- --------- --------
Deferred:
Federal (177) (616) 524
State 306 48 (51)
Foreign 3,884 (1,077) (1,808)
--------- --------- --------
4,013 (1,645) (1,335)
--------- --------- --------
$ 15,416 $ 7,297 $ (2,177)
========= ========= ========
A reconciliation of the United States federal statutory corporate tax to the
Company's effective tax is as follows (in thousands):
Year Ended December 31, 2004 2003 2002
- ------------------------------------ --------- ---------- ---------
Income tax provision (benefit) at
federal statutory rate $ 18,606 $ 8,137 $ (2,871)
State income taxes, net of
federal benefit 1,070 325 67
Tax-exempt investment income (1,463) (1,901) (2,992)
Foreign tax rate differential (3,138) 1,023 2,934
Goodwill amortization and
impairment charges - - 846
Other 341 (287) (161)
--------- ---------- ----------
Provision (benefit) for income taxes $ 15,416 $ 7,297 $ (2,177)
========= ========== ==========
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65
Deferred tax assets consist of the following (in thousands):
December 31, 2004 2003
- ------------ --------- ---------
Current deferred tax assets:
Inventory and revenue related $ 6,321 $ 6,494
Bonus, commission, and other compensation 937 500
Other 2,246 1,229
--------- ---------
Total net current deferred tax asset $ 9,504 $ 8,223
========= =========
Noncurrent deferred tax assets (liabilities):
Federal and state tax credit carryforwards $ 8,138 $ 6,638
Net operating loss carryforwards 3,989 5,519
Acquired complete technology and other intangibles 3,180 3,353
Federal and state capital loss carryforwards 1,640 1,694
Unrealized investment gains (losses) 1,573 (462)
Depreciation 1,339 1,308
Acquired in-process technology 972 1,021
Other 685 357
--------- ---------
Total net noncurrent deferred tax asset $ 21,516 $ 19,428
========= =========
At December 31, 2004, the Company had federal research and experimentation tax
credit carryforwards of approximately $4,424,000, which may be available to
offset future federal income tax liabilities and will begin to expire in 2015.
The Company also had approximately $2,290,000 of alternative minimum tax credits
and approximately $991,000 of foreign tax credits, which may be available to
offset future regular income tax liabilities. The alternative minimum tax
credits have an unlimited life and the foreign tax credits will begin to expire
in 2007. In addition, the Company had approximately $433,000 of state research
and experimentation tax credit carryforwards, which will begin to expire in
2015.
At December 31, 2004, the Company's subsidiaries had net operating loss
carryforwards of approximately $15,688,000, of which $9,011,000, representing a
tax benefit of $3,154,000, will expire in 2009. The remaining balance of
$6,677,000, representing a tax benefit of $835,000, has an unlimited life.
The Company did not establish valuation allowances against its deferred
tax assets at December 31, 2004 and 2003. While these assets are not assured of
realization, the Company has evaluated the realizability of these deferred tax
assets and has determined that it is more likely than not that these assets will
be realized. In reaching this conclusion, the Company has evaluated certain
relevant criteria including the Company's historical profitability, current
projections of future profitability, and the lives of tax credits, net operating
and capital losses, and other carryforwards. Should the Company fail to generate
sufficient pre-tax profits in future periods, the Company may be required to
establish valuation allowances against these deferred tax assets, resulting in a
charge to income in the period of determination.
The Company files income tax returns in all jurisdictions in which it
operates. The Company has established reserves to provide for additional income
taxes that may be due in future years as these previously filed tax returns are
audited. These
66 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reserves have been established based upon management's assessment as to the
potential exposure attributable to permanent differences and interest applicable
to both permanent and temporary differences. All tax reserves are analyzed
periodically and adjustments are made as events occur that warrant modification.
