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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended April 3, 2005 or oTransition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____ to _____ Commission File Number0-17869 COGNEX CORPORATION  (Exact name of registrant as specified in its charter)
 Massachusetts(State or other jurisdiction of
incorporation or organization)
    
    04-2713778(I.R.S. Employer Identification No.)
 One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000(Address, including zip code, and telephone number,
including area code, of principal executive offices)
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ           No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) Yes þ           No o As
of April 29, 2005, there were 46,338,643 shares of Common Stock, $.002 par value, of the
registrant outstanding.




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INDEX  PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements

1Consolidated
Statements of Operations for the three-month periods ended
April 3, 2005 and April 4, 2004

1Consolidated Balance Sheets at April 3, 2005 and December 31, 2004

2Consolidated
Statement of Shareholders Equity for the three-month period ended April 3, 2005

3Consolidated
Condensed Statements of Cash Flows for the three-month periods ended
April 3, 2005 and April 4, 2004

4Notes to Consolidated Financial Statements

5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations

13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk

16Item 4.
    
    Controls and Procedures

16PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings

17Item 2.
    
    Unregistered Sales
of Equity Securities and Use of Proceeds

17Item 3.
    
    Defaults Upon Senior Securities

17Item 4.
    
    Submission of Matters to a Vote of Security Holders

17Item 5.
    
    Other Information

17Item 6.
    
    Exhibits

17Signatures

18Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedApril 3,
    
    
    April 4,2005
    
    
    2004(unaudited)RevenueProduct
    
    $
    37,177
    
    
    $
    42,560Service
    
    
    6,021
    
    
    
    5,60943,198
    
    
    
    48,169Cost of revenueProduct
    
    
    10,357
    
    
    
    11,333Service
    
    
    3,433
    
    
    
    3,45613,790
    
    
    
    14,789Gross marginProduct
    
    
    26,820
    
    
    
    31,227Service
    
    
    2,588
    
    
    
    2,15329,408
    
    
    
    33,380Research, development, and engineering expenses
    
    
    6,315
    
    
    
    6,898Selling, general, and administrative expenses
    
    
    17,508
    
    
    
    16,314Operating income
    
    
    5,585
    
    
    
    10,168Foreign currency gain
    
    
    99
    
    
    
    625Investment and other income
    
    
    1,470
    
    
    
    1,274Income before provision for income taxes
    
    
    7,154
    
    
    
    12,067Income tax provision
    
    
    1,860
    
    
    
    3,500Net income
    
    $
    5,294
    
    
    $
    8,567Net income per common and common-equivalent share:Basic
    
    $
    0.11
    
    
    $
    0.19Diluted
    
    $
    0.11
    
    
    $
    0.18Weighted-average common and common-equivalent shares outstanding:Basic
    
    
    46,235
    
    
    
    44,512Diluted
    
    
    47,181
    
    
    
    46,752Cash dividends per common share
    
    $
    0.08
    
    
    $
    0.06
 The accompanying notes are an integral part of these consolidated financial statements. 1




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COGNEX CORPORATION 
 CONSOLIDATED BALANCE SHEETS
  April 3,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,062
    
    
    $
    54,270Short-term investments
    
    
    217,244
    
    
    
    180,409Accounts receivable, less reserves of $2,594 and $2,596 in 2005 and 2004, respectively
    
    
    29,303
    
    
    
    33,816Inventories, net
    
    
    17,799
    
    
    
    20,091Deferred income taxes
    
    
    9,617
    
    
    
    9,504Prepaid expenses and other current assets
    
    
    11,695
    
    
    
    14,871Total current assets
    
    
    340,720
    
    
    
    312,961Long-term investments
    
    
    122,149
    
    
    
    156,397Property, plant, and equipment, net
    
    
    23,573
    
    
    
    23,995Deferred income taxes
    
    
    21,074
    
    
    
    21,516Intangible assets, net
    
    
    6,800
    
    
    
    7,506Goodwill
    
    
    6,764
    
    
    
    7,033Other assets
    
    
    3,632
    
    
    
    3,900$
    524,712
    
    
    $
    533,308LIABILITIES
AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,855
    
    
    $
    5,563Accrued expenses
    
    
    44,544
    
    
    
    55,779Customer deposits
    
    
    3,301
    
    
    
    3,445Deferred revenue
    
    
    6,585
    
    
    
    5,714Total current liabilities
    
    
    58,285
    
    
    
    70,501Commitments (Notes 3, 7, 8, and 9)Shareholders equity:Common stock, $.002 par value Authorized:
140,000 shares, issued: 46,295 and 46,155 shares in 2005 and
2004, respectively
    
