1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Revenue for the year ended December 31, 1997 increased 26% over 1996 and net
income increased 33% over the prior year as the Company benefited from a
recovery in the semiconductor and electronics industries. These markets
experienced a cyclical slowdown that impacted the Company's business during
1996. The increase in revenue is due primarily to increased volume of modular
vision systems sold to Original Equipment Manufacturer (OEM) customers serving
these two industries. Sales to OEM customers increased 33% over 1996 and grew to
68% of revenue in 1997 from 65% of revenue in 1996. Additionally, sales to
factory floor customers increased 15% over the prior year. The increase in sales
to factory floor customers is primarily a result of additional sales and
marketing resources dedicated to this market in 1997, as well as the third
quarter acquisition of Mayan Automation, Inc. (Mayan), whose Fine-Line products
are sold to factory floor customers.
The Company's financial position remained strong at December 31, 1997, with $262
million in total assets and $236 million in stockholders' equity. Working
capital was $200 million at December 31, 1997, representing an increase of 31%
over the prior year. Cash and investments increased 33% from the prior year
primarily as a result of $52 million of cash generated from operations.
The following table sets forth certain consolidated financial data as a
percentage of revenue:
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------
Revenue 100% 100% 100%
Cost of revenue 27 32 22
--------------------------
Gross margin 73 68 78
Research, development and engineering expenses 14 16 13
Selling, general and administrative expenses 23 21 23
Charge for acquired in-process technology (1) 2 9
--------------------------
Income from operations 34 31 33
Investment and other income 4 5 3
--------------------------
Income before provision for income taxes 38 36 36
Provision for income taxes 12 11 14
--------------------------
Net income 26% 25% 22%
==========================
(1) Charge from the write-off of acquired in-process technology in connection
with the acquisitions of Mayan Automation, Inc. in 1997 and Acumen, Inc. in
1995.
12
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO
YEAR ENDED DECEMBER 31, 1996:
The acquisition of Mayan, a developer of low-cost machine vision systems used
for surface inspection, on July 31, 1997 was accounted for under the purchase
method of accounting. The results of operations of Mayan since the acquisition
date are included in the Company's results.
Revenue for the year ended December 31, 1997 increased 26% to $155,340,000 from
$122,843,000 for the year ended December 31, 1996. This increase in revenue over
the prior year represents a recovery from the slowdown in the semiconductor and
electronics industries which had previously impacted the Company's business. The
increase is due primarily to increased volume from OEM customers serving these
two industries. Sales to OEM customers increased $26,221,000, or 33%, over 1996,
and grew to 68% of revenue in 1997 from 65% of revenue in 1996. Additionally,
sales to factory floor customers increased $6,276,000, or 15%, over 1996 due
primarily to increased volume resulting from additional sales and marketing
resources serving customers in this market, as well as the addition of Fine-Line
products from the acquisition of Mayan in the third quarter of 1997.
For the year ended December 31, 1997, approximately one half of the Company's
revenue was derived from customers based in Asia, primarily in Japan. During
1997, 3% of the Company's revenue was derived from Southeast Asia, with 1%
representing business in Korea. The Company believes the currency and credit
situation currently affecting Asia will have a limited impact on its business
since a majority of its sales to customers in Asia are denominated in U.S.
dollars and the Company has tightened its credit policy to customers based in
Southeast Asia. However, the Company believes its growth would be hampered for a
period of time if a worldwide slowdown in capital spending develops as a result
of the current financial situation in Asia.
Gross margin as a percentage of revenue for the year ended December 31, 1997 was
73% compared to 68% for 1996. Gross margin for 1996 included a $4,231,000
inventory charge to "Cost of revenue," which reduced the margin by approximately
four percentage points. The charge reflected costs associated with excess
inventories resulting from product transition plans, as well as reduced
production plans caused by the slowdown in the semiconductor and electronics
industries. Excluding the 1996 inventory charge, the slight improvement in gross
margin as a percentage of revenue is due primarily to the Company's ability to
significantly increase the number of machine vision systems manufactured with
only small increases in manufacturing overhead expenses, thereby improving the
absorption rate of overhead expenses. Gross margin as a percentage of revenue
for 1998 is expected to remain consistent with the results experienced for the
year ended December 31, 1997.
Research, development and engineering expenses for the year ended December 31,
1997 increased 16% to $22,481,000 from $19,434,000 for the year ended December
31, 1996. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's continued investment in the
research and development of new and existing products. Expenses as a percentage
of revenue were 14% in 1997 compared to 16% in 1996. The decrease in expenses as
a percentage of revenue results from demand from OEM customers increasing
revenue at a rate that outpaced the increase in expenses associated with the
addition of new engineers. The Company intends to maintain its product
development schedule in 1998, irrespective of revenue trends, and therefore, the
level of research, development and engineering expenses as a percentage of
revenue may increase during the next few quarters.
Selling, general and administrative expenses for the year ended December 31,
1997 increased 36% to $35,810,000 from $26,261,000 for the year ended December
31, 1996. The increase in aggregate expenses is due primarily to higher
personnel-related costs, both domestically and internationally, to support the
Company's worldwide operations, as
13
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
well as the reinstatement of company bonuses, which were eliminated as part of
an effort to control costs during 1996 in light of the temporary downturn in the
semiconductor and electronics industries. Expenses as a percentage of revenue
were 23% in 1997 compared to 21% in 1996. Selling, general and administrative
expenses are expected to continue to increase as additional resources are
committed to further penetrate the factory floor market, and therefore, expenses
as a percentage of revenue may increase during the next few quarters.
Investment income for the year ended December 31, 1997 increased 26% to
$5,947,000 from $4,726,000 for the year ended December 31, 1996. The increase in
investment income is due primarily to an increase in the Company's invested cash
balance during 1997.
Other income for the year ended December 31, 1997 totaled $718,000 and remained
fairly consistent with other income of $678,000 in 1996. Other income consists
primarily of rental income, net of related expenses, from leasing the building
adjacent to the Company's corporate headquarters.