The Company does not provide U.S. taxes on its foreign subsidiaries'
undistributed earnings, as they are deemed to be permanently reinvested outside
the U.S. Non-U.S. income taxes are, however, provided on those foreign
subsidiaries' undistributed earnings. Upon repatriation, the Company would
provide the appropriate U.S. income taxes on these earnings.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act")
was signed into law. The Act creates a temporary incentive for U.S.
multinationals to repatriate accumulated income earned outside the U.S. at an
effective tax rate of 5.25%. On November 15, 2004, the Financial Accounting
Standards Board issued proposed Statement of Financial Accounting Standard
(SFAS) No. 109-2, "Accounting and Disclosure for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." SFAS No.
109-2 would allow companies additional time to evaluate the effect of the law on
whether unrepatriated foreign earnings continue to qualify for SFAS No. 109's
exception to recognizing deferred tax liabilities and would require explanatory
disclosures from those companies who need the additional time. Through December
31, 2004, the Company had not provided deferred taxes on foreign earnings
because such earnings were intended to be indefinitely reinvested outside the
U.S. Whether the Company will ultimately take advantage of this provision
depends upon a number of factors, including reviewing future Congressional
guidance, before a decision can be made. Until that time, the Company will not
change its current intention to indefinitely reinvest accumulated earnings of
its foreign subsidiaries.
NOTE 16: NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated as follows (in thousands, except per
share amounts):
Year Ended December 31, 2004 2003 2002
- ----------------------- --------- --------- ---------
Net income (loss) $ 37,744 $ 15,951 $ (6,027)
========= ========= =========
Basic:
Weighted-average common
shares outstanding 45,480 43,173 43,503
========= ========= =========
Net income (loss) per common share $ 0.83 $ 0.37 $ (0.14)
========= ========= =========
Diluted:
Weighted-average common
shares outstanding 45,480 43,173 43,503
Effect of dilutive stock options 1,878 1,293 -
--------- --------- ---------
Weighted-average common and
common equivalent shares
outstanding 47,358 44,466 43,503
========= ========= =========
Net income (loss) per common and
common equivalent share $ 0.80 $ 0.36 $ (0.14)
========= ========= =========
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67
Stock options to purchase 1,656,927, 2,934,936, and 6,347,233 shares of common
stock were outstanding in 2004, 2003, and 2002, respectively, but were not
included in the calculation of diluted net income (loss) per share because the
options' exercise prices were greater than the average market price of the
Company's common stock during those years. Additionally, stock options to
purchase 939,961 shares of common stock were not included in the calculation of
diluted net loss per share in 2002 because they were antidilutive.
NOTE 17: SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: the Modular Vision Systems Division
(MVSD) and the Surface Inspections Systems Division (SISD). MVSD designs,
develops, manufactures, and markets modular vision systems that are used to
control the manufacturing of discrete items by locating, identifying,
inspecting, and measuring them during the manufacturing process. SISD designs,
develops, manufactures, and markets surface inspection vision systems that are
used to inspect surfaces of materials that are processed in a continuous fashion
to ensure there are no flaws or defects in the surfaces. Segments are determined
based upon the way that management organizes its business for making operating
decisions and assessing performance. The Company evaluates segment performance
based upon income or loss from operations, excluding unusual items.
The following table summarizes information about the Company's segments
(in thousands):
Reconciling
MVSD SISD Items Consolidated
---------- ---------- ---------- ------------
YEAR ENDED DECEMBER 31, 2004
Product revenue $ 155,966 $ 20,603 - $ 176,569
Service revenue 17,923 7,465 - 25,388
Depreciation and amortization 5,526 341 $ 207 6,074
Operating income (loss) 53,572 1,336 (8,059) 46,849
Year Ended December 31, 2003
Product revenue $ 108,170 $ 22,500 - $ 130,670
Service revenue 12,846 6,576 - 19,422
Depreciation and amortization 5,863 392 $ 179 6,434
Operating income (loss) 21,397 3,830 (5,717) 19,510
Year Ended December 31, 2002
Product revenue $ 78,270 $ 17,932 - $ 96,202
Service revenue 12,088 5,817 - 17,905
Depreciation and amortization 6,487 388 $ 202 7,077
Operating income (loss) (497) 1,369 (10,630) (9,758)
68 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciling items consist of unallocated corporate expenses, which primarily
include corporate headquarters costs, professional fees, and patent infringement
litigation. Asset information by segment is not produced internally for use by
the chief operating decision maker, and therefore, is not presented. Asset
information is not provided because the cash and investments are commingled and
the divisions share assets and resources in a number of locations around the
world.