    
    93
    
    
    
    92Additional paid-in capital
    
    
    195,734
    
    
    
    192,860Retained earnings
    
    
    285,308
    
    
    
    283,712Accumulated other comprehensive loss
    
    
    (14,708
    )
    
    
    (13,857
    )Total shareholders equity
    
    
    466,427
    
    
    
    462,807$
    524,712
    
    
    $
    533,308
 The accompanying notes are an integral part of these consolidated financial statements. 2




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COGNEX CORPORATION 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
  AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Income
    
    
    EquityBalance at December 31, 2004
    
    
    46,155
    
    
    $
    92
    
    
    $
    192,860
    
    
    $
    283,712
    
    
    $
    (13,857
    )
    
    
    
    
    
    $
    462,807Issuance of stock under stock option, stock
purchase, and other plans
    
    
    140
    
    
    
    1
    
    
    
    2,541
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,542Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333Payment of dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,698
    )
    
    
    
    
    
    
    
    
    
    
    (3,698
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,294
    
    
    
    
    
    
    $
    5,294
    
    
    
    5,294Losses on long term intercompany loans
on currency swaps, net of tax of $295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (503
    )
    
    
    (503
    )
    
    
    (503
    )Net unrealized loss on
available-for-sale investments, net of
tax of $316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540
    )
    
    
    (540
    )
    
    
    (540
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    192
    
    
    
    192Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,443Balance at April 3, 2005 (unaudited)
    
    
    46,295
    
    
    $
    93
    
    
    $
    195,734
    
    
    $
    285,308
    
    
    $
    (14,708
    )
    
    
    
    
    
    $
    466,427
 The accompanying notes are an integral part of these consolidated financial statements. 3




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COGNEX CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Three Months EndedApril 3,
    
    
    April 4,2005
    
    
    2004(unaudited)Cash flows from operating activities:Net income
    
    $
    5,294
    
    
    $
    8,567Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and
amortization
    
    
    2,536
    
    
    
    2,566Tax benefit from exercise of stock options
    
    
    333
    
    
    
    3,949Deferred income tax expense
    
    
    522
    
    
    
    Change in current assets and current liabilities
    
    
    (1,057
    )
    
    
    (821
    )Other
    
    
    191
    
    
    
    (561
    )Net cash provided by operating activities
    
    
    7,819
    
    
    
    13,700Cash flows from investing activities:Purchase of investments
    
    
    (167,137
    )
    
    
    (156,003
    )Maturity and sale of investments
    
    
    162,681
    
    
    
    154,029Purchase of property, plant, and equipment
    
    
    (767
    )
    
    
    (570
    )Net cash used in investing activities
    
    
    (5,223
    )
    
    
    (2,544
    )Cash flows from financing activities:Payment of dividends
    
    
    (3,698
    )
    
    
    (2,676
    )Issuance of stock under stock option, stock
purchase, and other plans
    
    
    2,542
    
    
    
    20,407Net cash provided by (used in) financing activities
    
    
    (1,156
    )
    
    
    17,731Effect of foreign exchange rate changes on cash
    
    
    (648
    )
    
    
    868Net increase in cash and cash equivalents
    
    
    792
    
    
    
    29,755Cash and cash equivalents at beginning of period
    
    
    54,270
    
    
    
    76,227Cash and cash equivalents at end of period
    
    $
    55,062
    
    
    $
    105,982
 The accompanying notes are an integral part of these consolidated financial statements. 4




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COGNEX CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1: Summary of Significant Accounting Policies As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports
on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally
accepted accounting principles. Reference should be made to the consolidated financial statements
and related notes included in the Companys Annual Report on Form 10-K for the year ended December
31, 2004. In the opinion of the management of Cognex Corporation, the accompanying consolidated unaudited
financial statements contain all adjustments necessary to present fairly the Companys financial
position at April 3, 2005, and the results of its operations for the three-month periods ended
April 3, 2005 and April 4, 2004, and changes in shareholders equity and cash flows for the periods
presented. The results disclosed in the Consolidated Statements of Operations for the three-month period ended
April 3, 2005 are not necessarily indicative of the results to be expected for the full year.
Certain amounts reported in prior periods have been reclassified to be consistent with the current
period presentation. Stock-Based Compensation Plans The Company recognizes compensation costs using the intrinsic value based method described in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. 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 Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, had been adopted, are as follows (in
thousands): Three Months EndedApril 3,
    
    
    April 4,2005
    
    
    2004Net income, as reported
    
    $
    5,294
    
    
    $
    8,567Less: Total stock-based compensation
costs determined under fair value based
method, net of tax
    
    
    (2,311
    )
    