The Company's effective tax rate was 30.5% for each of the years ended December
31, 1997 and 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995:
The acquisition of Isys Controls, Inc. (Isys) in the first quarter of 1996 was
accounted for as a pooling of interests. The results of operations of Isys for
the full year ended December 31, 1996 are included in the Company's results. The
results of operations of Isys for the year ended December 31, 1995 were not
material to the Company's previously reported results, and therefore, that year
has not been restated.
Revenue for the year ended December 31, 1996 increased 18% to $122,843,000 from
$104,543,000 for the year ended December 31, 1995. Sales to customers based in
the United States, which grew to 45% of revenue in 1996 compared to 41% of
revenue in 1995, increased $12,597,000, or 30%, over 1995. Sales to customers
based in Japan increased $739,000, or 2%, over 1995, and sales to customers
based in Europe increased $3,715,000, or 30%, over 1995.
The increase in worldwide revenue for the year ended December 31, 1996 over the
prior year is due primarily to increased volume from factory floor customers.
Sales to factory floor customers increased $17,737,000, or 71%, over 1995, and
grew to 35% of revenue in 1996 from 24% of revenue in 1995. The increased volume
from factory floor customers includes sales of Isys products totaling
$13,183,000, or 11% of revenue, for the year ended December 31, 1996. During the
first half of 1996, sales to OEM customers increased $13,505,000, or 40%, over
the comparable period in 1995, whereas during the second half of 1996, sales to
OEM customers decreased $12,942,000, or 28%, over the comparable period in 1995,
resulting in increased OEM sales of $563,000, or 1%, year-on-year.
Gross margin for the year ended December 31, 1996 was 68% and included a
$4,231,000 inventory charge to "Cost of revenue," which reduced the margin by
approximately four percentage points. The charge reflected costs associated with
excess inventories resulting from product transition plans, as well as reduced
production plans caused by the slowdown in the semiconductor and electronics
industries.
Excluding the inventory charge, gross margin for the year ended December 31,
1996 was 72% compared to 78% for the year ended December 31, 1995. The decrease
in gross margin excluding the inventory charge is due primarily to a shift in
product mix to lower margin products including Isys products, price discounts to
some of the Company's larger customers for attaining certain volume thresholds,
and underabsorbed manufacturing costs resulting from reduced production plans.
Research, development and engineering expenses for the year ended December 31,
1996 increased 47% to $19,434,000 from $13,190,000 for the year ended December
31, 1995. Expenses as a percentage of revenue were 16% in 1996 compared to 13%
in 1995. The increase in aggregate expenses is due primarily to higher
personnel-related
14
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
costs to support the Company's continued investment in the research and
development of new and existing products. These higher costs reflect the hiring
of additional personnel at the Company's corporate headquarters, and Japanese
and Acumen subsidiaries, as well as the addition of Isys engineers to the
Company's talent pool. The increase in expenses as a percentage of revenue is
due primarily to the investment in research and development outpacing the growth
in revenue.
Selling, general and administrative expenses for the year ended December 31,
1996 increased 10% to $26,261,000 from $23,973,000 for the year ended December
31, 1995. Expenses as a percentage of revenue were 21% in 1996 compared to 23%
in 1995. The increase in aggregate expenses is due primarily to higher
personnel-related costs, both domestically and internationally, to support the
Company's worldwide operations and further penetrate the factory floor market.
These higher costs reflect the hiring of additional personnel at the Company's
corporate headquarters, and Japanese and European subsidiaries, as well as the
addition of Isys employees resulting from the acquisition. The decrease in
expenses as a percentage of revenue is due primarily to the Company's efforts to
control costs during the second half of 1996, which included the elimination of
substantially all company bonuses.
Investment income for the year ended December 31, 1996 increased 50% to
$4,726,000 from $3,147,000 for the year ended December 31, 1995. The increase in
investment income is due primarily to an increased investment base, as well as
higher returns on invested balances.
Other income for the year ended December 31, 1996 totaled $678,000, compared to
other expense of $182,000 for the year ended December 31, 1995. Other income
(expense) consists primarily of rental income and related expenses from leasing
the building adjacent to the Company's corporate headquarters, which was
purchased in June 1995. The increase in other income is due primarily to the
collection of rental income for a full year in 1996, compared to only a half
year in 1995.
The Company's effective tax rate was 30.5% for each of the years ended December
31, 1996 and 1995, excluding the impact of a $10,189,000 charge for acquired
in-process technology in the third quarter of 1995, which had no associated tax
benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements during the year ended December 31, 1997 were met
through cash generated from operations. Cash and investments increased
$44,014,000 from December 31, 1996 primarily as a result of $52,493,000 of cash
generated from operations, offset by $10,852,000 of capital expenditures. Cash
generated from operations consists of net income, adjusted for non-cash charges
and changes in current assets and current liabilities, most notably a decrease
in accounts receivable resulting from the timing of cash receipts at year end.
15
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As discussed in the Notes to Consolidated Financial Statements, at December 31,
1997, the Company had unconditional obligations to purchase $5,570,000 of
inventory from third-party contractors within 60 days.
Capital expenditures for the year ended December 31, 1997 totaled $10,852,000
and consisted primarily of expenditures related to the implementation of new
computer information systems and expenditures for computer hardware, as well as
the cash purchase of land adjacent to the Company's corporate headquarters which
is anticipated to be used for future expansion.
On July 31, 1997, the Company acquired selected assets and assumed selected
liabilities of Mayan Automation, Inc. for $4,800,000 in cash, $1,800,000 of
which, at December 31, 1997, remained to be paid through the year 1999. Of the
$1,800,000 of future cash payments, $900,000 represents payments contingent upon
the attainment of certain performance milestones.
In July 1995, the Company acquired Acumen, Inc. for approximately $14,000,000.
The purchase price included $8,452,000 in cash, $566,000 of which, at December
31, 1997, remained to be paid through the year 2000.
Based on a recent assessment, the Company has determined that its internal
computer systems are capable of processing transactions relating to the year
2000 and beyond, and, to the best of its knowledge, the Company does not have
any material exposure to contingencies related to year 2000 issues for its
products. Additionally, the Company has initiated formal communications with its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to those third parties' failures to remediate their own year 2000
issues. Although the Company is only in the preliminary stages of assessing the
impact of year 2000 issues and no assurances can be given, the Company does not
believe that year 2000 expenses will have a material impact on its business.
