# COGNEX CORP (CGNX) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from COGNEX CORP's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/851205/000085120525000012/cgnx-20241231.htm Accession: 0000851205-25-000012 Filing date: 2025-02-13 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/CGNX/ All MD&A years: /company/CGNX/mda/ Previous year: /company/CGNX/mda/fy2023/ (FY 2023) Next year: /company/CGNX/mda/fy2025/ (FY 2025) ITEM 7: 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 Exchange Act. Readers can identify these forward-looking statements by our use of the words “expects,” “anticipates,” “estimates,” "potential," “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” "opportunity," "goal" and similar words and other statements of a similar sense. These statements are based on our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance and financial targets, customer demand and order rates and timing of related revenue, future product or revenue mix, research and development activities, sales and marketing activities, new product offerings, innovation and product development activities, customer acceptance of our products, capital expenditures, cost and working capital management activities, investments, liquidity, dividends and stock repurchases, strategic and growth plans and opportunities, acquisitions, and estimated tax benefits and expenses and other tax matters, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the technological obsolescence of current products and the inability to develop new products; (2) the impact of competitive pressures; (3) the inability to attract and retain skilled employees, effectively plan for succession, and maintain our unique corporate culture; (4) the failure to properly manage the distribution of products and services; (5) economic, political, and other risks associated with international sales and operations, including the impact of trade disputes on the economic climate in China; (6) the challenges in integrating and achieving expected results from acquired businesses; (7) uncertainty surrounding our future capital needs; (8) information security breaches; (9) the failure to comply with laws or regulations relating to data privacy or data protection; (10) the inability to protect our proprietary technology and intellectual property; (11) the failure to manufacture and deliver products in a timely manner; (12) the inability to obtain, or the delay in obtaining, components for our products at reasonable prices; (13) the inability to design and manufacture high-quality products; (14) the loss of, or curtailment of purchases by, large customers in the logistics, consumer electronics, or automotive industries; (15) challenges in accurately forecasting our financial results due to seasonal and cyclical variations in customer purchasing patterns; (16) potential impairment charges with respect to our investments or acquired intangible assets; (17) exposure to additional tax liabilities, increases and fluctuations in our effective tax rate, and other tax matters; (18) fluctuations in foreign currency exchange rates and the use of derivative instruments; (19) unfavorable global economic conditions, including increases in interest rates and elevated inflation rates; (20) business disruptions from natural or man-made disasters, public health crises, or other events outside our control; (21) exposure to potential liabilities, increased costs, reputational harm, and other adverse effects associated with expectations relating to environmental, social, and governance considerations; (22) stock price volatility; and (23) our involvement in time-consuming and costly litigation or activist shareholder activities. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of this 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. EXECUTIVE OVERVIEW Cognex Corporation (“the Company”) invents and commercializes technologies that address some of the most critical manufacturing and distribution challenges. We are a leading global provider of machine vision products and solutions that seek to improve efficiency and quality in a wide range of businesses across attractive industrial end markets. In addition to product revenue derived from the sale of machine vision products, the Company also generates revenue by providing maintenance and support, consulting, and training services to its customers; however, service revenue accounted for less than 10% of total revenue for all periods presented. Machine vision is used in a variety of industries where technology is widely recognized as an important component of automated production, distribution, and quality assurance. Virtually every manufacturer or distributor can achieve better quality and efficiency by using machine vision. This results in a broad base of potential customers across a 19 Table of Content variety of industries, including logistics, automotive, consumer electronics, semiconductor, consumer products, medical-related, and food and beverage. Revenue was $914,515,000 in 2024, representing an increase of 9% over the prior year. The increase was due to incremental revenue arising from the acquisition of Moritex Corporation (“Moritex”) that closed in the fourth quarter of 2023, as well as higher revenue from customers in the logistics and semiconductor industries. These increases were partially offset by lower revenue from customers in the automotive industry and softness across our broader factory automation business. Gross margin was 68% in 2024 compared to 72% in 2023. The decrease was primarily due to a less favorable revenue mix related to the contribution of Moritex and higher logistics revenue, and to a lesser extent, the impact of pricing pressures. Operating expenses increased 9% over the prior year. Investments intended to expand our sales coverage, incremental costs related to the acquisition of