    
    (3,703
    )Net income, pro forma
    
    $
    2,983
    
    
    $
    4,864Basic net income per share, as reported
    
    $
    0.11
    
    
    $
    0.19Basic net income per share, pro forma
    
    $
    0.06
    
    
    $
    0.11Diluted net income per share, as reported
    
    $
    0.11
    
    
    $
    0.18Diluted net income per share, pro forma
    
    $
    0.06
    
    
    $
    0.10
    (1)
 (1)  Amount
was originally reported as $0.11 and has been adjusted to $0.10
due to a refinement in the calculation. For the purpose of providing pro forma disclosures, the fair values of stock options granted
were estimated using the Black-Scholes option-pricing model with the following weighted-average
assumptions: Three Months EndedApril 3,
    
    
    April 4,2005
    
    
    2004Risk-free interest rate
    
    
    3.4
    %
    
    
    2.8
    %Expected life (in years)
    
    
    2.8
    
    
    
    3.2Expected volatility
    
    
    35
    %
    
    
    45
    %Expected annualized dividend yield
    
    
    1.27
    %
    
    
    .69
    %
 5




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: New Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123R requires companies to recognize
compensation cost for all share-based payments to employees (including stock option and employee
stock purchase plans) at fair value. SFAS 123R will be effective for public companies no later
than the beginning of the first fiscal year after June 15, 2005. The Company will adopt SFAS No.
123R beginning in the first quarter of 2006 using the modified prospective method in which
compensation cost is recognized beginning on the effective date. The Company currently recognizes compensation costs using the intrinsic value based method
and, as such, generally recognizes no compensation cost. Accordingly, the adoption of SFAS No.
123Rs fair value based method will have a significant impact on the Companys results of
operations, although it will have no impact on its overall financial
position. The impact of the
adoption of SFAS No. 123R cannot be predicted at this time because it will depend upon levels of
share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in
prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net income and net income per share in Note 1 to the
Companys consolidated financial statements. NOTE 3: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consist of the following (in thousands): April 3,
    
    
    December 31,2005
    
    
    2004Cash
    
    $
    55,062
    
    
    $
    54,270Total cash
and cash equivalents
    
    
    55,062
    
    
    
    54,270Municipal bonds
    
    
    217,244
    
    
    
    180,409Total short-term investments
    
    
    217,244
    
    
    
    180,409Municipal bonds
    
    
    109,312
    
    
    
    144,685Limited
partnership interest
    
    
    12,837
    
    
    
    11,712Total long-term investments
    
    
    122,149
    
    
    
    156,397$
    394,455
    
    
    $
    391,076
 On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P.,
(Venrock) a venture capital fund. A director of the Company is a Managing General Partner of
Venrock Associates. In the original agreement with Venrock, the Company committed to a total
investment in the limited partnership of up to $25,000,000 with an
expiration date of January 1,
2005. In January 2005, the Company signed an amendment to the original agreement, which reduces
its total commitment to $22,500,000 and extends the commitment period
through December 31, 2010. The
Company does not have the right to withdraw from the partnership prior to December 31, 2010. At April 3, 2005, the carrying value of this investment was $12,837,000 compared to an estimated
fair value, as determined by the General Partner, of $12,244,000. The unrealized loss of $593,000
was determined to be temporary. 6




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Inventories Inventories consist of the following (in thousands): April 3,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    6,329
    
    
    $
    6,311Work-in-process
    
    
    5,869
    
    
    
    6,285Finished goods
    
    
    5,601
    
    
    
    7,495$
    17,799
    
    
    $
    20,091
 In the fourth quarter of 2001, the Company recorded a $16,300,000 charge in Cost of product
revenue on the Consolidated Statements of Operations for excess inventories and purchase
commitments resulting from an extended slowdown in the semiconductor and electronics industries, as
well as the expected transition to newer Cognex hardware platforms by the Companys OEM customers.
A total of $12,500,000 of this charge represented reserves against existing inventories and was
accordingly included in Inventories on the Consolidated Balance Sheet at December 31, 2001. The
remaining $3,800,000 of the charge represented commitments to purchase excess components and
systems from various suppliers and accordingly was included in Accrued Expenses on the
Consolidated Balance Sheet at December 31, 2001. The following table summarizes the changes in the inventory-related reserves established in the
fourth quarter of 2001 (in thousands): Balance Sheet
    
    
    Statement ofAccrued
    
    
    OperationsInventories
    
    
    Expenses
    
    
    BenefitsReserve balance at December 31, 2004
    
    $
    7,448
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the first quarter of
2004
    
    
    
    
    
    
    
    
    
    $
    262Inventory sold to customers
    
    
    (118
    )
    
    
    