The Company believes that the existing cash and investments balance, together
with cash generated from operations, will be sufficient to meet the Company's
planned working capital and capital expenditure requirements through 1998,
including potential business acquisitions.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No.130 requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The Company will adopt the provisions of this statement, which
include the reclassification of prior periods presented for comparative
purposes, in 1998. The Company is currently evaluating the impact that this
statement will have on its financial statements; however, because the statement
requires only additional disclosure, the Company does not expect the statement
to have a material impact on its financial position or results of operations.
The additional disclosure will include comprehensive income, which will differ
from historical net income by the amount of the translation adjustments and
unrealized gain (loss) on investments included as separate components of
stockholders' equity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for fiscal years beginning after December 15, 1997. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 requires companies to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds assets and
reports revenue. In 1998, the Company will adopt the provisions of this
statement, which include the reclassification of prior periods presented, unless
impracticable, for comparative purposes. The Company is currently evaluating the
impact that this statement will have on its financial statements; however,
because the statement requires only
16
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
additional disclosure, the Company does not expect the statement to have a
material impact on its financial position or 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, which are prefaced with words such as "expects,"
"anticipates," "believes," and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances, which may or may not be in the Company's control and as to which
there can be no firm assurances given. These forward-looking statements, like
any other forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include: (1) capital spending trends by
manufacturing companies; (2) the cyclicality of the semiconductor industry; (3)
the Company's continued ability to achieve significant international revenue;
(4) the loss of, or a significant curtailment of purchases by, any one or more
principal customers; (5) inability to protect the Company's proprietary
technology and intellectual property; (6) inability to attract or retain skilled
employees; (7) technological obsolescence of current products and the inability
to develop new products; (8) inability to respond to competitive technology and
pricing pressures; and (9) reliance upon certain sole source suppliers to
manufacture or deliver critical components of the Company's products. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. Further discussions of risk
factors are also available in the Company's registration statements filed with
the Securities and Exchange Commission. The Company wishes to caution readers
not to place undue reliance upon any such forward-looking statements, which
speak only as of the date made.
17
7
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Revenue $ 155,340 $ 122,843 $ 104,543
Cost of revenue 42,273 38,855 22,543
-----------------------------------------------
Gross margin 113,067 83,988 82,000
Research, development and engineering expenses 22,481 19,434 13,190
Selling, general and administrative expenses 35,810 26,261 23,973
Charge for acquired in-process technology 3,115 10,189
-----------------------------------------------
Income from operations 51,661 38,293 34,648
Investment income 5,947 4,726 3,147
Other income (expense) 718 678 (182)
-----------------------------------------------
Income before provision for income taxes 58,326 43,697 37,613
Provision for income taxes 17,790 13,328 14,579
-----------------------------------------------
Net income $ 40,536 $ 30,369 $ 23,034
===============================================
Net income per common and common equivalent share:
Basic $ .98 $ .75 $ .60
===============================================
Diluted $ .91 $ .69 $ .55
===============================================
Weighted-average common and common
equivalent shares outstanding:
Basic 41,322 40,594 38,175
===============================================
Diluted 44,702 43,814 41,952
===============================================
The accompanying notes are an integral part of these consolidated financial
statements.
18
8
COGNEX CORPORATION - CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and investments $ 178,014 $ 134,000
Accounts receivable, less reserves of $1,940 and $968 in 1997
and 1996, respectively 25,095 18,809
Revenue in excess of billings 3,723 3,379
Inventories 7,784 7,013
Deferred income taxes 3,453 2,642
Prepaid expenses and other 5,937 3,545
---------------------------
Total current assets 224,006 169,388
---------------------------
Property, plant and equipment, net 32,995 28,331
Other assets 3,462 3,534
Deferred income taxes 1,377
---------------------------
$ 261,840 $ 201,253
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,332 $ 3,652
Accrued expenses 13,712 7,007
Accrued income taxes 2,684 2,029
Customer deposits 3,112 2,596
Deferred revenue 1,596 1,287
---------------------------
Total current liabilities 24,436 16,571
---------------------------
Other liabilities 1,262 1,600
Deferred income taxes 393
Commitments (see Notes to Consolidated Financial Statements)
Stockholders' equity:
Common stock, $.002 par value
Authorized: 120,000,000 shares, issued: 41,859,395 and
40,914,166 shares in 1997 and 1996, respectively 84 82
Additional paid-in capital 91,082 77,569
Cumulative translation adjustment 44 95
Retained earnings 146,368 105,832
Treasury stock, at cost, 103,139 and 80,918 shares in 1997
and 1996, respectively (1,436) (889)
---------------------------
Total stockholders' equity 236,142 182,689
---------------------------
$ 261,840 $ 201,253
===========================
The accompanying notes are an integral part of these consolidated financial
statements.