Moritex, and higher incentive compensation expenses were partially offset by disciplined cost management and lower total headcount. Cost recoveries recorded in 2023 related to the 2022 fire at the Company’s contract manufacturer also contributed to the increase. Operating income decreased to 13% of revenue in 2024 compared to 16% of revenue in 2023 driven by the lower gross margin percentage. Net income decreased to 12% of revenue, or $0.62 per share, in 2024 compared to 14% of revenue, or $0.65 per share, in 2023. The following table sets forth certain consolidated financial data as a percentage of revenue: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2024 (1)","","2023 (1)","","2022 (1)"],["Revenue","100","%","","100","%","","100","%"],["Cost of revenue","32","","","28","","","28"],["Gross profit","68","","","72","","","72"],["Research, development, and engineering expenses","15","","","17","","","14"],["Selling, general, and administrative expenses","41","","","40","","","31"],["Loss (recovery) from fire","\u2014","","","(1)","","","2"],["Operating income","13","","","16","","","24"],["Non-operating income","2","","","1","","","\u2014"],["Income before income tax expense","14","","","16","","","24"],["Income tax expense","3","","","3","","","3"],["Net income","12","%","","14","%","","21","%"]] [[/GREPCENT_TABLE]] (1) Amounts may not total properly due to rounding. RESULTS OF OPERATIONS Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 Revenue Revenue was $914,515,000 in 2024 compared to $837,547,000 in 2023, representing an increase of 9%. Revenue from the acquisition of Moritex that closed in the fourth quarter of 2023 represented approximately 8% of total revenue in 2024 and 1% of total revenue in 2023. Excluding the contribution of Moritex, revenue increased by 1% in 2024 over the prior year due to higher revenue from customers in the logistics and semiconductor industries, partially offset by lower revenue from customers in the automotive industry and softness across our broader factory automation business. Changes in revenue from an end-market perspective, including Moritex, were as follows: •Revenue from the logistics industry represented approximately 23% of total revenue in 2024 and increased by 20% from the prior year due to investment by e-commerce customers. •Revenue from the automotive industry represented approximately 22% of total revenue in 2024 and decreased by 12% from the prior year due to continued weakness in this industry, including lower investment related to electric vehicles. •Revenue from the consumer electronics industry represented approximately 17% of total revenue in 2024 and increased by 3% from the prior year due to the contribution of Moritex, as well as higher large customer demand. 20 Table of Content •Revenue from the semiconductor industry represented approximately 11% of total revenue in 2024 and grew by 80% from the prior year due to the contribution of Moritex, as well as higher global demand for computing chips. The following table sets forth our disaggregated revenue information by geographic area based on the customers' country of domicile (in thousands) for the years ended December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["","","Twelve-months Ended"],["","","December 31, 2024","","December 31, 2023","","$ Change","","% Change"],["Americas","","$","350,155","","","$","330,415","","","$","19,740","","","6","%"],["Percentage of total revenue","","38","%","","39","%"],["Europe","","$","217,880","","","$","220,665","","","$","(2,785)","","","(1)","%"],["Percentage of total revenue","","24","%","","26","%"],["Greater China","","$","164,147","","","$","164,115","","","$","32","","","\u2014","%"],["Percentage of total revenue","","18","%","","20","%"],["Other Asia","","$","182,333","","","$","122,352","","","$","59,981","","","49","%"],["Percentage of total revenue","","20","%","","15","%"],["Total revenue","","$","914,515","","","$","837,547","","","$","76,968","","","9","%"]] [[/GREPCENT_TABLE]] Changes in revenue from a geographic perspective, including Moritex, were as follows: •Revenue from customers based in the Americas increased by 6% from the prior year. Strong growth in logistics was partially offset by weakness in the automotive industry. •Revenue from customers based in Europe decreased by 1% from the prior year. Growth in logistics was offset by declines in factory automation, most notably in the automotive industry. •Revenue from customers based in Greater China was flat compared to the prior year. The Moritex contribution, higher semiconductor revenue, and higher large customer consumer electronics revenue was offset by declines in other factory automation industries, most notably in the automotive industry. •Revenue from other countries in Asia increased by 49% from the prior year due to the Moritex contribution, higher semiconductor revenue, and growth in logistics. Gross Profit The following table sets forth our gross profit (in thousands) for the years ended December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["","","Twelve-months Ended"],["","","December 31, 2024","","December 31, 2023","","$ Change","","% Change"],["Gross profit","","$","625,794","","","$","601,241","","","$","24,553","","","4","%"],["Percentage of total revenue","","68","%","","72","%"]] [[/GREPCENT_TABLE]] Gross margin decreased to 68% in 2024 compared to 72% in 2023. The decrease was due to a less favorable revenue mix in 2024 that included higher logistics revenue and products with relatively lower gross margins from the Moritex acquisition that closed in the fourth quarter of 2023, as well as the amortization of Moritex acquired technologies. Lower average selling prices due to pricing pressures also contributed to the lower margin in 2024. 