    
    
    $
    118Inventory sold to brokers
    
    
    (22
    )
    
    
    
    
    
    
    Write-off and scrap of inventory
    
    
    (315
    )
    
    
    
    
    
    
    Reserve balance at April 3, 2005
    
    $
    6,993
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the first quarter of
2005
    
    
    
    
    
    
    
    
    
    $
    118
 A favorable settlement of the remaining purchase commitments may result in a recovery of a
portion of the remaining $1,400,000 accrued at April 3, 2005. 7




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: Intangible Assets Amortized intangible assets consist of the following (in thousands): Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingApril 3, 2005
    
    Amount
    
    
    Amortization
    
    
    AmountCustomer contracts and relationships
    
    $
    8,004
    
    
    $
    1,701
    
    
    $
    6,303Complete technology
    
    
    5,405
    
    
    
    4,994
    
    
    
    411Patents
    
    
    116
    
    
    
    47
    
    
    
    69Non-compete agreements
    
    
    51
    
    
    
    34
    
    
    
    17$
    13,576
    
    
    $
    6,776
    
    
    $
    6,800
 Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingDecember 31, 2004
    
    Amount
    
    
    Amortization
    
    
    AmountCustomer contracts and relationships
    
    $
    8,349
    
    
    $
    1,522
    
    
    $
    6,827Complete technology
    
    
    5,440
    
    
    
    4,864
    
    
    
    576Patents
    
    
    122
    
    
    
    42
    
    
    
    80Non-compete agreements
    
    
    54
    
    
    
    31
    
    
    
    23$
    13,965
    
    
    $
    6,459
    
    
    $
    7,506
 Aggregate amortization expense for the three-month periods ended April 3, 2005 and April 4, 2004
was $400,000 and $383,000, respectively. Estimated amortization expense for the current fiscal year and succeeding fiscal years is as
follows (in thousands): Year
    
    Amount2005
    
    $
    1,2642006
    
    
    1,1442007
    
    
    1,0892008
    
    
    9922009
    
    
    960Thereafter
    
    
    1,751Total
    
    $
    7,200
 8




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COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6: Goodwill The Company has two reporting units with goodwill, the Modular Vision Systems Division (MVSD) and
the Surface Inspection Systems Division (SISD), which are also reportable segments. The changes in the carrying amount of goodwill during the three-month period ended April 3, 2005
are as follows (in thousands): MVSD
    
    
    SISD
    
    
    ConsolidatedBalance at December 31, 2004
    
    $
    4,121
    
    
    $
    2,912
    
    
    $
    7,033Foreign exchange rate changes
    
    
    (127
    )
    
    
    (142
    )
    
    
    (269
    )Balance at April 3, 2005
    
    $
    3,994
    
    
    $
    2,770
    
    
    $
    6,764
 NOTE 7: Warranty Obligations The Company warrants its hardware products to be free from defects in material and workmanship for
periods ranging from six months to two years from the time of sale based upon the product being
purchased and the terms of the customers contract. Estimated warranty obligations are evaluated
and recorded at the time of sale based upon historical costs to fulfill warranty obligations.
Provisions may also be recorded subsequent to the time of sale whenever specific events or
circumstances impacting product quality that would not have been taken into account using
historical data become known. Warranty obligations are included in Accrued expenses on the
Consolidated Balance Sheets. The changes in the warranty obligation are as follows (in thousands): Balance at December 31, 2004
    
    $
    1,758Provisions for warranties issued during the period
    
    
    238Fulfillment of warranty obligations
    
    
    (205
    )Foreign exchange rate changes
    
    
    (59
    )Balance at April 3, 2005
    
    $
    1,732
 NOTE 8: Indemnification Provisions Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain
current or former directors, officers, and employees of the Company against expenses incurred by
them in connection with each proceeding in which he or she is involved as a result of serving or
having served in certain capacities. Indemnification is not available with respect to a proceeding
as to which it has been adjudicated that the person did not act in good faith in the reasonable
belief that the action was in the best interests of the Company. The maximum potential amount of
future payments the Company could be required to make under these provisions is unlimited. The
Company has never incurred significant costs related to these indemnification provisions. As a
result, the Company believes the estimated fair value of these provisions is minimal. 9