19
9
COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CUMULATIVE TREASURY STOCK TOTAL
--------------------- ADDITIONAL TRANSLATION RETAINED ------------------ STOCKHOLDERS'
(Dollars in thousands) SHARES PAR VALUE PAID-IN CAPITAL ADJUSTMENT EARNINGS SHARES COST EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 18,751,935 $ 38 $ 53,633 $ (53) $ 50,482 30,878 $ (492) $103,608
Common stock issued to
acquire Acumen, Inc. 96,140 4,170 4,170
Issuance of stock under
stock option and stock
purchase plans 683,079 1 4,826 4,827
Tax benefit from exercise
of stock options 8,581 8,581
Common stock received for
payment of stock option
exercises 9,581 (397) (397)
Stock issued to effect
stock split 9,508,521 39 (39) 40,459
Translation adjustment 93 93
Net income 23,034 23,034
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 39,039,675 78 71,171 40 73,516 80,918 (889) 143,916
-----------------------------------------------------------------------------------------------------
Common stock issued to
acquire Isys Controls,
Inc. 1,331,927 3 2,469 1,947 4,419
Issuance of stock under
stock option, stock
purchase, and bonus
plans 542,564 1 2,495 2,496
Tax benefit from exercise
of stock options 1,434 1,434
Translation adjustment 55 55
Net income 30,369 30,369
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 40,914,166 82 77,569 95 105,832 80,918 (889) 182,689
-----------------------------------------------------------------------------------------------------
Issuance of stock under
stock option, stock
purchase, and bonus
plans 945,229 2 5,504 5,506
Tax benefit from exercise
of stock options 8,009 8,009
Common stock received for
payment of stock option
exercises 22,221 (547) (547)
Translation adjustment (51) (51)
Net income 40,536 40,536
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,859,395 $ 84 $ 91,082 $ 44 $ 146,368 103,139 $(1,436) $ 236,142
-----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
10
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 40,536 $ 30,369 $ 23,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 4,870 4,352 2,845
Amortization of intangible assets 938 735 355
Loss on disposition of property, plant and equipment 470 99 56
Charge for acquired in-process technology 3,115 10,189
Tax benefit from exercise of stock options 8,009 1,434 8,581
Inventory provision 4,231
Deferred income tax provision (2,581) (385) (1,326)
Changes in other current assets and current liabilities:
Accounts receivable (6,603) 6,276 (14,705)
Inventories (920) 2,523 (7,678)
Accounts payable (421) 519 1,361
Accrued expenses 6,403 (1,768) 2,867
Other (1,323) 2,724 (3,744)
-----------------------------------------------
Net cash provided by operating activities 52,493 51,109 21,835
-----------------------------------------------
Cash flows from investing activities:
Purchase of investments (94,707) (63,067) (75,758)
Maturities of investments 40,468 44,219 34,198
Purchase of property, plant and equipment (10,852) (10,154) (10,503)
Cash paid related to acquisition of Mayan Automation, Inc.,
net of $51 cash assumed (2,862)
Cash paid related to acquisition of Acumen, Inc.,
net of $200 cash assumed in 1995 (137) (1,277) (6,454)
Cash assumed in acquisition of Isys Controls, Inc. 918
Other (156) (71) (294)
-----------------------------------------------
Net cash used in investing activities (68,246) (29,432) (58,811)
-----------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of stock under stock option,
stock purchase, and bonus plans 4,959 2,496 4,430
-----------------------------------------------
Net cash provided by financing activities 4,959 2,496 4,430
-----------------------------------------------
Effect of exchange rate changes on cash 569 339 131
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,225) 24,512 (32,415)
Cash and cash equivalents at beginning of year 48,423 23,911 56,326
-----------------------------------------------
Cash and cash equivalents at end of year 38,198 48,423 23,911
Investments 139,816 85,577 66,729
-----------------------------------------------
Cash and investments $ 178,014 $ 134,000 $ 90,640
===============================================
The accompanying notes are an integral part of these consolidated financial
statements.
21
11
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to the
consolidated financial statements.
NATURE OF OPERATIONS
Cognex Corporation (the Company) designs, develops, 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. The
Company's primary customers, Original Equipment Manufacturers (OEMs) in the
semiconductor and electronics industries, are principally located in Japan and
the United States.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the balance sheet date
and the reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Cognex Corporation
and its subsidiaries, all of which are wholly-owned. All intercompany accounts
and transactions have been eliminated. Certain amounts reported in prior years
have been reclassified to be consistent with the current year's 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 adjustments are reported as a separate component of stockholders'
equity.
CASH AND INVESTMENTS
Cash and investments include cash equivalents, which the Company considers to be
all investments purchased with original maturities of three months or less.
Investments having original maturities in excess of three months are stated at
amortized cost, which approximates fair value, and are classified as
available-for-sale. The Company considers all of its investments to be available
for current operations and maintains its investments in securities which are
highly liquid and would not result in significant losses if sold prior to
maturity.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the assets' estimated useful lives. Buildings' useful
lives are 39 years, building improvements' useful lives are 10 years, and the
useful lives of computer hardware, computer software, and furniture and fixtures
range from two to seven years. Leasehold improvements are depreciated over the
shorter of the estimated useful lives or the remaining terms of the leases.
Maintenance and repairs
22
12
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
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 five to eight
years. The Company evaluates the possible impairment of long-lived assets,
including intangible assets, whenever events or circumstances indicate that the
carrying value of the assets may not be recoverable.
WARRANTY OBLIGATIONS
The Company provides warranties for its products for periods ranging from six
months to one year from the date of shipment, based upon the product being
purchased and the terms of the customer's contract. Estimated warranty
obligations are evaluated and recorded at the time of sale.
REVENUE RECOGNITION
Revenue from product sales and software licenses is recognized upon shipment.
Revenue from construction-type projects, which include research and development
contracts, is recognized using the percentage-of-completion method. Losses on
projects, if any, are recognized when identified. Service and maintenance
revenue is recognized as earned.
RESEARCH AND DEVELOPMENT
Research and development costs for internally-developed products are expensed
when incurred until technological feasibility has been established for the
product. Thereafter, all software costs are capitalized until the product is
available for general release to customers. The cost of acquired software is
capitalized for products determined to have reached technological feasibility;
otherwise, the cost is expensed. Capitalized software costs are amortized using
the straight-line method over the economic life of the product, typically three
to five years, or based upon the anticipated revenues of the product.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
liability method prescribed by SFAS No. 109, a deferred tax asset or liability
is determined based on the differences between the financial statement and tax
basis of assets and liabilities as measured by the enacted tax rates which will
be in effect when these differences reverse. Tax credits are recorded as a
reduction in income taxes. Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
NET INCOME PER SHARE
The Company has adopted SFAS No. 128, "Earnings per Share," for the year ended
December 31, 1997, which included retroactively restating all prior periods for
which earnings per share (EPS) data is presented. SFAS No. 128 requires the
presentation of basic and diluted EPS. Basic EPS, which replaces primary EPS,
excludes dilution and is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exer-
23
13
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE (CONTINUED)
cised or converted into common stock or resulted in the issuance of common stock
that then participates in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS under the previous rules. Dilutive common
equivalent shares consist of stock options, calculated using the treasury stock
method.