No customer accounted for greater than 10% of revenue in 2004, 2003, or 2002.
The following table summarizes information about geographic areas (in
thousands):
United
States Japan Ireland Other Consolidated
---------- ---------- ----------- --------- ------------
YEAR ENDED DECEMBER 31, 2004
Product revenue $ 50,548 - $ 126,021 - $ 176,569
Service revenue 16,254 - 9,134 - 25,388
Long-lived assets 26,217 $ 2,396 12,797 $ 1,024 42,434
Year Ended December 31, 2003
Product revenue $ 43,001 - $ 87,669 - $ 130,670
Service revenue 12,792 - 6,630 - 19,422
Long-lived assets 27,921 $ 2,434 13,358 $ 925 44,638
Year Ended December 31, 2002
Product revenue $ 44,292 $ 14,355 $ 37,555 - $ 96,202
Service revenue 13,263 2,119 2,523 - 17,905
Long-lived assets 28,891 3,077 2,744 $ 1,040 35,752
Revenue is presented geographically based upon the country in which the sale is
recorded. The "Other" column represents all long-lived assets in other
countries, none of which were individually significant.
NOTE 18: ACQUISITIONS
ACQUISITION OF SIEMENS DEMATIC AG WAFER IDENTIFICATION BUSINESS
On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG, a subsidiary of Siemens AG. Siemens Dematic is a leading
supplier of logistics and factory automation equipment and has been a leading
supplier of wafer identification systems to semiconductor manufacturers in
Europe. Under the terms of the agreement, the Company acquired the rights to all
of Siemens' patented and unpatented wafer identification technology, as well as
substantially all of the assets related to its wafer identification business.
This acquisition enhances the Company's position as a leading provider of wafer
identification systems worldwide. The results of operations of the acquired
business have been included in the Company's consolidated results of operations
since the date of the acquisition. The historical results of operations of the
acquired business were not material compared to the consolidated results of
operations, and therefore, pro forma results are not presented.
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69
The original purchase price consisted of 7,000,000 Euros in cash (or
approximately $7,630,000) paid on March 31, 2003, with the potential for an
additional cash payment in 2005 of up to 1,700,000 Euros (or approximately
$2,306,000) depending upon the achievement of certain performance criteria. Any
contingent consideration will be recorded as purchase price when paid and will
be allocated to goodwill. The March 31, 2003 cash payment of 7,000,000 Euros was
based upon an estimated balance sheet for the wafer identification business as
of March 31, 2003. After receipt of a final March 31, 2003 balance sheet and
resolution of certain items in dispute, Siemens reimbursed Cognex 796,000 Euros
(or $868,000), of which $354,000 was allocated to receivables and $514,000 was
allocated to goodwill.
The final purchase price of 6,204,000 Euros (or approximately $6,762,000)
was allocated as follows: $616,000 to inventories; $274,000 to receivables;
$25,000 to accrued expenses; $4,469,000 to customer contracts and relationships,
to be amortized over eight years; $447,000 to complete technology, to be
amortized over five years; $98,000 to patents, to be amortized over five years;
$44,000 to non-compete agreements, to be amortized over three years; and
$839,000 to goodwill, which is assigned to the MVSD segment and is not
deductible for tax purposes.
ACQUISITION OF GAVITEC AG MACHINE VISION BUSINESS
On December 1, 2003, the Company acquired the machine vision business of Gavitec
AG. Gavitec produces machine vision products for direct part mark identification
(or Industrial ID), which can read markings on the surfaces of manufactured
items to collect data about product components during the manufacturing process
and trace the manufacturing history of the components during the product's
lifetime. Under the terms of the agreement, the Company acquired all of the
tangible and intangible assets and assumed certain liabilities associated with
Gavitec's machine vision business. This acquisition strengthens the Company's
overall market position in Germany and combines Gavitec's experience in the
design of easy-to-use Industrial ID products with Cognex's global sales force
and engineering support to enable the Company to provide additional products for
the growing Industrial ID market. The results of operations of the acquired
business have been included in the Company's consolidated results of operations
since the date of the acquisition. The historical results of operations of the
acquired business were not material compared to the consolidated results of
operations, and therefore, pro forma results are not presented.