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: Indemnification Provisions (continued) The Company accepts standard limited indemnification provisions in the ordinary course of business,
whereby it indemnifies its customers for certain direct damages incurred in connection with
third-party patent or other intellectual property infringement claims with respect to the use of
the Companys products. The term of these indemnification provisions generally coincides with the
customers use of the Companys products. The maximum potential amount of future payments the
Company could be required to make under these provisions is always subject to fixed monetary
limits. The Company has never incurred significant costs to defend lawsuits or settle claims

related to these indemnification provisions. As a result, the Company believes the estimated fair
value of these provisions is minimal. The Company also accepts limited indemnification provisions from time to time, whereby it
indemnifies customers for certain direct damages incurred in connection with bodily injury and
property damage arising from the installation of the Companys products. The term of these
indemnification provisions generally coincides with the period of installation. The maximum
potential amount of future payments the Company could be required to make under these provisions is
limited and is likely recoverable under the Companys insurance policies. As a result of this
coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or
settle claims related to these indemnification provisions, the Company believes the estimated fair
value of these provisions is minimal. NOTE 9: Standby Letters of Credit On March 23, 2005, the Company provided standby letters of credit totaling 3,264,887,000 Yen (or
approximately $30,340,000 based upon the exchange rate at April 3, 2005) to taxing authorities in
Japan that are collateralized by investments on the Consolidated Balance Sheet. The Tokyo Regional
Taxation Bureau (TRTB) has asserted that Cognex Corporation has a permanent establishment in Japan
that would require certain income, previously reported on U.S. tax returns for the years ended
December 31, 1997 through December 31, 2001, to be subject instead to taxation in Japan. The
Company disagrees with this position and believes that this assertion is inconsistent with
principles under the U.S.  Japan income tax treaty. The Company has filed a notice of objection
and request for deferral of tax payment and intends to contest this assessment vigorously, although
no assurances can be made that the Company will prevail in this matter. In September 2003, the
Company also filed a request with the Internal Revenue Service Tax Treaty Division for competent
authority assistance. Until this matter is resolved, the Company is required to provide collateral
for these tax assessments. These letters of credit expire in approximately one year. Should the
TRTB prevail in its assertion, the income in question would be taxable in Japan and the Company
would be required to pay approximately $30,340,000 in taxes, interest and penalties to Japanese
taxing authorities. The Company would then be entitled to a recoup the majority of this amount
from taxing authorities in the U.S. 10




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: Net Income Per Share Net income per share is calculated as follows (In thousands, except per share amounts): Three Months EndedApril 3,
    
    
    April 4,2005
    
    
    2004(unaudited)Net income
    
    $
    5,294
    
    
    $
    8,567Basic:Weighted-average common shares outstanding
    
    
    46,235
    
    
    
    44,512Net income per common share
    
    $
    0.11
    
    
    $
    0.19Diluted:Weighted-average common shares outstanding
    
    
    46,235
    
    
    
    44,512Effect of dilutive stock options
    
    
    946
    
    
    
    2,240Weighted-average common and common-equivalent
shares outstanding
    
    
    47,181
    
    
    
    46,752Net income per common and common-equivalent share
    
    $
    0.11
    
    
    $
    0.18
 Stock options to purchase 4,535,315 and 857,214 shares of common stock were outstanding during the
three-month periods ended April 3, 2005 and April 4, 2004, respectively, but were not included in
the calculation of diluted net income per common share because the
exercise prices of these options were
greater than the average market price of the Companys common stock during those periods. NOTE 11: Segment Information The Company has two reportable segments: the Modular Vision Systems Division (MVSD) and the Surface
Inspections Systems Division (SISD). MVSD designs, develops, manufactures, and markets modular
vision systems that are used to control the manufacturing of discrete items by locating,
identifying, inspecting, and measuring them during the manufacturing process. SISD designs,
develops, manufactures, and markets surface inspection vision systems that are used to inspect
surfaces of materials that are processed in a continuous fashion to ensure there are no flaws or
defects in the surfaces. Segments are determined based upon the way that management organizes its
business for making operating decisions and assessing performance. The Company evaluates segment
performance based upon income or loss from operations, excluding unusual items. The following table summarizes information about the Companys segments (in thousands): ReconcilingMVSD
    
    
    SISD
    
    
    Items
    
    
    ConsolidatedThree Months Ended
April 3, 2005Product revenue
    
    $
    32,685
    
    
    $
    4,492
    
    
    
    
    
    
    $
    37,177Service revenue
    
    
    3,644
    
    
    
    2,377
    
    
    
    
    
    
    
    6,021Operating income
    
    
    7,039
    
    
    
    534
    
    
    $
    (1,988
    )
    
    
    5,585Three Months Ended
April 4, 2004Product revenue
    
    $
    38,379
    
    
    $
    4,181
    
    
    
    
    
    
    $
    42,560Service revenue
    
    
    3,892
    
    
    
    1,717
    
    
    
    
    
    
    
    5,609Operating income
    
    
    12,281
    
    
    
    93
    
    
    $
    (2,206
    )
    