FINANCIAL INSTRUMENTS
FAIR VALUE
The Company's financial instruments consist primarily of cash and cash
equivalents, investments, trade receivables, trade payables, and forward
exchange contracts. The carrying amounts of cash and cash equivalents,
investments, trade receivables, and trade payables approximate fair value due to
the short maturity of these instruments. Based on year-end exchange rates and
the various maturity dates of the forward exchange contracts, the Company
estimates the aggregate contract value to be representative of the fair values
of these instruments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments, and
trade receivables.
The Company invests in debt instruments of U.S. and state government entities.
The Company has established guidelines relative to credit ratings,
diversification, and maturities that maintain safety and liquidity. The Company
has not experienced any significant losses on its cash equivalents and
investments.
A significant portion of the Company's sales and receivables are from customers
in the semiconductor and electronics industries. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses. The Company has not experienced any significant losses related to
the collection of its accounts receivable.
OFF-BALANCE SHEET RISK
In certain instances, the Company enters into forward exchange contracts to
hedge specific commitments against foreign currency fluctuations. The forward
exchange contracts are for periods consistent with its committed exposure and
require the Company to exchange foreign currencies for U.S. dollars at maturity,
at rates agreed upon at the inception of the contracts. For contracts that are
designated and effective as hedges, the gain or loss on the forward exchange
contract is deferred and included in the measurement of the related foreign
currency transaction. The Company had $7,900,000 of foreign exchange contracts
outstanding, all of which were in Japanese yen, at December 31, 1997. The
Company had no foreign exchange contracts outstanding at December 31, 1996.
FOREIGN CURRENCY RISK
The Company enters into transactions denominated in foreign currencies and
includes the exchange rate gain or loss arising from such transactions in
current operations. The Company recorded exchange rate losses of $155,000 in
1997, $1,027,000 in 1996, and $573,000 in 1995.
24
14
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND INVESTMENTS
Cash and investments consist of the following:
DECEMBER 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
Cash $ 19,868 $ 25,905
Municipal obligations with contractual maturities:
Less than three months 18,330 22,518
------------------------------
Total cash and cash equivalents 38,198 48,423
Greater than three months and less than one year 49,216 30,025
Greater than one year 90,600 55,552
------------------------------
$ 178,014 $ 134,000
==============================
INVENTORIES
Inventories consist of the following:
DECEMBER 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
Raw materials $ 4,425 $ 5,058
Work-in-process 1,355 513
Finished goods 2,004 1,442
--------------------------
$ 7,784 $ 7,013
==========================
In the third quarter of 1996, the Company recorded a $4,231,000 inventory charge
to "Cost of revenue." The charge reflected costs associated with excess
inventories resulting from product transition plans, as well as reduced
production plans caused by the slowdown in the semiconductor and electronics
industries.
25
15
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------
Land $ 3,051 $ 1,150
Buildings 17,563 12,963
Building improvements 2,725 1,883
Construction-in-process 5,943
Computer hardware and software 19,553 13,921
Furniture and fixtures 2,429 1,713
Leasehold improvements 661 477
--------------------------------
45,982 38,050
Less: accumulated depreciation (12,987) (9,719)
--------------------------------
$ 32,995 $ 28,331
================================
In December 1997, approximately $8,100,000 of expenditures related to new
computer information systems and a building addition, that had previously been
recorded in construction-in-process, were transferred to buildings, building
improvements, and computer hardware and software when they were placed in
service.
ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Bonus $ 3,055 $ 559
Payroll and related costs 3,020 2,066
Warranty 2,407 1,284
Accrued acquisition costs 1,237 337
Professional fees 1,027 938
Other 2,966 1,823
----------------------------------
$ 13,712 $ 7,007
==================================
26
16
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Current:
Federal $ 17,048 $ 13,169 $ 14,083
State 2,850 128 1,572
Foreign 473 392 249
--------------------------------------------
20,371 13,689 15,904
Deferred:
Federal (1,552) (902) (28)
State (1,029) 541 (1,297)
--------------------------------------------
$ 17,790 $ 13,328 $ 14,579
============================================
A reconciliation of the provision for income taxes at the federal statutory rate
is as follows:
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------
Provision for income taxes at federal statutory rate 35% 35% 35%
Non-deductible charge for acquired in-process technology 9
State income taxes, net of federal benefit 2 2.5 2
Foreign Sales Corporation benefit (3) (3) (4)
Tax-exempt investment income (3) (3) (2)
Tax credit utilization (1) (1) (1)
Other 0.5
---------------------------
Provision for income taxes 30.5% 30.5% 39%
===========================
27
17
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The tax effects of the
principal items making up deferred income taxes are as follows:
DECEMBER 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------
Current deferred tax assets:
Vacation, bad debt and other $ 1,296 $ 936
Inventory, warranty and other 1,833 1,461
Other 324 245
-----------------------
Total net current deferred tax asset $ 3,453 $ 2,642
=======================
Noncurrent deferred tax assets (liabilities):
State net operating loss and credit carryforwards $ 888 $ 574
Acquired complete technology (376) (630)
Acquired incomplete technology 1,099
Depreciation (234) (337)
-----------------------
Total net noncurrent deferred tax asset (liability) $ 1,377 $ (393)
=======================
The Company's state credit carryforwards, net of federal tax impact, are
approximately $888,000, a portion of which will begin to expire in the year
2010.