The net purchase price consisted of 3,777,000 Euros in cash (or
approximately $4,516,000), including 3,477,000 Euros paid at closing, 100,000
Euros (or approximately $123,000) paid on December 1, 2004, and 200,000 Euros
(or approximately $271,000) to be paid on December 1, 2005. There was the
potential for two additional cash payments of up to 250,000 Euros (or
approximately $339,000) each in the third quarter of 2004 and first quarter of
2005 depending upon the achievement of certain performance criteria. These
criteria were not met, and therefore, these contingent payments were not made.
70 COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price was allocated as follows: $213,000 to inventories;
$76,000 to receivables; $60,000 to fixed assets; $114,000 to accrued expenses;
$2,726,000 to customer contracts and relationships, to be amortized over nine
years; $155,000 to complete technology, to be amortized over three years; and
$1,400,000 to goodwill, which is assigned to the MVSD segment and is not
deductible for tax purposes.
NOTE 19: DIVIDENDS
Beginning in the third quarter of 2003, the Company's Board of Directors has
declared and paid a cash dividend in each quarter. During the third quarter of
2004, the Company's Board of Directors voted to increase the quarterly cash
dividend from $0.06 per share to $0.08 per share. Dividend payments amounted to
$12,756,000 in 2004 and $5,237,000 in 2003.
NOTE 20: SUBSEQUENT EVENTS
On January 28, 2005, the Company's Board of Directors declared a cash
dividend of $0.08 per share. The dividend was paid on February 25, 2005 to all
shareholders of record at the close of business on February 11, 2005 and
amounted to $3,698,000.
On January 19, 2005, the Company signed an amendment to its agreement with
Venrock Associates III L.P., a venture capital fund in which the Company is a
limited partner. The amendment reduced the Company's commitment to $22,500,000
from $25,000,000 and extended the commitment period through December 31, 2010.
NOTE 21: SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes totaled $2,327,000 in 2004, $4,169,000 in 2003, and
$1,180,000 in 2002.
Common stock received as payment for stock option exercises totaled
$317,000 in 2004, $134,000 in 2003 and $2,467,000 in 2002.
The Company retired certain fully depreciated property, plant, and
equipment totaling $1,824,000 in 2004, $2,497,000 in 2003, and $5,407,000 in
2002.
Advertising costs are expensed as incurred and totaled $2,000,000 in
2004, $1,684,000 in 2003, and $1,753,000 in 2002.
COGNEX CORPORATION: REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRMS 71
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COGNEX CORPORATION:
We have audited the accompanying consolidated balance sheets of Cognex
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 2004. 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 in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cognex
Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Cognex
Corporation and subsidiaries internal control over financial reporting as of
December 31 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 4, 2005 expressed an unqualified opinion
thereon.
Boston, Massachusetts ERNST & YOUNG LLP
March 4, 2005
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COGNEX CORPORATION:
In our opinion, the accompanying consolidated statements of operations, of
shareholders' equity and cash flows for the year ended December 31, 2002 present
fairly, in all material respects, the results of operations and cash flows of
Cognex Corporation and its subsidiaries for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. 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 audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards 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
audit provides a reasonable basis for our opinion.