    
    10,168
 11




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##### Table of Contents



COGNEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11: Segment Information (continued) Reconciling items consist of unallocated corporate expenses, which primarily include corporate
headquarters costs, professional fees, and patent infringement litigation. Asset information by
segment is not produced internally for use by the chief operating decision maker, and therefore, is
not presented. Asset information is not provided because the cash and investments are commingled
and the divisions share assets and resources in a number of locations around the world. NOTE 12: Dividends On January 28, 2005, the Companys Board of Directors declared a cash dividend of $0.08 per share.
The dividend was paid on February 25, 2005 to all shareholders of record at the close of business
on February 11, 2005. NOTE 13: Subsequent Event On April 21, 2005, the Companys Board of Directors declared a cash dividend of $0.08 per share.
The dividend is payable on May 20, 2005 to all shareholders of record at the close of business on
May 6, 2005. Future dividends will be declared at the discretion of the Board of Directors and
will depend upon such factors as the Board of Directors deems relevant. The Board of Directors may
modify the Companys dividend policy from time to time. 12




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements made in this report, as well as oral statements made by the Company from time to
time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers
can identify these forward-looking statements by the Companys use of the words expects,
anticipates, estimates, believes, projects, intends, plans, will, may, shall, and
similar words and other statements of a similar sense. These statements are based upon the
Companys current estimates and expectations as to prospective events and circumstances, which may
or may not be in the Companys control and as to which there can be no firm assurances given.
These forward-looking statements involve known and unknown risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and uncertainties include:
(1) global economic conditions that impact the capital spending trends of manufacturers in a
variety of industries; (2) the cyclicality of the semiconductor and electronics industries; (3) the
inability to achieve significant international revenue; (4) fluctuations in foreign exchange rates;
(5) the loss of, or a significant curtailment of purchases by, any one or more principal customers;
(6) the reliance upon certain sole-source suppliers to manufacture and deliver critical components
for the Companys products; (7) the inability to attract and retain skilled employees; (8) the
inability to design and manufacture high-quality products; (9) inaccurate forecasts of customer
demand; (10) the technological obsolescence of current products and the inability to develop new
products; (11) the inability to protect the Companys proprietary technology and intellectual
property; (12) the Companys involvement in time-consuming and costly litigation; (13) the impact
of competitive pressures; and (14) the inability to achieve expected results from acquisitions.
The foregoing list should not be construed as exhaustive and the Company encourages readers to
refer to the detailed discussion of risk factors included in
Part I - Item 1 of the Companys
Annual Report on Form 10-K. The Company cautions readers not to place undue reliance upon any such
forward-looking statements, which speak only as of the date made. The Company disclaims any
obligation to subsequently revise forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date such statements are made. Results of Operations Revenue Revenue for the quarter ended April 3, 2005 decreased 10% to $43,198,000 from $48,169,000 for the
quarter ended April 4, 2004. Sales to customers who make capital equipment used in the
semiconductor and electronics industries decreased $11,118,000, or 49%, from the prior year.
Demand from these customers is highly cyclical, with periods of investment followed by temporary
downturns. During the first half of 2004, the Company experienced an increase in orders from these
capital equipment manufacturers that has since been curtailed. Sales to discrete manufacturing
customers and surface inspection customers, however, increased $5,177,000, or 27%, and $970,000, or
16%, respectively, from 2004. As a result of this growth from a variety of industries, as well as
the downturn in the semiconductor and electronics capital equipment sector, sales to customers
outside of the capital equipment sector represented 57% of total revenue in the first quarter of
2005 compared to 40% in the first quarter of 2004. Product revenue for the quarter ended April 3, 2005 decreased 13% to $37,177,000 from $42,560,000
for the quarter ended April 4, 2004 due to a lower volume of machine vision systems sold to
customers in the semiconductor and electronics industries. Service revenue, which is derived from
the sale of maintenance and support, education, consulting, and installation services, increased 7%
to $6,021,000 from $5,609,000 due principally to the timing of surface inspection installation
services. Service revenue represented 14% of total revenue in the first quarter of 2005 compared
to 12% in the first quarter of 2004. MVSD revenue for the quarter ended April 3, 2005 decreased 14% to $36,329,000 from $42,271,000 for
the quarter ended April 4, 2004 due to a lower volume of modular vision systems sold to customers
in the semiconductor and electronics industries. SISD revenue increased 16% to $6,869,000 from
$5,898,000 due principally to the timing of surface inspection shipments and installations. SISD revenue
represented 16% of total revenue in the first quarter of 2005 compared to 12% in the first quarter
of 2004. Gross Margin Gross margin as a percentage of revenue was 68% for the quarter ended April 3, 2005 compared to 69%
for the quarter ended April 4, 2004. The decrease in gross margin was primarily due to the impact
of a higher percentage of total revenue from the sale of surface inspection systems and services,
which carry lower margins than the sale of modular vision systems. Product gross margin as a percentage of revenue was 72% for the quarter ended April 3, 2005
compared to 73% for the quarter ended April 4, 2004 primarily due to the shift in product mix to
lower margin surface inspection systems. Service gross margin as a percentage of revenue was 43%
for the quarter ended April 3, 2005 compared to 38% for the quarter ended April 4, 2004 due
principally to the higher revenue from installation services. MVSD gross margin as a percentage of revenue remained consistent with the prior year at 72%. SISD
gross margin as a percentage of revenue was 48% for the quarter ended April 3, 2005 compared to 47%
for the quarter ended April 4, 2004 due to the higher service margins. 13