LEASES
The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through the year 2002 and are accounted for
as operating leases. Annual rent expense totaled $1,637,000 in 1997, $1,324,000
in 1996, and $996,000 in 1995. Future minimum rental payments under these
agreements are as follows at December 31, 1997 (in thousands):
YEAR AMOUNT
----------------------
1998 $ 985
1999 815
2000 712
2001 210
2002 152
--------
$ 2,874
========
28
18
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES (CONTINUED)
In June 1995, the Company purchased 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 the year
2000. Annual rental income totaled $1,428,000 in 1997, $1,326,000 in 1996, and
$536,000 in 1995. Rental income and related expenses are presented on the
Consolidated Statements of Income as "Other income (expense)." Future minimum
rental receipts under non-cancelable lease agreements are as follows at December
31, 1997 (in thousands):
YEAR AMOUNT
---------------------------
1998 $ 1,343
1999 1,181
2000 994
---------
$ 3,518
=========
COMMITMENTS
The Company has agreements with third-party contractors to perform the majority
of component procurement, subassembly, final assembly, and initial testing for
the hardware portion of its vision systems. After the completion of initial
testing, the third-party contractors deliver the products to the Company to
perform final testing and assembly. At December 31, 1997, the Company had
unconditional obligations to purchase $5,570,000 of inventory from third-party
contractors within 60 days. These purchase commitments relate to expected sales
in 1998.
STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
On November 14, 1995, the Company announced a two-for-one stock split, effected
in the form of a stock dividend, payable December 18, 1995 to stockholders of
record at the close of business December 1, 1995. Accordingly, $39,000
representing the par value of the additional shares issued was transferred from
additional paid-in capital to common stock. These consolidated financial
statements and related notes have been retroactively adjusted, as appropriate,
to reflect this two-for-one stock split.
In April 1996, an amendment to the Company's Articles of Organization was
adopted to increase the number of authorized shares of common stock from
60,000,000 shares to 120,000,000 shares.
The Company has 400,000 shares of authorized but unissued $.01 par value
preferred stock.
STOCK-BASED COMPENSATION PLANS
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." No
compensation costs were recognized in 1997, 1996, and 1995.
29
19
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION PLANS (CONTINUED)
Net income and net income per share as reported in these consolidated financial
statements and on a pro forma basis, as if the fair value based method described
in SFAS No. 123 had been adopted, are as follows:
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Net income As reported $ 40,536 $ 30,369 $ 23,034
Pro forma 34,380 25,204 21,652
Basic net income per share As reported .98 .75 .60
Pro forma .83 .62 .57
Diluted net income per share As reported .91 .69 .55
Pro forma .74 .59 .52
The effects of applying SFAS No. 123 for the purpose of providing pro forma
disclosures may not be indicative of the effects on reported net income and net
income per share for future years, as the pro forma disclosures include the
effects of only those awards granted after January 1, 1995.
STOCK OPTION PLANS
At December 31, 1997, the Company had 8,672,000 shares approved by the Board of
Directors and stockholders for grant under the following stock option plans: the
1992 Director plan, 352,000; the 1993 Director plan, 320,000; and the 1993
Employee plan, 8,000,000. In April 1996, an amendment was adopted to increase
the number of shares of common stock reserved for issuance under the 1993
Employee plan from 5,000,000 shares to 8,000,000 shares.
In connection with the acquisition of Isys Controls, Inc. in February 1996, the
Company adopted the 1996 Long-Term Incentive Plan. This plan provided for the
grant of 321,589 shares of either restricted common stock or options to purchase
restricted stock. Other than restrictions that limit the sale and transfer of
the restricted stock within 20 years from the date of grant, participants are
entitled to all of the rights of a stockholder.
Options vest over various periods, not exceeding 10 years, and expire no later
than 20 years from the date of grant.
On July 30, 1996, the Company granted 1,177,830 options at the current fair
market value with similar terms and conditions to previously issued but
unexercised grants. In exchange for the new grants, employees agreed to forfeit
their prior options.
30
20
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes the status of the Company's stock option plans at
December 31, 1997, 1996, and 1995, and changes during the years then ended:
1997 1996 1995
------------------------ -------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 8,014,386 $ 8.34 7,699,826 $ 9.10 7,882,832 $ 5.69
Granted at fair market value 1,450,521 24.55 933,915 16.80 1,397,874 21.74
Granted above fair market value 91,500 26.41 1,807,583 16.18 71,000 26.39
Exercised (996,965) 4.87 (518,925) 3.18 (1,312,392) 3.36
Forfeited (794,535) 10.05 (1,908,013) 24.39 (339,488) 7.73
---------- ---------- ----------
Outstanding at end of year 7,764,907 11.85 8,014,386 8.34 7,699,826 9.10
========== ========== ==========
Options exercisable at year-end 2,140,956 6.14 2,128,058 4.40 1,389,164 3.17
Weighted-average grant-date fair
value of options granted during
the year at fair market value $ 12.48 $ 11.78 $ 11.19
Weighted-average grant-date fair
value of options granted during
the year above fair market value $ 11.50 $ 4.46 $ 10.17
31
21
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------------------------------
$ .50 - 6.00 1,445,405 5.3 $ 3.28 1,251,686 $ 3.08
6.06 - 7.00 169,913 7.0 6.82 100,455 6.85
7.12 - 7.50 2,516,800 10.7 7.50 289,800 7.49
7.94 - 14.19 727,790 6.9 11.57 302,938 11.25
14.50 - 14.50 1,105,863 8.4 14.50 151,150 14.50
14.56 - 23.44 1,091,570 9.5 19.80 34,142 16.84
24.00 - 36.31 707,566 9.6 29.91 10,785 22.89
--------- ---------
.50 - 36.31 7,764,907 8.7 11.85 2,140,956 6.14
========= =========
For the purpose of providing pro forma disclosures, the fair values of options
granted were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997, 1996, and 1995,
respectively: a risk-free interest rate of 6.3%, 6.3%, and 5.9%; an expected
life of 5.1, 4.4, and 4.5 years; expected volatility of 50%; and no expected
dividends.
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 stock
purchased under the ESPP for a period of one year from the date of purchase.
Common stock reserved for future sales totaled 463,534 shares at December 31,
1997. Shares purchased under the ESPP totaled 22,436 in 1997, 27,215 in 1996,
and 16,133 in 1995. The weighted-average fair value of shares purchased under
the ESPP was $5.08 in 1997, $6.82 in 1996, and $3.74 in 1995.
For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchases in 1997, 1996, and
1995: a risk-free interest rate of 5.3%, 5.3%, and 6.1%, respectively; an
expected life of six months; expected volatility of 50%; and no expected
dividends.