Boston, Massachusetts PRICEWATERHOUSECOOPERS LLP
January 24, 2003
72 COGNEX CORPORATION: FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Year Ended December 31, 2004 2003 2002 2001 2000
- ------------------------------ --------- --------- ---------- ---------- ---------
Revenue $ 201,957 $ 150,092 $ 114,107 $ 140,729 $ 250,726
Cost of revenue 57,371 50,139 39,859 62,345 63,820
--------- --------- ---------- ---------- ---------
Gross margin 144,586 99,953 74,248 78,384 186,906
Research, development,
and engineering expenses 27,063 24,719 25,630 30,094 33,341
Selling, general, and
administrative expenses 70,674 55,724 58,376 61,262 62,015
Amortization of goodwill - - - 3,108 1,964
Charge for intangible
asset impairment - - - 10,932 -
--------- --------- ---------- ---------- ---------
Operating income (loss) 46,849 19,510 (9,758) (27,012) 89,586
Nonoperating income 6,311 3,738 1,554 11,341 10,632
--------- --------- ---------- ---------- ---------
Income (loss) before taxes 53,160 23,248 (8,204) (15,671) 100,218
Income tax provision (benefit) 15,416 7,297 (2,177) (4,544) 32,070
--------- --------- ---------- ---------- ---------
Net income (loss) $ 37,744 $ 15,951 $ (6,027) $ (11,127) $ 68,148
========= ========= ========== ========== =========
Basic net income (loss)
per share $ 0.83 $ 0.37 $ (0.14) $ (0.25) $ 1.58
========= ========= ========== ========== =========
Diluted net income (loss)
per share $ 0.80 $ 0.36 $ (0.14) $ (0.25) $ 1.49
========= ========= ========== ========== =========
Basic weighted-average
common shares outstanding 45,480 43,173 43,503 43,639 43,043
========= ========= ========== ========== =========
Diluted weighted-average
common shares outstanding 47,358 44,466 43,503 43,639 45,698
========= ========= ========== ========== =========
Cash dividends per
common share $ 0.28 $ 0.12 $ - $ - $ -
========= ========= ========== ========== =========
BALANCE SHEET DATA:
December 31, 2004 2003 2002 2001 2000
- ------------------------------ --------- --------- ---------- ---------- ---------
Working capital $ 242,460 $ 150,311 $ 162,808 $ 143,712 $ 167,913
Total assets 533,308 432,533 385,934 406,904 436,141
Long-term debt - - - - -
Shareholders' equity 462,807 384,994 354,520 378,044 383,949
COGNEX CORPORATION: SELECTED QUARTERLY FINANCIAL (UNAUDITED) 73
(in thousands, except per share amounts and stock prices)
2004 Quarter Ended April 4 July 4 October 3 December 31
- ---------------------------- ----------- ----------- ----------- -----------
Revenue $ 48,169 $ 54,467 $ 55,412 $ 43,909
Gross margin 33,380 38,562 40,526 32,118
Operating income 10,168 14,339 15,875 6,467
Net income 8,567 10,878 11,655 6,644
Basic net income per share 0.19 0.24 0.26 0.15
Diluted net income per share 0.18 0.23 0.25 0.14
Cash dividends per
common share 0.06 0.06 0.08 0.08
Common stock prices:
High 35.05 38.48 37.06 29.90
Low 28.24 30.09 23.50 23.14
2003 Quarter Ended March 30 June 29 September 28 December 31
- ---------------------------- ----------- ----------- ------------ -----------
Revenue $ 32,888 $ 36,622 $ 38,704 $ 41,878
Gross margin 21,172 24,623 25,514 28,644
Operating income 1,945 4,411 5,507 7,647
Net income 1,793 3,306 5,138 5,714
Basic net income per share 0.04 0.08 0.12 0.13
Diluted net income per share 0.04 0.08 0.11 0.13
Cash dividends per
common share - - 0.06 0.06
Common stock prices:
High 24.40 24.00 31.79 31.11
Low 18.17 17.91 20.55 25.00
74 COGNEX CORPORATION: COMPANY INFORMATION
TRANSFER AGENT
National City Bank
Corporate Trust Operations
3rd Floor, North Annex
4100 West 150th Street
Cleveland, OH 44135-1385
Telephone: (216) 257-8663
Toll free: (800) 622-6757
GENERAL COUNSEL
Goodwin Procter LLP
Boston, Massachusetts
INDEPENDENT AUDITORS
Ernst & Young LLP
Boston, Massachusetts
FORM 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and Exchange
Commission is available to shareholders, 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, or on-line at http://www.cognex.com
The Company's report on internal controls over financial reporting and the
report of the Company's independent registered accounting firm is included in
Item 9A of the Annual Report on Form 10-K.