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##### Table of Contents



Operating Expenses Research, development, and engineering expenses (R,D&E) for the quarter ended April 3, 2005
decreased 8% to $6,315,000 from $6,898,000 for the quarter ended April 4, 2004. MVSD R,D&E
expenses decreased $598,000, or 10%, from the prior year primarily due to lower employee-related
costs resulting from a realignment of the Companys engineering resources over the past year, as
well as lower company bonus accruals. SISD R,D&E expenses were essentially flat with 2004. Selling, general, and administrative (S,G&A) expenses for the quarter ended April 3, 2005 increased
7% to $17,508,000 from $16,314,000 for the quarter ended April 4, 2004. MVSD S,G&A expenses
increased $1,357,000, or 11%, from the prior year and SISD S,G&A expenses were essentially flat
with 2004. Corporate expenses that are not allocated to a division decreased $218,000, or 10%,
from the prior year. The increase in MVSD expenses was primarily due to the hiring of additional
sales personnel over the past year to help drive revenue growth, as well as the unfavorable impact
of foreign exchange rates on the Companys international operations. A significant amount of the
Companys sales and marketing costs are denominated in currencies other than the U.S. Dollar, such
as the Euro Dollar. Although the U.S. Dollar strengthened versus the Euro Dollar during the first
quarter of 2005, its relative value was still lower than it was in the first quarter of 2004,
resulting in a higher level of expenses when Euro Dollar-based costs were translated into U.S.
Dollars. The decrease in corporate expenses was due principally to lower company bonus accruals. Foreign Currency Gain The Company recorded foreign currency gains of $99,000 for the quarter ended April 3, 2005 compared
to gains of $625,000 for the same period in 2004. The gains in 2004 were primarily due to the
revaluation and settlement of the Companys Irish subsidiarys accounts receivable denominated in
U.S. Dollars and Japanese Yen. During the first quarter of 2004, the U.S. Dollar and Japanese Yen
strengthened versus the Euro Dollar, resulting in foreign currency gains on the Irish subsidiarys
books when these receivables were revalued and collected. The gains in 2005 were primarily due to
a strengthening U.S. Dollar, as the value of the Japanese Yen remained relatively constant. In
addition, the amount of receivables denominated in U.S. Dollars on the Companys Irish subsidiarys
books was lower in 2005. Investment and Other Income Investment and other income increased 15% to $1,470,000 for the quarter ended April 3, 2005 from
$1,274,000 for the quarter ended April 4, 2004 due primarily to a higher invested balance. Income Taxes The Companys effective tax rate for the quarter ended April 3, 2005 was 26% compared to 29% for
the quarter ended April 4, 2004. The decrease in the effective tax rate was due primarily to more
of the Companys profits being earned and taxed in lower tax jurisdictions. Liquidity and Capital Resources At April 3, 2005, the Companys cash, cash equivalent, and investment balances increased $3,379,000
to $394,455,000 from $391,076,000 at December 31, 2004. The Companys cash requirements during the
quarter ended April 3, 2005 were met with positive cash flow from operations, as well as the
proceeds from the issuance of common stock under stock option plans. Cash requirements consisted
of operating activities, capital expenditures, and the payment of dividends. Capital expenditures
during the quarter ended April 3, 2005 totaled $767,000 and consisted principally of expenditures
for computer hardware. On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P.
(Venrock), a venture capital fund. A director of the Company is a Managing General Partner of
Venrock Associates. In the original agreement with Venrock, the Company committed to a total
investment in the limited partnership of up to $25,000,000, with the commitment period expiring on
January 1, 2005. In January 2005, the Company signed an amendment to the original agreement, which
reduces its commitment to $22,500,000 and extends the commitment period through December 31, 2010.
As of April 14