EMPLOYEE SAVINGS PLAN
Under the Company's Employee Savings Plan, a defined contribution plan,
employees who have attained age 21 may contribute 1% to 15% of their salary on a
pre-tax basis. Employer contributions are made at the discretion of management
and vest after five years of continuous employment with the Company. Employer
contributions approximated $400,000 in 1997, $300,000 in 1996, and $200,000 in
1995.
32
22
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER SHARE
Net income per share is calculated as follows:
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Net income $ 40,536 $ 30,369 $ 23,034
======== ======== ========
Basic:
Weighted-average common shares outstanding 41,322 40,594 38,175
======== ======== ========
Net income per common share $ .98 $ .75 $ .60
======== ======== ========
Diluted:
Weighted-average common shares outstanding 41,322 40,594 38,175
Effect of dilutive securities:
Stock options 3,380 3,220 3,777
-------- -------- --------
Weighted-average common and common
equivalent shares outstanding 44,702 43,814 41,952
======== ======== ========
Net income per common and common
equivalent share $ .91 $ .69 $ .55
======== ======== ========
Stock options to purchase 545,386 and 66,500 shares of common stock were
outstanding during the years ended December 31, 1997 and 1996, respectively, but
were not included in the calculations of diluted EPS because the option's
exercise price was greater than the average market price of the Company's common
shares during those years. Although these options were antidilutive in 1997 and
1996, because they were still outstanding at December 31, 1997, they may be
dilutive in future years' calculations. There were no options that were
antidilutive in the 1995 calculation of diluted EPS that were still outstanding
at December 31, 1997. The 545,386 options consisted of the following grants:
2,000 at $26.50 granted March 1996; 60,000 at $26.50 granted July 1996; 50,000
at $30.00, 56,370 at $32.63, and 180,936 at $32.81 granted July 1997; 45,820 at
$36.31 granted August 1997; 20,500 at $35.25 granted September 1997; 55,400 at
$32.00 granted October 1997; 53,360 at $28.56 granted November 1997; and 21,000
at $27.00 granted December 1997. The 66,500 options outstanding at December 31,
1996 consisted of the following grants: 2,000 at $26.50 granted March 1996;
4,500 at $24.00 granted June 1996; and 60,000 at $26.50 granted July 1996. All
of the options listed above expire 10 years from the date of grant.
33
23
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
During the years ended December 31, 1997, 1996, and 1995, one customer accounted
for $27,292,000, $13,765,000, and $17,237,000, or 18%, 11%, and 16%,
respectively, of revenue. The following table summarizes domestic and foreign
sales:
YEAR ENDED DECEMBER 31, 1997
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Domestic:
United States $ 59,723 $ 55,216 $ 42,619
Export
Japan 51,453 33,988 48,466
Europe 22,177 15,958 12,243
Rest of world 4,534 2,464 1,215
Foreign:
Japan 17,453 15,217
-------- -------- --------
$155,340 $122,843 $104,543
======== ======== ========
34
24
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION (CONTINUED)
The following table summarizes information about the Company's 1997 and 1996
operations in significant geographic areas (in thousands). Operations in
geographic areas other than the United States were not material prior to 1996.
YEAR ENDED DECEMBER 31, 1997 UNITED STATES JAPAN ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Unaffiliated customers $ 137,887 $ 17,453 $ 155,340
Intercompany 10,336 $(10,336)
--------- -------- -------- ---------
Total revenue 148,223 17,453 (10,336) 155,340
Income (loss) from operations 51,682 (21) 51,661
Identifiable assets 259,608 10,562 (8,330) 261,840
YEAR ENDED DECEMBER 31, 1996 UNITED STATES JAPAN ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Unaffiliated customers $ 107,626 $ 15,217 $ 122,843
Intercompany 9,755 $ (9,755)
--------- -------- -------- ---------
Total revenue 117,381 15,217 (9,755) 122,843
Income (loss) from operations 39,162 (869) 38,293
Identifiable assets 200,425 6,801 (5,973) 201,253
Inventories are transferred to the Company's Japanese subsidiary at previously
established transfer prices, resulting in intercompany revenue, as well as
intercompany receivables for the United States operation. All intercompany
transactions are eliminated in consolidation.
35
25
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF MAYAN AUTOMATION, INC.
On July 31, 1997, the Company acquired selected assets and assumed selected
liabilities of Mayan Automation, Inc. (Mayan), a developer of low-cost machine
vision systems used for surface inspection, for $4,800,000 in cash, of which
$1,800,000 will be paid through the year 1999. Of the $1,800,000 of future cash
payments, $900,000 represents payments contingent upon the attainment of certain
performance milestones. The acquisition was accounted for under the purchase
method of accounting. Accordingly, Mayan's results of operations have been
included in the Company's consolidated results of operations since the date of
acquisition. Mayan's historical results of operations were not material compared
to the Company's consolidated results of operations, and therefore, pro forma
results are not presented.
The purchase price was allocated among the identifiable assets of Mayan. After
allocating the purchase price to the net tangible assets, acquired technology
was valued using a risk-adjusted cash flow model, under which future cash flows
were discounted taking into account risks related to existing markets, the
technology's life expectancy, future target markets and potential changes
thereto, and the competitive outlook for the technology. This analysis resulted
in an allocation of $400,000 to complete technology, to be amortized over five
years, and $3,115,000 to in-process technology which had not reached
technological feasibility and had no alternative future use, and accordingly,
was expensed immediately. Up to an additional $900,000 of contingent
consideration will be recorded as purchase price when paid and will be allocated
to goodwill to be amortized over the remaining period of expected benefit.
36
26
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF ISYS CONTROLS, INC.
On February 29, 1996, the Company acquired Isys Controls, Inc. (Isys), a
developer of machine vision systems for high-speed surface inspection. The
acquisition was accounted for as a pooling of interests, and therefore, the
results of operations of Isys for the full year are included in the consolidated
financial statements of the Company for the year ended December 31, 1996. For
years presented prior to the acquisition, the financial position and results of
operations of Isys were not material to the previously reported financial
position and results of operations of the Company, and therefore, these years
have not been restated.