The Company's common stock is traded on the NASDAQ Stock Market, under the
symbol CGNX. As of February 11, 2005, there were approximately 600 shareholders
of record of the Company's common stock. The Company believes the number of
beneficial owners of the Company's common stock on that date was substantially
greater.
The Company declared and paid a cash dividend of $0.06 per share in the first
and second quarters of 2004, and a cash dividend of $0.08 per share in the third
and fourth quarters of 2004. Any future declaration and payment of cash divi-
dends will be subject to the discretion of the Board of Directors and will
depend upon such factors as the Board of Directors deems relevant. The Board of
Directors may modify the Company's dividend policy from time to time.
COGNEX CORPORATION: COMPANY INFORMATION 75
BOARD OF DIRECTORS
Robert J. Shillman
Chairman and Chief Executive Officer
Cognex Corporation
Patrick A. Alias
Executive Vice President
Cognex Corporation
Jerald G. Fishman
President and Chief Executive Officer
Analog Devices, Inc.
William A. Krivsky
Chairman and CEO
Keyson Airways Corporation
Anthony Sun
Managing General Partner
Venrock Associates
Reuben Wasserman
Business Consultant
OFFICERS
Robert J. Shillman
Chairman and Chief Executive Officer
James F. Hoffmaster
President and Chief Operating Officer
Patrick A. Alias
Executive Vice President
Richard A. Morin
Senior Vice President of Finance and
Administration, Chief Financial Officer,
and Treasurer
John McGarry
Senior Vice President,
In-Sight Products
William Silver
Senior Vice President and
Chief Technology Officer, MVSD
This annual report, including the letter to shareholders, contains
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934. Please see the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward-looking Statements" in this report for a discussion
regarding risks associated with these statements.
Cognex(R) Corporation has no connection, association, or affiliation to the
Dummies Books or their publisher. The similarity of this report to the Dummies
series of books is intentional; it's a parody! The Dummies trademark is owned by
IDG Books Worldwide, Inc., from International Data Group, Inc.
Copyright (C) 2005 by Cognex Corporation. All rights reserved. Any part of this
work may be reproduced or transmitted in any form or by any means without
written consent of Cognex Corporation, under the condition that the source of
the excerpted material is given.
Cognex, Cognex Vision for Industry, In-Sight, SmartView, and PatMax are
registered trademarks, and DataMan, IDMax, ProofRead, CPS 1000 and Checker are
trademarks of Cognex.
Design: PointOne Marketing & Design, Danvers, MA www.pointonemarketing.com
Printed in the United States of America
76 COGNEX CORPORATION: OFFICES
UNITED STATES
Corporate Headquarters
One Vision Drive
Natick, MA 01760
Telephone: (508) 650-3000
Fax: (508) 650-3333
2060 Challenger Drive
Alameda, CA 94501
Telephone: (510) 749-4000
Fax: (510) 865-9927
1001 Rengstorff Avenue
Mountain View, CA 94043
Telephone: (650) 969-4812
Fax: (650) 969-4818
800 East Diehl Road, Suite 125
Naperville, IL 60563
Telephone: (630) 649-6312
Fax: (630) 955-0661
46850 Magellan Drive, Suite 150
Novi, MI 48377
Telephone: (248) 668-5100
Fax: (248) 624-2964
15865 SW 74th Street, Suite 105
Portland, OR 97224
Telephone: (503) 620-6601
Fax: (503) 620-6093
318 Seaboard Lane
Suite 314
Franklin, TN 37067
Telephone: (615) 844-6158
Fax: (615) 844-6159
10150 West National Avenue, Suite 202
West Allis, WI 53227
Telephone: (414) 604-7000
Fax: (414) 604-2342
FINLAND
Cognex Finland, Oy
Kellonkierto 7
70460 Kuopio, Finland
Telephone: +358-17-3893 200
Fax: +###-##-#### 232
FRANCE
Cognex International Inc., France
104 Avenue Albert 1er
F-92563 Rueil Malmaison cedex, France
Telephone: +33-1-47-77-15-50
Fax: +33-1-47-77-15-55
GERMANY
Cognex Germany, Inc.