21 Table of Content Operating Expenses The following table sets forth our operating expenses (in thousands) for the years ended December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["","","Twelve-months Ended"],["","","December 31, 2024","","December 31, 2023","","$ Change","","% Change"],["Research, development, and engineering expenses","","$","139,815","","","$","139,400","","","$","415","","","\u2014","%"],["Percentage of total revenue","","15","%","","17","%"],["Selling, general, and administrative expenses","","$","370,914","","","$","339,139","","","$","31,775","","","9","%"],["Percentage of total revenue","","41","%","","40","%"],["Loss (recovery) from fire","","$","\u2014","","","$","(8,000)","","","$","8,000","","","(100)","%"],["Percentage of total revenue","","\u2014","%","","(1)","%"],["Total operating expenses","","$","510,729","","","$","470,539","","","$","40,190","","","9","%"],["Percentage of total revenue","","56","%","","56","%"]] [[/GREPCENT_TABLE]] Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses in 2024 were relatively flat compared to the prior year. Higher incentive compensation expenses and the additional cost associated with a new team of optical engineers that joined Cognex with the acquisition of Moritex in the fourth quarter of 2023 was offset by a reduction in RD&E headcount outside of Moritex, lower deferred compensation costs related to the 2019 acquisition of Sualab Co, Ltd. that were fully paid in the fourth quarter of 2023, and disciplined cost management. RD&E expenses as a percentage of revenue were 15% in 2024 compared to 17% in 2023. We believe that a continued commitment to RD&E activities is essential to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, as well as to provide engineering support for large customers. In addition, we consider our ability to accelerate the time to market for new products to be critical to our revenue growth and competitive position. This annual percentage is impacted by revenue levels and investment cycles. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses in 2024 increased by 9% from the prior year. The increase was due primarily to investments in entry-level sales personnel hired over the past few years intended to transform our sales model, allowing us to broaden and deepen our sales coverage. Costs related to the acquisition of Moritex that closed in the fourth quarter of 2023 also contributed to the higher SG&A expenses in 2024, including additional sales and support personnel-related costs, the amortization of acquired customer relationship and trademarks, and integration costs. In addition, incentive compensation expenses were higher in 2024. These increases were partially offset by Moritex transaction costs incurred in the fourth quarter of 2023, a reduction in SG&A headcount outside of Moritex and entry-level sales, and disciplined cost management. Loss (Recovery) from Fire On June 7, 2022, the Company’s primary contract manufacturer experienced a fire at its plant in Indonesia, destroying a significant amount of Cognex inventories. In 2023, the Company recorded recoveries related to the fire totaling $8,000,000, including $5,500,000 for proceeds received from a financial settlement and $2,500,000, for proceeds received from business interruption insurance. Non-operating Income (Expense) The following table sets forth our non-operating income (expense) (in thousands) for the years ended December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["","","Twelve-months Ended"],["","","December 31, 2024","","December 31, 2023","","$ Change","","% Change"],["Foreign currency gain (loss)","","$","1,531","","","$","(10,039)","","","$","11,570","","","(115)","%"],["Investment income","","$","13,971","","","$","14,093","","","$","(122)","","","(1)","%"],["Other income (expense)","","$","922","","","$","592","","","$","330","","","56","%"],["Total non-operating income (expense)","","$","16,424","","","$","4,646","","","$","11,778","","","254","%"]] [[/GREPCENT_TABLE]] 22 Table of Content In the third quarter of 2023, the Company recorded a foreign currency loss of $8,456,000 on the settlement of a foreign currency forward contract entered into to hedge the Japanese Yen purchase price of the acquisition of Moritex Corporation. Remaining foreign currency gains and losses in each year resulted primarily from the revaluation and settlement of assets and liabilities that are denominated in currencies other than the functional currency of the Company, which is the U.S. Dollar, or its subsidiaries. Investment income decreased by $122,000, or 1%, from the prior year. The decrease was due to lower average investment balances, partially offset by higher yields on the Company's portfolio of debt securities. During the fourth quarter of 2023, net cash payments related to the acquisition of Moritex reduced cash available to invest by approximately $257 million, which resulted in lower investment income for 2024. Income Tax Expense The following table sets forth income tax information (in thousands) for the years ended December 31, 2024 and December 31, 2023. [[GREPCENT_TABLE]] [["","","Twelve-months Ended"],["","","December 31, 2024","","December 31, 2023","","$ Change","","% Change"],["Income before income tax expense","","$","131,489","","","$","135,348","","","$","(3,859)","","","(3)","%"],["Income tax expense","","$","25,318","","","$","22,114","","","$","3,204","","","14","%"],["Effective income tax rate","","19","%","","16","%"]] [[/GREPCENT_TABLE]] The Company’s effective tax rate was 19% in 2024 and 16% in 2023. The Company recorded discrete tax net expenses of $5,731,000 in 2024 and $2,338,000 in 2023. Excluding the impact of these discrete tax items, the Company’s effective tax rate was 15% in both years. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 For a discussion of the Company’s fiscal 2023 results compared to fiscal 2022, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 15, 2024. LIQUIDITY AND CAPITAL RESOURCES The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and resulted in an accumulated cash and investment balance of $586,948,000 as of December 31, 2024. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments to maintain liquidity and safety of its investment portfolio. Operating Activities Net cash provided by operating activities totaled $149,081,000 in 2024. Significant uses of cash consisted of an increase in accounts receivable related to growth in logistics revenue and in support of sales initiatives. Investing Activities Net cash used in investing activities totaled $38,969,000 in 2024. Investing activities included capital expenditures, that totaled $15,043,000 and consisted primarily of continued investments in business systems, manufacturing equipment related to new product introductions, and building and leasehold improvements. Financing Activities Net cash used in financing activities totaled $118,420,000 in 2024. In March 2022, the Company's Board of Directors authorized the repurchase of $500,000,000 of the Company's common stock. Under this program, the Company repurchased 1,711,000 shares at a cost of $67,085,000 in 2024, leaving a remaining balance of $265,807,000 as of December 31, 2024. The Company may repurchase shares under this program in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee stock awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions. 23 Table of Content The Company’s Board of Directors declared and paid cash dividends of $0.075 per share in the first, second, and third quarters of 2024 and $0.080 per share in the fourth quarter of 2024, totaling $52,329,000 in 2024. Future dividends will be declared at the discretion of the Company's Board of Directors and will depend on such factors as the Board deems relevant, including, among other things, the Company's ability to generate positive cash flow from operations. Future Cash Requirements As of December 31, 2024, the Company had inventory purchase commitments of $44,269,000, with the majority payable within twelve months, and lease payment obligations of $115,200,000, with $13,177,000 payable within twelve months. As of December 31, 2024, the Company had a remaining balance of $18,338,000 payable in the second quarter of 2025 related to a one-time transition tax on unrepatriated foreign earnings arising from the Tax Cuts and Jobs Act of 2017. We believe that the Company's existing cash and investment balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. In addition, the Company has no long-term debt. We believe that our strong cash position has put us in a relatively good position with respect to anticipated longer-term liquidity needs. CRITICAL ACCOUNTING ESTIMATES Our discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements included in this Annual Report on Form 10-K, 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. We base our 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. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ from these estimates under different assumptions or circumstances resulting in charges that could be material in future reporting periods. We believe the following critical accounting policies require the use of significant estimates and judgments in the preparation of our consolidated financial statements. Revenue Recognition The Company recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Management uses significant judgment when determining the amount of revenue to be recognized each period for application-specific customer solutions. Accounting for application-specific customer solutions requires management to monitor and evaluate customer contracts to determine the point in time at which the solution is validated. The Company’s application-specific customer solutions are comprised of a combination of products and services which are accounted for as one performance obligation to deliver a total solution to the customer. Revenue for application-specific customer solutions is recognized at the point in time when the solution is validated, which is the point in time when the Company can reasonably determine that the agreed-upon specifications in the contract have been met and the customer should reasonably accept the performance obligations in the arrangement. Although the customer may have taken legal title and physical possession of the goods when they arrived at the customer’s designated site, the significant risks and rewards of ownership transfer to the customer only upon validation. Income Taxes Significant judgment is required in determining worldwide income tax expense based on tax laws in the various jurisdictions in which the Company operates. The Company has established reserves for income taxes by applying the “more likely than not” criteria, under which the recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant tax authority. All tax positions are analyzed periodically and adjustments are made as events occur that warrant modification, such as the completion of audits or the expiration of statutes of limitations, which may result in future charges or credits to income tax expense. 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. These estimates occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise 24 Table of Content from differences in the timing of the recognition of certain expenses for tax and financial statement purposes. We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain federal, state, and international tax credit carryovers. The Company accounts for the impact of the Global Intangible Low-Taxed Income (GILTI) minimum tax in deferred taxes. NEW PRONOUNCEMENTS Refer to Part II, Item 8 - Note 2 within this Form 10-K, for a full description of recently issued accounting pronouncements including the expected dates of adoption and expected impact on the financial position and results of operations of the Company.