ACQUISITION OF ACUMEN, INC.
On July 21, 1995, the Company acquired all of the outstanding shares of Acumen,
Inc. (Acumen), a developer of machine vision systems for semiconductor wafer
identification. The purchase price of $13,950,000 included $8,452,000 in cash,
96,140 shares of Cognex common stock with a fair value of $4,170,000, and Cognex
stock options valued at $1,328,000. At December 31, 1997, 1996, and 1995,
$1,598,000, $1,935,000, and $3,125,000, respectively, of the purchase price
remained to be paid in cash and stock options through the year 2001. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, Acumen's results of operations have been included in the Company's
consolidated results of operations since the date of acquisition.
37
27
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Cash paid for income taxes totaled $12,564,000 in 1997, $11,218,000 in 1996, and
$7,982,000 in 1995.
Common stock received as payment for stock option exercises totaled $547,000 in
1997 and $397,000 in 1995.
The Company retired certain fully-depreciated property, plant and equipment
totaling $1,056,000 in 1997 and $3,049,000 in 1995.
In 1996, the Company exchanged 1,078,380 shares of Cognex common stock for Isys
common shares, and 253,547 shares of Cognex common stock for Isys restricted
common shares, with similar restrictions, in connection with the acquisition of
Isys.
38
28
COGNEX CORPORATION - REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COGNEX CORPORATION:
We have audited the accompanying consolidated balance sheets of Cognex
Corporation as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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
at December 31, 1997 and 1996 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Boston, Massachusetts /s/ COOPERS & LYBRAND L.L.P.
January 23, 1998
39
29
COGNEX CORPORATION
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts) 1997 1996(1)(2) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenue $ 155,340 $ 122,843 $ 104,543 $ 62,484 $ 43,371
Cost of revenue 42,273 38,855 22,543 13,884 10,280
-------------------------------------------------------------------
Gross margin 113,067 83,988 82,000 48,600 33,091
Research, development and engineering expenses 22,481 19,434 13,190 9,933 6,205
Selling, general and administrative expenses 35,810 26,261 23,973 16,847 12,183
Charge for acquired in-process technology 3,115 10,189
-------------------------------------------------------------------
Income from operations 51,661 38,293 34,648 21,820 14,703
Investment and other income 6,665 5,404 2,965 1,462 1,316
-------------------------------------------------------------------
Income before provision for income taxes 58,326 43,697 37,613 23,282 16,019
Provision for income taxes 17,790 13,328 14,579 7,210 4,871
-------------------------------------------------------------------
Net income $ 40,536 $ 30,369 $ 23,034 $ 16,072 $ 11,148
===================================================================
Basic net income per share (3) $ .98 $ .75 $ .60 $ .47 $ .33
===================================================================
Diluted net income per share (3) $ .91 $ .69 $ .55 $ .43 $ .31
===================================================================
Basic weighted-average common shares
outstanding (3) 41,322 40,594 38,175 34,560 33,632
===================================================================
Diluted weighted-average common shares
outstanding (3) 44,702 43,814 41,952 37,150 35,668
===================================================================
DECEMBER 31,
(In thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 199,570 $ 152,817 $ 119,402 $ 88,619 $ 51,605
Total assets 261,840 201,253 162,172 112,946 60,810
Long-term debt -- -- -- -- --
Stockholders' equity 236,142 182,689 143,916 103,608 55,061
(1) 1996 results include the full year results of Isys Controls, Inc. (Isys), a
developer of machine vision systems for high-speed surface inspection
acquired in February 1996. The Isys acquisition was accounted for as a
pooling of interests; however, because the results of Isys for prior years
were not material to the Company's previously reported results, prior years
have not been restated.
(2) Cost of revenue includes a $4,231,000 inventory charge for costs associated
with excess inventories resulting from product transition plans, as well as
reduced production plans.
(3) Adjusted for the 2-for-1 stock splits effective December 18, 1995 and
September 30, 1993.
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30
COGNEX CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31,
(In thousands, except per share amounts) 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $ 28,143 $ 36,271 $ 43,936 $ 46,990
Gross margin 20,448 26,331 32,476 33,812
Charge for acquired in-process technology 3,115
Income from operations 7,850 12,069 13,976 17,766
Net income 6,491 9,372 10,941 13,732
Basic net income per share .16 .23 .26 .33
Diluted net income per share .15 .21 .24 .31
Common stock prices:
High 21.750 27.500 38.500 34.375
Low 17.500 19.000 26.375 22.250
QUARTER ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 31,
(In thousands, except per share amounts) 1996 1996 1996(1) 1996
- --------------------------------------------------------------------------------------------------------------------------
Revenue $ 34,887 $ 34,949 $ 26,540 $ 26,467
Gross margin 25,681 25,358 14,243 18,706
Income from operations 14,570 13,690 2,913 7,120
Net income 10,829 10,134 3,244 6,162
Basic net income per share .27 .25 .08 .15
Diluted net income per share .25 .23 .08 .14
Common stock prices:
High 35.000 29.000 17.250 21.250
Low 18.000 15.750 11.750 12.250
(1)Cost of revenue includes a $4,231,000 inventory charge for costs associated
with excess inventories resulting from product transition plans, as well as
reduced production plans.
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31
COGNEX CORPORATION - COMPANY INFORMATION
TRANSFER AGENT
BankBoston, N.A. c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone (781) 575-3100
GENERAL COUNSEL
Hutchins, Wheeler & Dittmar - Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. - Boston, Massachusetts
FORM 10-K
A copy of the annual report filed with the Securities and Exchange Commission on
Form 10-K is available to stockholders, without charge, upon request to:
Department of Investor Relations
Cognex Corporation
One Vision Drive
Natick, MA 01760
Additional copies of this annual report are also available, without charge, upon
request to the above address.
The Company's common stock is traded on The NASDAQ Stock Market, under the
symbol CGNX. As of February 12, 1998, there were approximately 17,000 registered
and non-registered holders of the Company's common stock.
No dividends on the Company's common stock were paid during 1997 and 1996.
42