Emmy Noether Strasse 11
D-76131 Karlsruhe, Germany
Telephone: + 49-721-6639-0
Fax: + 49-721-6639-599
IRELAND
Cognex Ltd,
1, South Mall,
Cork, Ireland
Telephone: +353 (0)21 230 0271
Fax: +353 (0)21 230 0133
ITALY
Cognex International Inc., Italy
Via Gasparotto, 1
I-20124 Milano, Italy
Telephone: + 39-02-67471200
Fax: +39-02-67471300
NETHERLANDS
Cognex Benelux
Fellenoord, 130
NL-5611 ZB Eindhoven, Netherlands
Telephone: +31-402668565
Fax: +31-402668567
COGNEX CORPORATION: OFFICES 77
SWEDEN
Cognex International Inc.
Skrapan 1830
Kopparbergsvagen 10
S-722 10 Vasteras, Sweden
Telephone: +46-21-145588
Fax: +46-21-144080
UNITED KINGDOM
Cognex UK, Ltd.
Sunningdale House
43 Caldecotte Lake Drive
Caldecotte Lake Business Park
Milton Keynes MK7 8LF, UK
Telephone: +44-1908-206000
Fax: +44-1908-392463
Cognex UK, Ltd., Epsom Branch
Units 7-9, First Quarter
Blenheim Road, Epsom
Surrey, KT19 9QN, UK
Telephone: +44-1372-754 100
Fax: +44-1372-754 150
JAPAN
Cognex KK-Headquarters
23F Bunkyo Green Court
2-28-8 Honkomagome,
Bunkyo-ku
Tokyo 113-6591, Japan
Telephone: +81-3-5977-5400
Fax: +81-3-5977-5401
Cognex KK-Osaka
3F Central Shin-Osaka Building
4-5-36 Miyahara,
Yodogawa-ku
Osaka-shi, Osaka 532-0003 Japan
Telephone: +81-6-4807-8201
Fax: +81-6-4807-8202
Cognex KK-Fukuoka
5F, Dai 5 Hakata Kaisei Building
1-18-25 Hakataeki-Higashi,
Hakata-ku
Fukuoka-shi, Fukuoka-ken
812-0013, Japan
Telephone: +81-92-432-7741
Fax: +81-92-412-3590
Cognex KK-Nagoya
4F, IT Meieki Building
3-11-22 Meieki
Nakamura-ku, Nagoya-shi
Aichi-ken
450-0002 Japan
Telephone: + 81-52-569-5900
Fax: +81-52-581-7760
Cognex KK-Sendai
10F, Sendai-Hashimoto Building
27-21 Tachimachi
Aoba-ku, Sendai-shi, Miyagi-ken
980-0822, Japan
Telephone: +81-22-711-1971
Fax: +81-22-711-1982
SINGAPORE
10 Anson Road
#26-06A International Plaza
Singapore 079903
Telephone: +65-632-55-700
Fax: +65-632-55-703
78 COGNEX CORPORATION: OFFICES
TAIWAN
10F-1, No. 25
Puding Road
Hsin-Chu City
300 Taiwan, R.O.C.
Telephone: +886-3-5780060
Fax: +886-3-5781520
KOREA
8Fl., Dongkyung Bldg. 824-19
Yuksam-dong, Kangnam-Ku
Seoul, 135-080, Korea
Telephone: +82-2-539-9047
Fax: +82-2-569-9823
CHINA
Cognex China
CIIC Business Center
Unit B, 22/F Jian Hui Building,
922 Heng Shan Road
Shanghai 200030 PRC
Telephone: +86 21 6407-5835