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##### Table of Contents



3, 2005, the Company had contributed $17,000,000 to the partnership, including $1,125,000 during
2005. The remaining commitment of $5,500,000 can be called by Venrock in any period through 2010. On March 31, 2003, the Company acquired the wafer identification business of Siemens Dematic AG for
7,000,000 Euros in cash (or approximately $7,630,000) paid at closing, with the potential for an
additional cash payment in 2005 of up to 1,700,000 Euros (or approximately $2,194,000) depending
upon the achievement of certain performance criteria. On December 1, 2003, the Company acquired the machine vision business of Gavitec AG for 3,777,000
Euros in cash (or approximately $4,516,000), including 3,477,000 Euros paid at closing, 100,000
Euros (or approximately $123,000) paid on December 1, 2004, and 200,000 Euros (or approximately
$258,000) to be paid on December 1, 2005. There was the potential for two additional cash payments
of up to 250,000 Euros (or approximately $323,000) each in the third quarter of 2004 and first
quarter of 2005 depending upon the achievement of certain performance criteria. These criteria
were not met, and therefore, these contingent payments were not made. On December 12, 2000, the Companys Board of Directors authorized the repurchase of up to
$100,000,000 of the Companys common stock. During 2002, a total of 1,768,452 shares were
repurchased at a cost of $26,425,000. There have been no other shares repurchased under this
program. The Company may repurchase additional shares under this program in future periods
depending upon a variety of factors, including the market value of the Companys common stock and
the average return on the Companys invested balances. On January 8, 2005, the Companys Board of Directors declared a cash dividend of $0.08 per share.
The dividend, amounting to $3,698,000, was paid on February 25,
2005 to all shareholders of record
at the close of business on February 11, 2005. On April 21, 2005, the Companys Board of Directors
declared a cash dividend of $0.08 per share payable on May 20,
2005 to all shareholders of record
at the close of business on May 6, 2005. Future dividends will be declared at the discretion of
the Board of Directors and will depend upon such factors as the Board of Directors deems relevant.
The Board of Directors may modify the Companys dividend policy from time to time. The Company believes that its existing cash, cash equivalents, and investment balances, together
with cash flow from operations, will be sufficient to meet its operating,
investing, and financing activities in 2005 and the foreseeable future. New Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123R requires companies to recognize
compensation cost for all share-based payments to employees (including stock option and employee
stock purchase plans) at fair value. SFAS 123R will be effective for public companies no later
than the beginning of the first fiscal year after June 15, 2005. The Company will adopt SFAS No.
123R beginning in the first quarter of 2006 using the modified prospective method in which
compensation cost is recognized beginning on the effective date. The Company currently recognizes compensation costs using the intrinsic value based method and, as
such, generally recognizes no compensation cost. Accordingly, the adoption of SFAS No. 123Rs fair
value based method will have a significant impact on the Companys results of operations, although
it will have no impact on its overall financial position. The impact
of the adoption of SFAS No. 123R
cannot be predicted at this time because it will depend upon levels of share-based payments granted
in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that
standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and net income per share in Note 1 to the Companys consolidated financial
statements. 15




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Companys exposures to market risk since December
31, 2004. 
 ITEM 4: CONTROLS AND PROCEDURES As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has
evaluated, with the participation of management, including the Chief Executive Officer and the
Chief Financial Officer, the effectiveness of its disclosure controls
and procedures (as defined in such rules) as of the end
of the period covered by this report. Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that such disclosure controls and
procedures were effective. From time to time, the Company
reviews its disclosure controls and procedures, and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that the Companys systems evolve with its business.
There was no change in the Companys internal control over financial reporting that occurred during
the quarter ended April 3, 2005 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 16




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PART II: OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS To the Companys knowledge, there are no pending legal proceedings, other than
as described in the section captioned Intellectual Property, appearing in Item I
of the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2004, which are material to the Company. There have been no material developments
in such legal proceedings since December 31, 2004. In addition, from time to time,
the Company may be subject to various claims and lawsuits by competitors, customers,
or other parties arising in the ordinary course of business, including lawsuits
charging patent infringement. There can be no assurance as to the outcome of any of
this litigation. 
 ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS  (a)
    Exhibits31.1  Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 193431.2  Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 193432.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 17




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 6, 2005
    
    
    
    COGNEX CORPORATIONBy:
    
    /s/ Robert J. ShillmanRobert J. ShillmanChief Executive Officer, and Chairman of the Board of Directors(duly authorized officer, principal executive officer)By:
    
    /s/ Richard A. MorinRichard A. MorinSenior Vice President of Finance, ChiefFinancial Officer, and Treasurer(duly authorized officer, principal financial and accounting officer)
 18